Accounting Theory

Assignment 2
Zienab Mosabbeh
20163933
1) Explain the meanings of (1) cost, (2) expense, and (3) loss
as used for financial reporting in conformity with GAAP. In
your explanation, discuss the distinguishing
characteristics of the terms and their similarities and
interrelationships. Cost, expense, and loss are all
representing outflow of funds. Differences:
Cost Expense Loss
amount paid for exchange of Amount incurred or outflow of resources
Definition.

goods. liabilities incurred during incurred by the company

the period from due to accidental events
producing goods, which are not regular
Unexpired cost is related to the delivering
when goods, of
the benefits businessonofthe
appear theincome
company.
Represent outflow

future revenues, and expired unexpired cost are statement as a deduction

cost are not related to the future utilized the cost become from revenue in the
of fund

revenues and deducted from expenses. period that the decrease

revenues or retained earnings in An expense is cost that in value occurred
the current year. has given a benefit and is
now expired

1) Classify each of the following items as a cost, expense,

loss, or other category, and explain how the classification
of each item may change:
Classify. How each item may change ?
a. Cost of goods sold: cost to expenses or some other category if the business is
not manufacturing and sales of goods e.g. a service
provider, a middleman.
b. Bad debts expense: expense Bad debt expense is an unfortunate cost of doing
business with customers on credit, as there is always a
default risk inherent to extending credit.
c. Depreciation expense expense because depreciation is treated like an expense
for plant machinery: when it occurs, but if the item is sold, the cost basis
is lowered by the depreciation as if it were a capital
loss.

d. Organization costs: expense Is the initial cost incurred to create a company Costs
usually include legal and promotional fees to establish
the company with the state and federal government
e. Spoiled goods: loss . Spoilage is included in the standard cost of goods, while
abnormal spoilage is charged to expense as incurred.

2) The term period cost and product cost are sometimes

used to describe certain items in financial statements.
Define these terms and distinguish between them. To
what types of items does each apply?
The key difference between product costs and period costs is that product costs are only
incurred if products are acquired or produced, and period costs are associated with the
passage of time. Thus, a business that has no production or inventory purchasing activities
will incur no product costs, but will still incur period costs.

Product cost : all the costs related to produce goods or acquire goods, and they are initially
recorded within the inventory asset. because these costs are used to value the inventory,
Once the related goods are sold, these capitalized costs are charged to expense.
This accounting is used to match the revenue from a product sale with the associated cost of
goods sold, so that the entire effect of a sale transaction appears within one reporting
period’s income statement.
Product costs are sometimes broken out into the variable and fixed subcategories. This
additional information is needed when calculating the break even sales level of a business. It
is also useful for determining the minimum price at which a product can be sold while still
generating a profit.

Examples : For manufacturing business, direct labor, direct materials, and manufacturing
overhead are the examples. For retailers, costs on inventory would be an example. (cost of
goods sold when the sales are made).

Period cost : all the costs that are not included in product costs meaning that they are not
directly related to the production. They are expensed on income statement (profit or loss)
when it incurred.
And they are sometimes broken out into additional subcategories for selling activities and
administrative activities. Administrative activities are the most pure form of period costs,
since they must be incurred on an ongoing basis, irrespective of the sales level of a business.
Selling costs can vary somewhat with product sales levels, especially if sales commissions are
a large part of this expenditure.
And are not assigned to one particular product or the cost of inventory like product costs.
Therefore, period costs are listed as an expense in the accounting period in which they
occurred.

Examples : sales commission, general and administrative expenses, such as rent, office
depreciation, office supplies, and utilities.