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Chapter 4: Q1IFRS (page 198)

IFRS4-1 Explain the difference between the 鈥渘ature-of-expense鈥� and 鈥渇unction-of-expense鈥� classifications.

Short Answer

Expert verified

Nature of expense method classifies expenses according to their nature based on the type of economic expenses incurred.

Function of expense method groups expenses depending upon the purpose for which these costs are incurred.

Step by step solution

01

Meaning of Expense

An expense refers to the cost of operations incurred for generating revenues. Employee wages, salaries, factory rent, utilities, and depreciation are some examples of expenses.

02

Explanation of differentiation between "nature of expense" and "function of expense" classification

The classification of expenses by nature is associated with different categories of what the expense is in itself, such as rent expense, employee benefits expense, amortization expense etc.

On the other hand, functional classification is done on the basis of purpose, such as the type of activity associated. Administrative expenses, selling and distribution expenses, and manufacturing expenses are some types of functional classification.

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Most popular questions from this chapter

Question: What is the major distinction (a) between revenues and gains and (b) between expenses and losses?

Starr Co. had sales revenue of \(540,000 in 2017. Other items recorded during the year were:

Cost of goods sold \)330,000

Salaries and wages expense 120,000

Income tax expense 25,000

Increase in value of company reputation 15,000

Other operating expenses 10,000

Unrealized gain on value of patents 20,000

Prepare a single-step income statement for Starr for 2017. Starr has 100,000 shares of stock outstanding.

You run into Greg Norman at a party and begin discussing financial statements. Greg says, 鈥淚 prefer the single step income statement because the multiple-step format generally overstates income.鈥� How should you respond to Greg?

What are the advantages and disadvantages of the single-step income statement?

The financial statements of P&G are presented in Appendix B. The company鈥檚 complete annual report, including the notes to the financial statements, is available online.

Instructions

Refer to P&G鈥檚 financial statements and the accompanying notes to answer the following questions.

(a) What type of income statement format does P&G use? Indicate why this format might be used to present income statement information.

(b) What are P&G鈥檚 primary revenue sources?

(c) Compute P&G鈥檚 gross profit for each of the years 2012鈥�2014. Explain why gross profit decreased in 2014.

(d) Why does P&G make a distinction between operating and nonoperating revenue?

(e) What financial ratios did P&G choose to report in its 鈥淔inancial Summary鈥� section covering the years 2009鈥�2014?
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