EXERCISE 2-13 (15 MINUTES)

1. A cost that is classified as a period cost will be recognized on the income

statement as an expense in the current period. A cost that is classified

as a product cost will be recognized on the income statement as an ex-

pense (i.e., cost of goods sold) only when the associated units of prod-

uct are sold. If some units are unsold at the end of the period, the costs

of those unsold units are treated as assets. Therefore, by reclassifying

period costs as product costs, the company is able to carry some costs

forward in inventories that would have been treated as current ex-

penses.