Grouping expenses by nature/function

CFA Level I
#1

Hi everyone,

hope the preparation is coming along well :slight_smile:

Can someone explain, in layman’s terms, what is the difference between grouping expenses by nature and by function? Does this distinction contribute to cost of sales / cost of goods sold (or are the latter two basically the same)?

Thanks in advance!

#2

That’s a little bit out of the curriculum though, however don’t know if it’s asked now. If not, perhaps you must look for specialized forums on accounting subjects.

#3

The only difference is in familiarity of reading financial statements for particular group of stakeholders (management, shareholders, creditors etc). It also depends on nature and size of business. For conglomerates which product and sells everything functional method may be favorable while for small startups grouping expenses by nature would be more appropriate. If an accounting system has been established correctly, any of two form of financial statements may be delivered.