AUDIT OF INVENTORIES

Problem 1: CAVALIERS Co. asks you to review its December 31, 2014, inventory values and prepare the
necessary adjustments to the books. The following information is given to you.

A. CAVALIERS uses the periodic method of recording inventory. A physical count reveals P704,670 of
inventory on hand at December 31, 2014.
B. Not included in the physical count of inventory is P31,260 of merchandise purchased on December 15
from Aezel. This merchandise was shipped FOB shipping point on December 29 and arrived in
January. The invoice arrived and was recorded on December 31.
C. Included in inventory is merchandise sold to Manuel on December 30, FOB Destination. This
merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale on
account for P38,400 on December 31. The merchandise cost P22,050 and Manuel received it on
January 3.
D. Included in inventory was merchandise received from Matet on December 31 with an invoice price of
P46,890. The merchandise was shipped FOB Destination. The invoice which has not yet arrived, has
not been recorded.
E. Not yet included in inventory is P25,260 of merchandise purchased from Masura Company. This
merchandise was received on December 31 after the inventory had been counted. The invoice was
received and recorded on December 30.
F. Included in inventory was P31,314 of inventory held by CAVALIERS on consignment from Damulag
Corporation.
G. Included in inventory is merchandise sold to Siri, FOB shipping point. This merchandise was shipped
after it was counted. The invoice was prepared and recorded as a sale for P56,700 on December 31.
The cost of this merchandise was P34,560, and Siri received the merchandise on January 5.
H. Excluded from inventory was a carton labelled Please accept for credit. This carton contains
merchandise costing P4,500 which had been sold to a customer for P7,800. No entry had been made
to the books to reflect the return, but none of the returned merchandise seemed damaged.

Required: Compute for the correct inventory balance for CAVALIERS at December 31, 2014.

Problem 2: The RAPTORS Company reviewed its inventories and found the following items:

1.) In the shipping room was a product costing P13,400 when the physical count was taken. Because it
was marked Hold for shipping instructions, it was not included in the count. The customer order was
dated December 15, but the product was shipped and the customer billed on January 4, 2015.
2.) On December 27, 2014, merchandise costing P11,648 was received and recorded. The invoice
accompanying the merchandise was marked on consignment.
3.) The company received merchandise costing P4,625 on January 2, 2015. The invoice, which was
recorded on January 3, 2015, showed shipment was made under FOB shipping point on December 31,
2014. The merchandise was not included in the inventory because it was not on hand when the
physical count was taken.
4.) A product, fabricated to order for a particular customer, was completed and in the shipping room on
December 31. Although it was shipped on January 5, 2015, the customer was billed on December 31,
2014, and it was excluded from the inventory.
5.) Merchandise costing P16,666 was received on January 5, 2015, and the related purchase invoice was
recorded January 6. The shipment of this merchandise was made on December 31, 2014, FOB
Destination.
6.) A product costing P150,000 was sold on an instalment basis on December 10, 2014. It was delivered to
the customer on that date. The product was included in inventory because RAPTORS still holds legal
title. The companys experience suggests that full payment on instalment sales is reasonably assured.
7.) An item costing P65,000 was sold and delivered to the customer on December 29, 2014. The goods
were included in the inventory because the sale was with a repurchase agreement that required
RAPTORS to buy back the inventory on January 15, 2015.

Required: Indicate which of the following items are to be included in the inventory balance at December 31,
2014.

Problem 3: The following information was provided by the bookkeeper of SPURS Inc.:
 Sales for the month of June totalled 286,000 units.
The following purchases were made in June:

Date Quantity Unit Cost

June 4 50,000 P13.00
June 8 62,500 12.50
June 11 75,000 12.00
June 24 70,000 12.40

There were 108,500 units on hand on June 1 with a total cost of P1,450,000.

Spurs uses a periodic FIFO costing system. The companys gross profit for June was P2,058,750

1.) How many units were on hand on June 30?

A. 80,000
B. 177,500
C. 28,500
D. 149,000
2.) What is the FIFO cost of the companys inventory on June 30?
A. P1,025,000
B. P1,016,230
C. P988,000
D. P1,069,124
3.) What is the total cost of goods sold in June?
A. P3,632,200
B. P3,617,900
C. P3,580,126
D. P3,661,250
4.) The 286,000 units sold in June had a unit selling price of
A. P20.00
B. P13.00
C. P12.70
D. P7.20
5.) An essential procedural control to ensure the accuracy of the recorded inventory quantities is
A. Performing a gross profit test
B. Testing inventory extensions
C. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with
inventory policy
D. Establishing a cutoff for goods received and shipped.

Problem 4: BULLS Company is a manufacturer of small tools. The following information was obtained from the
companys accounting records for the year ended December 31, 2014:

Inventory at December 31, 2014 (based on physical P1,870,000

count in BULLSs warehouse at cost on December 31,
2014)
Accounts payable at December 31, 2014 1,415,000
Net sales (sales less sales returns) 9,693,400

Your audit reveals the following information:

A. The physical count included tools billed to a customer FOB shipping point on December 31, 2014.
These tools cost P64,000 and were billed at P78,500. They were in the shipping area waiting to be
picked up by the customer.
B. Goods shipped FOB shipping point by a vendor were in transit on December 31, 2014. These goods
with invoice cost of P93,000 were shipped on December 29, 2014.
C. Work in process inventory costing P27,000 was sent to a job contractor for further processing..
D. Not included in the physical count were goods returned by customers on December 31, 2014. These
goods costing P49,000 were inspected and returned to inventory on January 7, 2015. Credit memos for
P67,800 were issued to the customers at that date.
 E. In transit to a customer on December 31, 2014, were tools costing P17,000 shipped FOB shipping point
on December 26, 2014. A sales invoice for P29,400 was issued on January 3, 2015, when BULLS
Company was notified by the customer that the tools had been received.
F. At exactly 5:00 pm on December 31, 2014, goods costing P31,200 were received from a vendor. These
were recorded on a receiving report dated January 2, 2015. The related invoice was recorded on
December 31, 2014, but the goods were not included in the physical count.
G. Included in the physical count were goods received from a vendor on December 27, 2014. However,
the related invoice for P36,000 was not recorded because the accounting departments copy of the
receiving report was lost.
H. A monthly freight bill for P32,000 was received on January 3, 2015. It specifically related to
merchandise bought in December 2014, one-half of which was still in the inventory at December 31,
2014. The freight was not included in either the inventory or in accounts payable at December 31,
2014.

1.) BULLSs December 31, 2014, inventory should be increased by

A. P216,200
B. P233,200
C. P252,200
D. P123,200
2.) BULLSs accounts payable balance at December 31, 2014, should be increased by
A. P68,000
B. P145,000
C. P125,000
D. P161,000
3.) The amount of net sales to be reported on BULLSs income statement for the year ended December
31, 2014 should be
A. P9,547,100
B. P9,576,500
C. P9,591,000
D. P9,595,300
4.) BULLSs statement of financial position at December 31, 2014, should report accounts payable of
A. P1,576,000
B. P1,483,000
C. P1,540,000
D. P1,431,000
5.) The amount of inventory to be reported on BULLSs December 31, 2014, statement of financial position
should be
A. P2,103,200
B. P2,086,200
C. P2,122,200
D. P1,993,200

Problem 5: PELICANS Corp. began operations in 2009. On July 15, 2014, a fire broke out in the companys
warehouse destroying all inventory and many accounting records. The following information was assembled
from the microfilmed records. All sales and purchases are on account.

Jan. 1, 2014 July 15, 2014

Inventory P287,700
Accounts receivable 261,180 P257,780
Accounts payable 176,280 245,700
Collections from customers, 1,507,600
January 1 July 1, 2014
Payments to suppliers, January 1 975,000
July 1, 2014
Goods out on consignment on July 97,500
15, 2014, at cost
Goods in transit at July 15, 2014, 34,750
purchased FOB Shipping point
(included in the July 15 accounts
payable balance)
The following is a summary of prior years sales and gross profit on sales:

2011 2012 2013

Sales P1,252,000 P1,410,000 P1,360,000
Gross Profit 375,600 366,600 462,400

1.) What is the companys average gross profit ratio based on its prior years sales?
A. 26%
B. 34%
C. 30%
D. 29%
2.) What is the companys total sales for the period January 1 through July 15 of the current year.
A. P1,504,200
B. P1,511,000
C. P1,765,380
D. P1,768,780
3.) What is the companys total purchases for the period January 1 through July 15 of the current year?
A. P905,580
B. P912,170
C. P1,044,420
D. P1,009,670
4.) What is the companys estimated inventory on July 15, 2014, before the fire?
A. P186,605
B. P243,430
C. P146,930
D. P279,180
5.) What is the inventory fire loss?
A. P146,930
B. P186,605
C. P132,250
D. P112,180

Problem 6: In conducting your audit of BLUE DEVILS Corporation, a company engaged in import and
wholesale business, for the fiscal year ended June 30, 2010, you determined that its internal control system
was good. Accordingly, you observed the physical inventory at an interim date, May 31, 2010 instead of at
June 30, 2010.

You obtained the following information from the companys general ledger.

Sales for eleven months ended May 31, 2010 P1,344,000

Sales for the fiscal year ended June 30, 2010 1,536,000
Purchases for eleven months ended May 31, 2010 1,080,000
(before audit adjustment)
Purchases for the fiscal year ended June 30, 2010 1,280,000
Inventory, July 1, 2009 140,000
Physical Inventory, May 31, 2010 220,000

Your audit disclosed the following additional information.

a) Shipments costing P12,000 were received in May and included in the physical inventory but recorded
as June purchases
b) Deposit of P4,000 made with vendor and charged to purchases in April 2010, Product was shipped in
July 2010.
c) A shipment in June was damaged through the carelessness of the receiving department. This shipment
was later sold in June at its cost of P16,000

In audit engagements in which interim physical inventories are observed, a frequently used auditing procedure
is to test the reasonableness of the year-end inventory by the application of the gross profit ratio. Based on the
result of your audit, you are to provide answers to the following:

1.) The gross profit ratio for eleven months ended May 31, 2010 is
 a. 20%
b. 35%
c. 30%
d. 25%
2.) The cost of goods sold during the month of June, 2010 using the gross profit ratio method is
a. 132,000
b. 144,000
c. 148,000
d. 160,000
3.) The June 30, 2010 inventory using the gross profit method is
a. 264,000
b. 340,000
c. 268,000
d. 260,000

Problem 7: You obtained the following information in connection with your audit of TAR HEELS Corporation:

Cost Retail
Beginning inventory 1,987,200 2,760,000
Sales 7,812,000
Purchases 4,688,640 6.512.000
Freight in 94.560
Mark ups 720,000
Mark up cancellation 120,000
Markdowns 240,000
Markdown cancellation 40,000

TAR HEELS uses the retail method in estimating the values of its inventories and cost of goods sold.

Based on the above, and the result of your audit, answer the following:

1.) The cost ratio to be used in accordance with PAS 2 is

a. 68.58%
b. 69.20%
c. 70.00%
d. 75.78%
2.) The estimated ending inventory at retail is
a. 2,300,000
b. 2,060,000
c. 1,940,000
d. 1,860,000
3.) The estimated ending inventory at cost is
a. 1,412,786
b. 1,275,588
c. 1,302,000
d. 1,278,120
4.) The estimated cost of goods sold is
a. 5,468,400
b. 5,494,812
c. 5,357,614
d. 4,685,117

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