AUDIT OF INVENTORIES

Inventories are assets held for sale in the ordinary course of business, in the process of production for
such sale or in the form of materials or supplies to be consumed in the production process or in
rendering of services.

Finished goods are completed products which are ready for sale.

Goods in process or work in process are partially complete products which require further process or
work before they can be sold

Raw Materials are goods that are to be used in the production process. No work or process has been
done on them as yet by the entity inventorying them.

Factory or manufacturing supplies are similar to raw materials but their relationship to the end product
is indirect, May be referred to as Indirect Materials.

FOB destination- ownership of goods purchased is transferred only upon receipt of the goods by the
buyer at the point of destination.

FOB shipping point- ownership is transferred upon shipment of the goods and therefore, the goods in
transit are the property of the buyer.

Freight Collect – This means that the freight charge on the goods shipped is not yet paid. the common
carrier shall collect the same from the buyer. Thus, under this, the freight charge is actually paid by the
buyer.

Freight Prepaid- Thus means that the freight charge on the goods shipped is already paid by the seller.

Consignment is a method of marketing goods in which the owner called the consignor transfers physical
possession of certain goods to an agent called the consignee who sells them on the owner’s behalf.

Consigned goods shall be included in the consignor’s inventory and excluded from the consignee’s
inventory.

Periodic System calls for the physical counting of goods on hand at the end of the accounting period to
determine quantities. The periodic inventory procedure is generally used when individual inventory
items have small peso investment.

Perpetual System requires the maintenance of records call stock cards that usually offer a running
summary of the inventory inflow and outflow. The perpetual inventory procedure is commonly used
where the inventory items treated individually represent a relatively large pesos investment.

Trade Discounts are deductions form the list or catalogue price in order to arrive at the invoice price
which is the amount actually charge to the buyer. Thus, trade discounts are not recorded.

Cash Discounts are deductions from the invoice price when payment is made within the discount period.
The purpose of the cash discounts is to encourage prompt payment.

Cost of inventories shall comprise Cost of purchase, cost of conversion and other cost incurred in
bringing the inventories to their present location and condition.
PROBLEMS

Problem 1

KOBE BRYANT COMPANY is a manufacturer of small tools. The following information was obtained from
the company’s accounting records for the year ended December 31, 2019.

Inventory at December 31, 2019 (based on physical count in

KOBE BRYANT COMPANY at cost on December 31, 2019) P3,740,000
Accounts payable at December 31, 2019 2,830,000
Net Sales (sales less sales returns) 19,386,800

Your audit reveals the following information:

1. The physical count included tools billed to a customer FOB Shipping point on December 31,
2019. These tools cost P192,000 and were billed at P235,500 . They were in the shipping area
waiting to be picked up by the customer.
2. Goods shipped FOB shipping point by a vendor were in transit on December 31,2019.These
goods were invoice cost of P279,000 were shipped on December 29,2019.
3. Work in process inventory costing P81,000 was sent to a job contractor for further processing.
4. Not included in the physical count were goods returned by customers on December 31,2019.
These goods costing P147,000 were inspected and returned to inventory on January 7,2020.
Credit memos for P203,400 were issued to the customer at that date.
5. In transit to a customer on December 31, 2019, were tools costing P51,000 shipped FOB
shipping point on December 26, 2019. A sales invoice for P88,200 was issued on January 3,2020,
when KOBE BRYANT COMPANY was notified by the customer that the tools had been received.
6. At exactly 5:00 pm on December 31, 2019, goods costing P93,600 were received from a vendor.
These were recorded on a receiving report dated January 02, 2020. The related invoice was
recorded on December 31, 2019, but the goods were not included in the physical count.
7. Included in the physical count were goods received from a vendor on December 27, 2019.
However, the related invoice for P108,000 was not recorded because the accounting
department’s copy of the receiving report was lost.
8. A monthly freight bill for P96,000 was received on January 3, 2020. It specifically related to
merchandise bought in December 2019, one half of which was still in the inventory at December
31, 2019. The freight was not included in either the inventory or in accounts payable at
December 31, 2019.

1. Kobe Bryant’s December 31, 2019, inventory should be increased by

a. P279,000 b. P648,600 c. P555,000 d. P540,600
2. Kobe Bryant’s accounts payable balance at December 31, 2019, should be increased by
a. P483,000 b. P279,000 c. P108,000 d. P576,600
3. The amount of net sales to be reported on Kobe Bryant’s income statement for the year ended
December 31, 2019, should be
a. P 18,947,900 b. P19,386,800 c. P19,036,100 d. P19,151,300
4. Kobe Bryant’s statement of financial position at December 31 2019, should report accounts
payable of
a. P3,217,000 b. P2,755,000 c. P2,830,000 d. P3,313,000
5. The amount of inventory to be reported on Kobe Bryant’s December 31, 2019, statement of
financial position should be
a. P 4,148,000 b. P4,295,000 c. P4,388,600 d. P3,740,000
Problem 2
On April 21, 2019, a fire damaged the office and warehouse of KATIPUNAN COMPANY. The only
accounting record saved was the general ledger, from which the trial balance below was prepared:

KATIPUNAN COMPANY
TRIAL BALANCE
MARCH 31, 2019
Debit
Cash P180,000
Accounts Receivable 400,000
Inventory, December 31, 2018 750,000
Land 350,000
Building 1,100,000
Accumulated Depreciation P413,000
Other Assets 56,000
Accounts Payable 237,000
Accrued Expenses 180,000
Ordinary Share Capital, P100 par 1,000,000
Retained Earnings 520,000
Sales 1,350,000
Purchases 520,000
Operating Expenses 344,000
Totals P3,700,000 P3,700,000

The following data have been gathered:

a. The company’s year- end is December 31.
b. An examination of the April bank statement and cancelled checks revealed that checks written
during the period April 1 to April 21 totaled P130,000: P57,000 paid to accounts payable as
March 31; P34,000 for April merchandise purchases; and P39,000 paid for other expenses.
Deposits during the same period amounted to P129,500, which consisted of receipts on account
from customers with the exception of a P9,500 refund from a vendor for merchandise returned
in April.
c. Correspondence with suppliers revealed unrecorded obligations at April 21 of P106,000 for April
merchandise purchases, including P23,000 for shipments in transit on that date.
d. Customers acknowledged indebtedness of P360,000 at April 21, 2019. It was also estimated that
customers owed another P80,000 that will never be acknowledged or recovered. Of the
acknowledged indebtedness, P6,000 will probably be uncollectible.
e. The insurance company agreed that the fire loss claim should be based on the assumption that
the overall gross profit ration for the past two years was in effect during the current year. The
company’s audited financial statements disclosed the following information:

2018 2017
Net Sales P5,300,000 P3,900,000
Net Purchases 2,800,000 2,350,000
Beginning Inventory 500,000 660,000
Ending Inventory 750,000 500,000
 f. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of the
inventory was a total loss.

Questions:
1. How much is the sales for the period January 1 to April 21, 2019?
a. P1,430,000 b. P1,510,000 c. P1,519,500 d. P1,506,000
2. How much is the net purchases for the period January 1 to April 21, 2019?
a. P683,000 b. P660,000 c. P673,500 d. P650,500
3. How much is the cost of sales for the period January 1 to April 21, 2019?
a. P683,000 b. P835,725 c. P830,500 d. P828,300
4. How much is the estimated inventory on April 21,2019?
a. P579,500 b. P623,500 c. P587,775 d. P570,000
5. How much is the estimated inventory fire loss?
a. P579,500 b. P535,000 c. P477,000 d. P512,000

Problem 3
You are engaged in the audit of the AWAYBATI CO. for the year ended December 31, 2018. To reduce
the workload at year-end, the company took its annual physical inventory under your observation on
November 30, 2018.

The company’s inventory account, which includes raw materials and work in process, is on a perpetual
basis and it uses the first-in, first-out method of pricing. It has no finished goods inventory.

The company’s physical inventory revealed that the book inventory of P181,710 was understated by
P9,000. To avoid distorting the interim financial statements, the company decided not to adjust the
Book inventory until year-end except for obsolete inventory items.

Your audit revealed this information about November 30 inventory:

(a) Pricing tests showed that the physical inventory was overpriced by P6,600.
(b) Footing and extension errors resulted in a P450 understatement of the physical inventory.
(c) Direct labor included in the physical inventory amounted to P30,000. Overhead was included at
the rate of 200% of direct labor. You determined that the amount of direct labor was correct
and the overhead rate was proper.
(d) The physical inventory included obsolete materials recorded at P750. During December, these
materials were removed from the inventory account by a charge to cost of sales. Your audit also
disclosed the following information about the December 31, 2018, inventory.
(e) Total debits to certain accounts during December are:
Purchases P74,100
Direct labor 36,300
Manufacturing overhead expense 75,600
Cost of Sales 205,800
(f) The cost of sales of P205,800 included direct labor of P41,400.
(g) Normal scrap loss on established product lines is negligible. However, a special order started
and completed during December had excessive scrap loss of P2,400, which was charged to
Manufacturing overhead expense.

1. What is the inventory per physical count on November 30,2018?

 a. P183,810 c. P172,710
b. P190,710 d. P181,710
2. What is the correct amount of the physical inventory at November 30, 2018?
a. P183,810 c. P165,810
b. 190,710 d. P184,560

Without prejudice to your answers to questions 1 and 2, assume that the correct amount of inventory
at November 30, 2018, was P173,100.

3. What is the materials inventory at Dec. 31, 2018?

a. P74,700 c. P73,950
b. P76,350 d. P78,750
4. What is the amount of direct labor cost included in the December 31, 2018, inventory?
a. P30,000 c. P66,300
b. P24,900 d. P41,400
5. What is the correct inventory at Dec. 31, 2018?
a. P148,650 c. P149,400
b. P198,150 d. P151,050

Problem 4
In testing the sales cut off got the SAS Company in connection with an audit for the year ended October
31, 2018, you find the following information.

A physical inventory was taken as of the close of business on October 31, 2018. All customers are within
a three-day delivery area of the company’s plant. The unadjusted balances of Sales and Inventories are
P7,500,000 and P330,000, respectively.

Invoice
FOB Terms Date Shipped Date Recorded Sales Cost
Number
6671 Destination Oct. 20 Oct. 31 P3,000 P2,700
6672 Shipping Point Oct. 31 Nov. 2 7,500 6,000
6673 Shipping Point Oct 25 Oct. 31 5,400 3,600
6674 Destination Oct. 31 Oct. 29 12,600 9,300
6675 Destination Oct. 31 Nov. 2 27,600 24,000
6676 Shipping Point Nov. 2 Oct. 23 19,500 15,300
6677 Shipping Point Nov. 5 Nov. 6 22,500 17,400
6678 Destination Oct. 25 Nov. 3 11,700 6,000
6679 Shipping Point Nov. 4 Oct. 31 25,800 24,600
6680 Destination Nov. 5 Nov. 2 15,000 12,000

Based on the foregoing information, compute the October 31, 2018, adjusted balances of the following
accounts.
1. Sales
a. P7,461,300 c. P7,449,600
b. P7,455,900 d. P7,487,100

2. Inventories
a. P354,000 c. P348,000
 b. P363,300 d. P357,300

Problem 5

NOVALICHES SALES COMPANY uses the firs-in, first out method in calculating cost of goods sold for the
three products that the company handles. Inventories and purchases information concerning the three
products are given for the month of October.

Product C Product P Product A

50,000 units 30,000 units 65,000 units
October 1 Inventory
at P6.00 at P10.00 at P0.90
70,000 units 45,000 units 30,000 units
October 1-15 Purchases
at P6.50 at P10.50 at P1.25
30,000
October 16-31 Purchases
At P8.00
October 1-31 Sales 105,000 units 50,000 units 45,000 units
October 31 Sales price P8.00/unit P11.00/unit P2.00/unit

On October 31, the company’s suppliers reduced their prices from the most recent purchases prices by
the following percentages: Product C, 20%; Product P, 10%; Product A, 8%. Accordingly, Novaliches
decide to reduce its sales prices on all items by 10% effective November 1.Novaliches’s selling cost is
10% of sales price. Products C and P have a normal profit (after selling costs) of 30% on sales prices,
while the normal profit on Product A (after selling cost) is 15% of sales price.

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

1. Total cost of Inventory at October 31 is

A. P565,000 B. P557,310 C. P655,500 D. P617,500

2. The amount of Inventory to be reported on the company’s balance sheet at October 31 is

A. P569,850 B. P559,350 C. P543,810 D. 595,350

3. The allowance for Inventory Writedown at October 31 is

A. P5,650 B P85,650 C. P13,500 D. P60,150

4. The cost of sales, after loss on inventory writedown, for the month of October is
A. P1,293,650 B. P1,022,260 C. P1,290,650 D. P1,208,000