AP.

M-1404 (AUDIT OF INVENTORIES)

MULTIPLE CHOICE QUESTIONS - THEORY

1. When auditing inventories, an auditor would least likely verify that

A. The financial statement presentation of inventories is appropriate.
B. Damaged goods and obsolete items have been properly accounted for.
C. All inventory owned by the client is on hand at the time of the count.
D. The client has used proper inventory pricing.

2. The primary objective of a CPA;s observation of the client’s physical inventory count
is to
A. Discover whether a client has counted particular inventory items or group of
items.
B. Obtain direct knowledge that the inventory exists and has been properly counted.
C. Provide an appraisal of the quality of merchandise on hand on the day of physical
count.
D. Allow the auditor to supervise the conduct of the count so as to obtain assurance
that inventory quantities are reasonably accounted.

3. A client maintains perpetual inventory records in both quantities and pesos. If the
assessed level of control risk is high, an auditor would probably
A. Increase the extent of tests of controls of the inventory cycle.
B. Request the client to schedule the physical inventory count at the end of the year.
C. Insist that the client perform counts of inventory items several times during the
year.
D. Apply gross profit tests to ascertain the reasonableness of the physical counts.

4. The audit of year-end physical inventories should include steps to verify that the
client’s purchases and sales cut-offs are adequate. The audit should be designed to
detect whether merchandise included in the physical count at year-end was not
recorded as a
A. Sale in the subsequent period.
B. Purchase in the current period.
C. Sale in the current period.
D. Purchase return in the subsequent period.

5. After accounting for a sequence of inventory tags, an auditor traces a sample of tags
to the physical inventory listing to obtain evidence that all items
A. Included in the listing have been counted.
B. Represented by inventory tags are included in the listing.
C. Included in the listing are represented by inventory tags.
D. Represented by inventory tags are bona fide.
6. An auditor selected items for test counts while observing a client’s physical inventory.
The auditor then traced the test counts to the client’s inventory listing. This procedure
most likely obtained evidenced concerning management’s assertion of
A. Rights and obligations
B. Existence and occurrence
C. Completeness
D. Valuation

7. To gain assurance that all inventory items in a client’s inventory listing schedule are
valid, an auditor most likely would trace
A. Inventory tags noted during auditor’ observation to items listed in the inventory
listing schedule.
B. Inventory tags noted during the auditor’s observation to items listed in receiving
reports and vendor’s invoices.
C. Items listed in the inventory listing schedule to inventory tags and the auditor’s
recorded count sheets.
D. Items listed in receiving report and vendors’ invoices to the inventory listing
schedule.

8. The physical count of inventory of a retailer was higher than shown by the perpetual
records. Which of the following could explain the difference?
A. Inventory items had been counted but the tags placed on the items had not been
taken off the items and added to the inventory accumulation sheets.
B. Credit memos for several items returned by customers had not been recorded.
C. No journal entry had been made on the retailers’ books for several items returned
to its suppliers.
D. An item purchased “FOB shipping point” had not arrived at the date of the
inventory count and had not been reflected in the perpetual records.

9. For several years a client’s physical inventory count has been lower than what was
shown on the books at the time of the count so that downward adjustments to the
inventory account were required. Contributing to the inventory problem could be
weaknesses in internal control that led to the failure to record some
A. Purchases returned to vendors.
B. Sales returns received.
C. Sales discounts allowed.
D. Cash purchases.

10. Which of the following is the best audit procedure for the discovery of damaged
merchandised in a client’s inventory?
A. Compare the physical quantities of slow-moving items with corresponding
quantities of the prior year.\
 B. Observe merchandise and raw material during the client’s physical inventory
taking.
C. Review the management’s inventory representation letter of accuracy.
D. Test overall fairness of inventory values by comparing the company’s turnover
ratio with the industry average.

11. An inventory turnover ratio is useful to the auditor because it may detect
A. Inadequacies in inventory pricing.
B. Methods of avoiding cyclical holding costs.
C. The optimum automatic reorder points.
D. The existence of obsolete merchandise.

12. Which of the following auditing procedures most likely would provide assurance
about a manufacturing entity’s inventory valuation?
A. Testing the entity’s computation of standard OH rates.
B. Obtaining confirmation of inventories pledged under loan agreements.
C. Reviewing shipping and receiving cut-off procedures for inventories.
D. Tracing tests counts to the entity’s inventory listing.

13. When auditing merchandise inventory at year-end, the auditor performs a purchase
cut-off test to obtain evidence that:
A. All goods purchased before year-end are received before the physical count.
B. No goods held on consignment for customers are included in the inventory
balance.
C. No goods observed during the physical count are pledged or sold.
D. All goods owned at year-end are included in the inventory balance.

14. In a manufacturing company, which one of the following audit procedures would
give the least assurance of the valuation of inventory at the audit date?
A. Testing the computation of standard OH rates.
B. Examining paid vendors’ invoices.
C. Reviewing direct labor rates.
D. Obtaining confirmation of inventories pledged under loan agreements.

15. Observation of inventories is a generally accepted auditing procedure. Which of the

following statements concerning this accepted auditing procedure is not correct?
A. Regardless of the inventory system maintained by the client, an annual physical
count must be made of each item in the inventory, and test counts must be made
by the auditor
B. The independent auditor, when he asked to audit financial statements covering
the current period and one or more periods for which (s)he had not observed or
 made some physical counts, may be able to become satisfied as to such prior
inventories through appropriate alternative procedures.
C. When the well-kept perpetual inventory records are checked by the client
periodically by comparisons with physical counts, the auditor’s observation
procedures usually can be performed either during or after the end of the period
under audit.
D. Inventories, which in the ordinary course of business are physically located in
public warehouses, may be verified by direct confirmation in writing form the
custodians, provided that, when the amount involved is a significant portion of the
current assets or the total assets, additional procedures are applied as deemed
necessary.

16. An auditor is most likely to inspect loan agreements under which an entity’s
inventories are pledged to support management’s assertion of
A. Existence and occurrence
B. Presentation and disclosure
C. Completeness
D. Valuation or allocation

17. Which of the following is the best audit test to evaluate the accuracy of the inventory
records for materials inventory in a production operation?
A. Trace selected inventory receipts to perpetual inventory records.
B. Vouch selected postings in the perpetual inventory records to source documents.
C. Perform turnover tests for materials inventory.
D. Reconcile quantities on hand per physical counts of selected items with perpetual
inventory records and verify pricing.

18. Some firms that dispose of only a small part of their total output by consignment
shipments fail to make any distinction between consignment shipments and regular
sales. Which of the following suggests to the auditor that the client’s good have been
shipped on consignment?
A. Numerous shipments of small quantities.
B. Numerous shipments of large quantities and few returns.
C. Large debits to accounts receivable and small periodic credits.
D. Large debits to accounts receivable and large periodic credits.

STRAIGHT PROBLEMS

PROBLEM 1

Troy Co., a manufacturer of rubber wrappers, provided the following information from its
accounting records for the year ended December 31, 2014:
 Inventory at December 31, 2014(based on physical count on Dec 31) P 967, 500

Accounts Payable at Dec 31, 2014 657, 000

Net Sales (sales minus sales returns) 6, 065, 250

Additional Information follows:

(a) Included in the physical count were goods billed to a customer FOB shipping point on
December 31, 2014. These goods had cost of P23, 250 and were billed at P30, 000.
The shipment was on Troy’s loading dock waiting to be picked up by the common
carrier.
(b) Goods returned by customers and held pending inspection in the returned goods area
on December 31, 2014, were not included in the physical count. On January 8, 2015,
the goods costing P24, 000 were inspected and returned to inventory. Credit memos
totaling P35, 250 were issued to the customers on the same date.
(c) Parts held on consignment from Axe to Troy amounting to P6, 750, were included in
the physical count of goods in Troy’s warehouse on December 31, 2014, and in
accounts payable in December 31, 2014.
(d) Goods, with an invoice cost of P20, 250, received from a vendor at 5:00 p.m. on
December 31, 2014, were recorded on a receiving report dated January 2, 2015. The
goods were not included in the physical count, but the invoice was included in
accounts payable at December 31, 2014.
(e) Retailers were holding P37, 500 at cost, of goods on consignment from Troy, at their
stores on December 31, 2014.
(f) On January 3, 2015, a monthly freight bill in the amount of P4, 500 was received. The
bill specifically related to merchandise purchased in December 2014, one-half of
which was still in the inventory at December 31, 2014. The freight charges were not
included in either the inventory or accounts payable at December 31, 2014.
(g) P11, 250 worth of parts which were purchased from Jam and paid for in December
31, 2014 and were sold in the last week of 2014 and appropriately recorded as sales of
P15, 750. The parts were included in the physical count on December 31, 2014,
because the parts were on the loading dock waiting to be picked up by the customer.
(h) Goods were in transit from a vendor to Troy on December 31, 2014. The invoice cost
was P53, 250 and the goods were shipped FOB shipping point on December 29, 2014.
(i) Work in process inventory costing P22, 500 was sent to an outside for plating on
December 30, 2014.
(j) Goods shipped to a customer FOB destination on December 26, 2014, were in transit
at December 31, 2014, and had a cost of P15, 750, upon notification of receipt by the
customer on January 2, 2015; Troy issued a sales invoice for P31, 500.
(k) Goods received from a vendor on December 26, 2014, were included in the physical
count. However, the related P42, 000 vendor invoice was not included in accounts
payable at December 31, 2014, because the accounts payable copy of the receiving
report was lost.
Required:

1. Adjusted balance of Inventory as of December 31, 2014 P 1, 125, 000

2. Adjusted balance of Accounts payable as of December 31, 2014 P750, 000
3. Adjusted balance of Net sales for the year 2014 P6,000,000

PROBLEM 2

You were engaged by Albert Corporation for the audit of the company’s financial statements
for the year ended December 31, 2013. The company is engaged in the wholesale business
and makes all sales at 20% over cost.

The following were gathered from the client’s accounting records:

SALES PURCHASES
Date Ref. Amount Date Ref. Amount
Balance forwarded P10, 400,000 Balance forwarded P5, 400,000
Dec. 27 SI No. 2965 80,000 Dec. 27 RR No. 557 70,000
Dec. 28 SI No. 2966 300,000 Dec. 28 RR No. 558 130,000
Dec. 28 SI No. 2967 20,000 Dec. 29 RR No. 559 48,000
Dec. 31 SI No. 2969 92,000 Dec. 30 RR No. 561 140,000
Dec. 31 SI No. 2970 136,000 Dec. 31 RR No. 562 84,000
Dec. 31 SI No. 2971 32,000 Dec. 31 RR No. 563 128,000
Dec. 31 Closing entry (11,060,000) Dec. 31 Closing entry (6,000,000)
P - P -
Note: SI= sales invoice RR=receiving report

Inventory P1, 200, 000

Accounts receivable 1,000,000

Accounts payable 800,000

You observe the physical inventory of goods in the warehouse on December 31 and were
satisfied that it was properly taken.

When performing sales and purchase cut-off test, you found that at Dec 31, the last RR which
had been used was No. 563 and that no shipments had been made on any SI whose number is
larger than No. 2968. You also obtained the following additional information:

(a) Included in the warehouse physical inventory at December 31 were goods which had
been purchased and received on RR no. 560 but for which the invoice was not
received until the following year. Cost was P36, 000.
(b) On the evening of December 31, there were two delivery trucks in the company
sliding:
  Delivery truck no. CER 489 was unloaded on January 2 the following
year and received on RR no. 563. The freight was paid by the vendor
 Delivery truck no. RTS 543 was loaded and sealed on December 31
but leave the company premises on January 2. This order was sold for
P200, 000 per SI no. 2968.
(c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks
enroute to Sha-Sha Corporation. Sha-Sha received the goods, which were sold on SI
no. 2966 terms FOB destination, the next day.
(d) Enroute to the client on December 31 was a truckload of goods, which was received
on RR no. 564. The goods were shipped FOB Destination, and freight of P4, 000 was
paid by the client. However, the freight was deducted from the purchase price of P1,
600, 000.

Required:

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

1. Sales for the year ended December 31, 2013

A. P10,500,000
B. P10,300,000
C. P10,800,000
D. P10,700,000

2. Purchases for the year ended December 31, 2013

A. P6,000,000
B. P7,508,000
C. P6,036,000
D. P7,636,000

3. Inventory as of December 31,2013

A. P1,728,000
B. P1,600,000
C. P1,936,000
D. P1,628,000

4. Accounts receivable as of December 31, 2013

A. P700,000
B. P440,000
C. P740,000
D. P240,000

5. Accounts payable as of December 31, 2013

 A. P836,000
B. P708,000
C. P800,000
D. P1,435,000

PROBLEM 3

Surfy Company is preparing its 2013 financial statements. Prior to any adjustments, inventory
is valued at P1, 595, 000. During your audit, you found the following information relating to
certain inventory transactions from your cut off test.

a. Goods costing P75, 000, sold for P98, 000, were shipped on December 31, 2013. The
terms of the invoice were FOB shipping point. The goods were included in the ending
inventory for 2013 and the sale was recorded in 2014.
b. A P63, 000 shipment of goods to a customer on December 31, 2013, terms FOB
destination, was recorded as a sale upon shipment. The goods, costing P40, 000 and
delivered to the customer on January 6, 2014, were not included in the 2013 ending
inventory.
c. Goods valued at P108, 000 are on consignment with a customer. These goods were not
included in the ending inventory figure.
d. The invoice for goods costing P45, 000 was received and recorded as a purchase on
December 31, 2013. The related goods, shipped FOB destination were received on
January 2, 2014, and thus were not included in the physical inventory.
e. Goods costing P79, 000 were received from a vendor on January 5, 2014. The related
invoice was received and recorded on January 12, 2014. The goods were shipped on
December 31, 2013, terms FOB shipping point.
f. A P51, 000 shipment of goods to a customer on December 31, terms FOB destination
was not included in the year-end inventory. The goods cost P36, 000 and were delivered
to the customer on January 8, 2014. The sale was properly recorded in 2014.
g. Goods valued at P145, 000 are on consignment from a vendor. These goods are not
included in the physical inventory.

Required:

1. Compute the proper inventory amount to be reported on Makati’s statement of

financial position for the year ended December 31, 2013. P 1, 783, 000
2. By how much would the profit or loss have been misstated if no adjustments were
made for the above transactions? P189, 000

PROBLEM 4

You were engaged to perform an audit of the accounts of the Miami Heat for the year ended
December 31, 2013, and you observed the taking of the physical inventory of the company on
December 30, 2013. Only merchandise shipped by the company to customers up to and
including December 30, 2013 has been eliminated from inventory. The inventory as
determined by physical count has been recorded on the books by the company’s controller.
No perpetual inventory records are maintained. All sales are made FOB shipping point basis.
You are to assume that all purchase invoices have been correctly recorded. The inventory was
recorded through the cost of sales method.

The following lists of sales invoices are entered in the sales books for the month of December
2013 and January 2014, respectively.

DECEMBER 2013
Sales invoice amount Sales invoice date Cost Date shipped
a) P250, 000 December 21, 2013 P200,000 December 31,
2013
b) 200, 000 December 31, 2013 140,000 November 03,
2013
c) 150, 000 December 29, 2013 130, 000 December 30,
2013
d) 300, 000 December 31, 2013 220, 000 January 03, 2014
e) 600, 000 December 30, 2013 380, 000 December 29,
2013
(shipped to
consignee)
JANUARY 2014
f) P400, 000 December 31, 2013 P300, 000 December 30,
2013
g) 300, 000 January 02, 2014 215, 000 January 02,
2014
h) 500, 000 January 03, 2014 375, 000 December 31,
2013

Required:

Prepare the necessary adjusting entries at December 31, 2013.

ENTRIES:

A. Cost of sales 20, 000

Merchandise Inventory 20,000
B. NO ADJUSTMENTS
C. NO ADJUSTMENTS
D. Sales 300, 000
Accounts Receivable 300, 000
E. Merchandise Inventory 380, 000
Cost of sales 380, 000
 Sales 600, 000
Accounts Receivable 600, 000
F. Accounts receivable 400, 000
Sales 400, 000
G. NO ADJUSTMENTS
H. Accounts receivable 500, 000
Sales 500, 000

Cost of sales 375, 000

Merchandise Inventory. 375, 000

PROBLEM 5

Your client, San Antonio Spurs, is an importer and wholesaler. Its merchandise is purchased
from several suppliers and is warehouse until sold to customers.

In conducting your audit for the fiscal year ended June 30, 2013, you were satisfied that the
system of internal control was good. Accordingly, you observed the physical inventory at an
interim date, May 31, 2013 instead of at year end. You obtained the following information
from your client’s general ledger:

Inventory P 1, 312, 500

Physical inventory, May 31, 2013 1, 425, 000

Sales for 11 months ended May 31, 2013 12, 600, 000

Sales for the year ended June 30, 2013 14, 400, 000

Purchase for 11 months ended May 31, 2013(before audit adjustments) 10, 125, 000

Purchase for the year ended June 30, 2013(before audit adjustments) 12, 000, 000

Your audit discloses the following information:

a) Shipment received in May included in the physical inventory but recorded

as June purchases P 112,

500
 b) Shipment received in unsalable condition and excluded from physical inventory
Credit memos had not been received nor chargebacks to vendors been recorded:
Total at May 31, 2013 15,
000
Total at June 30, 2013(including the November unrecorded chargebacks) 22,
500
c) Deposits made with vendor and charged to purchases in April, 2013. Product
was shipped in July, 2013 30,
000
d) Deposits made with vendor and charged to purchases in May, 2013. Product
Was shipped FOB destination, on May 30, 2013 and was included in May 31,
2013 physical inventory as goods in transit 82,
500
e) Through the carelessness of the receiving department shipment in early June
2013 inventory was damaged by rain. This shipment was later sold in the last
week of June at cost 150,
000

Required:

1. Gross profit rate for 11 months ended May 31, 2013 20%
2. Cost of goods sold during the month of June 2013 using gross profit method
P1,470,000
3. June 30, 2013 inventory using the gross profit method P1,710,000

PROBLEM 6

On April 25, 2013, a fire damaged the office and warehouse of Kalayo Company. The only
accounting record saved was the ledger, from which the trial balance below was prepared.

Kalayo Company
Trial balance
March 31, 2013

DEBIT CREDIT
Cash P90, 000
Accounts receivable 200, 000
Inventory, Dec. 31 2012 375, 000
Land 175, 00
Building 550, 000
Acc. Depreciation P206, 500
Other assets 28,000
Accounts payable 118, 600
Accrued expenses 90, 000
Share capital, P100 par 500, 000
Retained earnings 260,000
Sales 675, 000
Purchases 260, 000
Operating expenses 172, 000
Totals P1, 850, 00 P1, 850,
000
The following data and information have been gathered:

a. The company’s year-end is December 31.

b. An examination of the April bank statement and cancelled checks written during the
period April 1 to 25 totaled P65, 000: P28, 500 paid to accounts payable as of March
31, P17, 000 for April merchandise purchases, and P19, 500 paid for other expenses.
Deposits during the same period amounted to P64, 750, which consisted of receipts on
account from customers with the exception of a P4, 750 refund from a vendor for
merchandise returned in April.
c. Correspondence with suppliers revealed unrecorded obligations at April 25 of P53,
000 for April merchandise purchases, including P11, 500 for shipments in transit on
that date.
d. Customers acknowledged indebtedness of P180, 000 at April 2013. It was also
estimated that customers owed another P40, 000 that will never be acknowledged
indebtedness,
P3, 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 ratio for the past two years was in effect
during the current year. The company’s audited financial statements disclosed the
following information:
2012 2011
Net Sales P2, 650, 000 P1, 950, 000
Net Purchases 1, 400, 000 1, 175, 000
Beginning Inventory 250, 000 330, 000
Ending Inventory 375, 000 250, 000

f. Inventory with a cost of P35, 000 was salvaged and sold for P17, 500. The balance of
the inventory was a total loss.

Required:

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

1. How much is the adjusted balance of Accounts Receivable as of April 25, 2013?
 A. P200, 000
B. 220, 000
C. 180, 000
D. 177, 000
2. How much is the sales for the period January 1 to April 25, 2013?
A. P715, 000
B. 759, 750
C. 755, 000
D. 753, 000
3. How much is the adjusted balance of Accounts Payable as of April 25, 2013?
A. 143, 100
B. 53, 000
C. 118, 500
D. 171, 500
4. How much is the net purchases for the period January 1 to April 25, 2013?
A. P325, 250
B. 336, 750
C. 330, 000
D. 341, 500
5. How much is the cost of sales for the period January 1 to April 25, 2013?
A. P393, 250
B. 417, 866
C. 415, 250
D. 414, 250

6. How much is the estimated inventory on April 25, 2013?

A. P285, 000
B. 307, 000
C. 311, 750
D. 289, 750

7. How much is the estimated inventory fire loss?

A. P278, 000
B. 289, 750
C. 238, 500
D. 267, 500

PROBLEM 7

You are engaged in the regular annual examination of the accounts and records of CERTS
publishing for the year ended December 31, 2013. To reduce the workload at the end, the
company, upon your recommendation, took its annual physical inventory on November 30,
2013. You observed the taking of the inventory and made tests of the inventory count and the
inventory and made tests of the inventory count and inventory records.

The company’s inventory account, which includes raw materials and work-in-process, is on
perpetual basis. Inventories are valued at cost, freight-in, first-out method. There is no
finished goods inventory.

The company’s physical inventory revealed that the book inventory of P1, 695, 960 was
understated by P84, 000. To avoid delay in completing its monthly financial statements, the
company decided not to adjust the book inventory until year-end except for obsolete
inventory items.

Your examination disclosed the following information regarding the November 30 inventory:

a. Pricing tests showed that the physical inventory was overstated by P61, 600.
b. An understatement of physical inventory by P4,200 due to errors in footings and
extensions.
c. Direct labor included in the inventory amounted to P280, 000. Overhead was included
at the rate of 200% of direct labor. You have ascertained that the amount of direct
labor was correct and that the overhead rate was proper.
d. The physical inventory included obsolete materials with a total cost of P7, 000.
During December, the obsolete materials were off by charge to cost of sales.

Your audit also disclosed the following information about the December 31
inventory:
a. Total debits to the following accounts during December were:
Cost of sales P1, 920, 800
Direct labor 338, 800
Purchases 691, 600
b. The cost of sales of P1, 920, 800 included direct labor of P386, 400.

Required:

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

1. Adjusted amount of physical inventory at November 30, 2013?

A. P1,715,560
B. 1,631,560
C. 1,845,760
D. 1,722,560
2. Adjusted amount of inventory at December 31, 2013?
A. P1,509,760
B. 1,516,760
 C. 1,502,760
D. 1,452,760
3. Cost of materials on hand and materials included in work-in-process as of December
31, 2013?
A. P819,560
B. 812,560
C. 728,560
D. 942,760
4. The amount of direct labor included in work-in-process as of December 31, 2013?
A. P618,800
B. 232,400
C. 338,800
D. 386,400

5. The amount of factory overhead included in work-in-process as of December 31,

2013?
A. P772,800
B. 1,237,600
C. 464,800
D. 777,600

MULTIPLE CHOICE QUESTIONS-PROBLEMS

Questions 1 through 3 are based on the following information:

In your audit of the December 31, 2013, financial statements of Lace Company, you found
the following inventory-related transactions.

A. Goods costing P5, 000 are on consignment with a customer. These goods were not
included in the physical count on December 31, 2013.
B. Goods costing P1, 650 were delivered to Lace, Inc. on January 4, 2014. The invoice
for these goods was received and recorded on January 10, 2014. The invoice showed
the shipment was made on December 29, 2013, FOB shipping point.
C. Goods costing P2, 164 were shipped FOB shipping point on December 31, 2013, and
were received by the customer on January 2, 2014. Although the sale was recorded in
2013, these goods were included in the 3103 ending inventory.
D. Goods costing P864 were shipped to a customer on December 31, 2013, FOB
destination, These goods were delivered to the customer on January 5, 2014, and were
not included in the inventory. The sale was properly taken up in 2014.
E. Goods costing P860 shipped by a vendor under FOB destination term, were received
on January 3, 2014, and thus were not included in the physical inventory. Because the
 related invoice was received on December 31, 2013, this shipment was recorded as a
purchase in 2013
F. Goods valued at P5, 100 were received from a vendor under consignment term. These
goods were included in the physical count.
G. Lace, Inc. recorded as a 2013 sale P64, 300 shipments of goods to a customer on
December 31, 2013, FOB destination. This shipment of goods costing P37, 500 was
received by the customer on January 5, 2014, and was not included in the ending
inventory figure.

Prior to any adjustments, Lace, Inc.’s ending inventory is valued at P445, 000 and the
reported net income for the year is P1, 648, 000.

1. Lace’s December 31, 2013, inventory should be increased by

A. P8, 000
B. 40, 000
C. 37,750
D. 61, 640
2. What is Lace’s adjusted net income for the year 2013?
A. P1, 565, 800
B. 1, 674, 260
C. 1, 615, 800
D. 1, 666, 800
3. Purchase cut-off procedures test the cut-off completeness assertions. A company
should include goods in its inventory if it
A. Has sold the goods.
B. Holds legal title to the goods
C. Has physical possession of the goods.
D. Has paid for the goods.

Questions 4 through 5 are based on the following information:

MORE ENERGY Company operates a wholesale oil products company. MORE ENERGY
believes that an employee and a customer are conspiring to steal gasoline. The employee
records sales to this customer for less than the amount actually placed in the customer’s tank
truck. In order to confirm or refuse these suspicions, MORE ENERGY has collected the
following data for the past 10 working days.

Quantity Cost per

Item (gallons) unit (gal.) Total Cost
Inventory, September 1 220, 000 P 1.45 P 319, 000
Purchases 1,560,000 1.45 2,262,000
Goods available for sale 1,780,000 P 2.581,000
MORE ENERGY had sales of P 2, 512, 000 during this 10-day period. All sales were made
at P1.60 per gallon. A physical inventory indicates that there are 192, 000 gallons of gasoline
in inventory at the close of business on September 10.

4. How much inventory should be present at the end of the 10-day period (in gallon)?
A. 192, 000
B. 200, 000
C. 210, 000
D. 220, 000
5. What is the cost of missing inventory?
A. ZERO
B. P26, 100
C. 40, 600
D. 304,500

Questions 6 through 9 are based on the following information:

The SOMAN CO. is on a calendar year basis. The following data were found during your
audit:

A. Goods in transit shipping FOB shipping point on December 28 by a supplier in the

amount of P100, 000 had been excluded from the inventory, and further testing
revealed that the purchased had been recorded
B. Goods costing P30, 000 had been received, included in inventory, and recorded as a
purchase. However, upon your inspection, the goods were found to be defective and
would be immediately returned.
C. Materials costingP170, 000 and billed on December 30 at a selling price of P264, 000
had been segregated in the warehouse for the shipment to a customer. The materials
had been excluded from inventory as a signed purchase order had been received from
the customer. Terms, FOB destination.
D. Goods costing P70, 000 was out on consignment with Gundura, Inc. Since the
monthly statement from Gundura listed those materials as on hand, the items had been
excluded from the inventory and invoiced on December 31 at P80, 000/
E. The sale of P150, 000 worth of materials and costing P120, 000 had been shipped
FOB point of shipment on December 31. However, this inventory had found to be
included in the final inventory
F. Goods costing P100, 000 and selling for P140,000 had been segregated, but not
shipped at December 31, and were not included in the inventory. A review of the
customer’s purchase order set forth terms as FOB destination. The sale had not been
recorded.
G. Your client has an invoice from a supplier, terms FOB shipping point, but the goods
had not arrived as yet. However, these materials costing P134, 000 had been included
in the inventory count, but no entry had been made for their purchase.
 H. Merchandise costing P200, 000 had been recorded as a purchases but not included in
inventory. Terms of sale are FOB shipping point according the supplier’s warehouse
which had arrived by December 31.

Further inspection of the client’s record’d revealed the following December 31 balances:
Inventory, P1, 350, 000; Account receivable P630, 000; Account payable P690, 000; Sales,
P6,032, 000; Purchases P3,150,000; Net income P727, 000.

Based on the preceding information, determine the adjusted balances of the following:

6. Inventory
A. P700, 000
B. 934, 000
C. 1, 900, 000
D. 1, 840, 000

7. Accounts payable
A. P286, 000
B. 380, 000
C. 446, 000
D. 406, 000
8. Purchases
A. P3, 354, 000
B. 3, 150, 000
C. 3,254, 000
D. 3, 120, 000
9. Sales
A. P 5, 848, 000
B. 6,376, 000
C. 5,688,000
D. 5,768,000