INVENTORIES – APPLIED AUDITING

EXERCISE 1
Presented below is a list of items that may or may not be reported as inventory
in a Company’s December 31, balance sheet.

Cost of goods but on consignment at another company’s P 2,400,000

store
Goods sold on installment basis 300,000
Goods in transit purchase FOB shipping point 360,000
Goods in transit purchase FOB destination 600,000
Cost of goods sold to another company, for which the 900,000
company has signed an agreement to repurchase at a set
price that covers all costs related to the inventory.
Cost of goods sold where large of returns are 840,000
predictable
Cost of goods in transit sold FOB shipping point 360,000
Freight charges on goods purchased 240,000
Factory labor costs incurred on goods still unsold 150,000
Interest cost incurred for inventories that are 120,000
routinely manufactured
Cost incurred to advertise goods held for resale 60,000
Materials on hand not yet placed into production 1,050,000
Office supplies 30,000
Raw materials on which the company has started 840,000
production, but which are not completely processed
Factory Supplies 60,000
Cost of goods held on consignment from another company 1,350,000
Cost identified with units completed but not yet sold 780,000
Cost of goods in transit sold FOB destination 120,000
Temporary Investment in stocks and bonds that will be 1,500,000
resold in the near future

1. How much of these items would typically be reported as inventory in the

financial statements?
A. 6,900,000 C. 6,780,000
B. 6,000,000 D. 6,660,000

EXERCISE 2
The following accounts were extracted from the unadjusted trial balance of
Silang Corp. as of December 31, 2014.

Cash 963,200
Accounts Receivable 2,254,000
Merchandise Inventory 6,050,000
Accounts Payable 4,201,000
Accrued Expenses 60,400
During your audit, you discovered that the client held its cash records open even
after the year end.

Audit Notes:
A. Collections for January 2015 of P 654,600 were recorded in the December 2014
cash records. The receipts of P 360,100 represents cash sales with the
balance representing collections from customers who paid within the 5% cash
discount period.

B. Accounts payable of P 372,400 was paid in January 2015. The payments on

which a P 12,400 cash discount has been taken were included in the December
31, 2014 check register.

C. Merchandise inventory as stated in the trial balance represented the result

of the count conducted on December 30, 2014 on inventories on hand. The
following information were found to be relevant in your audit of inventories:

APPLIED AUDITING PART I

INVENTORIES – APPLIED AUDITING
• Goods valued at P 275,000 are on a consignment with a customer and
were not included in the physical count.
• Goods costing P 217,500 were received from a vendor on January 05,
2015. The related invoice was received and recorded on January 6, 2015.
These goods were shipped by the vendor on December 31, 2014 under FOB
shipping point terms.
• Goods costing P 637,500 were shipped on December 31, 2014, and were
received by the customer on January 02, 2015. The terms of the invoice
were FOB shipping point. The sales of P 815,000 has been recorded in
2014.
• A shipment of goods invoiced at P 182,000 to a customer on December
29, terms FOB destination was recorded in 2015. The cost of related
goods amounted to P 130,000 and were received by the customer on
January 04, 2015.
• The invoice for goods costing P 175,000 was received and recorded as
purchase on December 31, 2014. The related goods, shipped FOB
destination were received on January 04, 2015.
• Goods valued at P 612,800 are consignment from a vendor. The goods
were excluded from the physical count.

1. The adjusted balance of cash:

A. 963,200 C. 681,000
B. 693,400 D. 668,600

2. The adjusted balance of accounts receivable:

A. 2,254,000 C. 2,564,000
B. 2,548,500 D. 2,908,600

3. Correct inventory ending balance:

A. 5,010,000 C. 6,035,000
B. 5,860,000 D. 6,080,000

4. Net adjustment to cost of sales:

A. debit by 57,500 C. credit by 580,000
B. debit by 232,500 D. credit by 555,300

5. Adjusted accounts payable:

A. 4,243,500 C. 4,615,900
B. 4,398,400 D. 4,790,900

6. Correct working capital ratio:

A. 2.00 C. 1.85
B. 1.98 D. 1.80

EXERCISE 3
You are making an audit of the Malaguku Co. for the year ended December 31, 2014.
You have observed the taking of physical inventory and have noted that all
merchandise actually received up to the close of business, December 28, 2014 were
included on the inventory sheets. The total of the physical inventory, at invoice
cost is P 175,000, while the purchase account shows a balance of P 1,750,000 as
of December 31, 2014.

You noted also that the following purchases invoices have been recorded in the
voucher register as follows:

RR NO. DECEMBER 2014 INVOICE DATE TERMS MERCHANDISE

VOUCHER REGISTER RECEIVED
631 2,000 December 26 Shipping Point December 29
632 4,000 December 26 Destination January 05
633 9,000 January 02 Destination December 30
634 8,000 December 31 Shipping Point January 04
635 1,000 January 07 Shipping Point December 28
636 6,000 January 03 Shipping Point January 06

APPLIED AUDITING PART I

INVENTORIES – APPLIED AUDITING
RR NO. JANUARY 2015 INVOICE DATE TERMS MERCHANDISE
VOUCHER REGISTER RECEIVED
637 8,500 December 20 Destination January 08
638 7,200 January 02 Shipping Point December 27
639 11,700 December 28 Destination January 07
640 6,900 December 30 Destination January 06
641 4,100 January 02 Destination December 25

1. What is the adjusted balance of purchases for the period ended December 31,
2014?
A. 1,751,300 C. 1,753,200
B. 1,743,800 D. 1,751,200

2. What is the adjusted balance of the inventory account as of December 31,

2014?
A. 175,000 C. 194,000
B. 186,000 D. 198,100

EXERCISE 4
You are engaged in the audit of the inventory of the Kula Inc. as of December 31,
2014. The company is on a physical basis. The physical inventory was actually
taken on December 29, 2014 rather than the evening of December 31, so that the
company employees might enjoy the New Year’s festivities. You have observed the
taking of the physical inventory. As taken, the physical inventory included only
merchandise received through December 29. The subsequent compilation of the
inventory includes only the merchandise physically counted and is not yet recorded
on the books. After having completed appropriate work on the inventory as
compiled, you make additional test to determine:

• The correct cut off the purchases account for the year 2014. It is the
company policy to recognize purchases based on the freight terms and the
passage of title. The ledger balance is P 650,000.
• The correct amount of inventory to be stated on a comparable basis with
acquisition costs purchases and sales. The inventory summary shows total
of P 27,000.

Listed in the table are certain matters developed in the course of your tests.
Certain voucher register entries are as follows:

F.O.B TERMS SHIPPED DATES MDSE. INVOICE NO. AMOUNT

DECEMBER, 2014 RECEIVED
Destination 12-23-2014 12-26-2014 1401 250
Shipping Point 12-24-2014 12-30-2014 9176 310
Shipping Point 12-24-2014 12-31-2014 0010 180
Destination 12-24-2014 12-29-2014 1307 550
Shipping Point 12-26-2014 01-02-2015 6609 690
Destination 12-26-2014 12-31-2014 6610 420
Destination 12-26-2014 01-03-2015 0481 750
Shipping Point 12-27-2014 12-30-2014 3671 290
Shipping Point 01-02-2015 01-04-2015 6098 350

F.O.B TERMS SHIPPED DATES MDSE. INVOICE NO. AMOUNT

JANUARY, 2015 RECEIVED
Destination 12-26-2014 01-02-2015 6069 680
Shipping Point 12-27-2014 12-30-2014 6909 460
Destination 12-27-2014 12-29-2014 9966 770
Destination 12-28-2014 01-02-2015 6699 205
Shipping Point 12-28-2014 01-03-2015 6666 315
Shipping Point 12-29-2014 12-31-2014 9999 595
Destination 12-29-2014 12-31-2014 9696 610
Destination 12-31-2014 01-04-2015 9996 375
Shipping Point 01-02-2015 01-05-2015 6669 805

The physical inventory compilation includes P 750 of merchandise received on

consignment from a supplier.

APPLIED AUDITING PART I

INVENTORIES – APPLIED AUDITING

The company has other consigned stocks on hand which were not included in the
physical inventory compilation and which cost P 5,200 if purchased.

Shipments of invoice 6969 on December 30, 2014 were properly recorded on the books
as sales. You computed the cost of these sales as being P 1,900.

Adjusted balances at December 31, 2014.

1. Inventory
A. 30,120 C. 27,300
B. 28,220 D. 26,430

2. Purchases
A. 649,675 C. 650,585
B. 649,990 D. 651,650

EXERCISE 5
On May 31, 2014, a fire completely destroyed the work in process inventory of
Alder Paints. Physical Inventory figures were published as follows.

As of January 1, 2014 As of May 31,2014

Raw Materials 15,000 30,000
Work in Process 50,000 -
Finished Goods 70,000 60,000

Sales for the five months of 2014 were 150,000. Raw materials purchased were P
50,000. Freight on purchases was P 5,000. Direct Labor for the five months was P
40,000. To determine the value of the lost inventory, the insurance adjusters
have agreed to use an average gross profit rate of 32.5%. Assume the manufacturing
overhead was 45% of direct labor cost.

1. The value of the goods manufactured and completed as of May 31, 2014 was
A. 60,000 C. 95,000
B. 90,000 D. 91,250

2. Raw materials used during the first five months of 2014 were
A. 25,000 C. 40,000
B. 35,000 D. 45,000

3. The total value of goods put in process during the five month period
amounted to
A. 143,000 C. 168,000
B. 150,000 D. 148,000

4. The value of the destroyed work in process inventory as determined by the

insurance adjusters would be
A. 56,750 C. 86,750
B. 65,750 D. 57,650

EXERCISE 6
Nancy Inc. had the following items of merchandise inventories with related
information about estimated selling price and cost to sell as of December 31,
2014.

Class Z
Item Quantity Unit Cost Unit SP Unit Cost to Sell
Z-01 10,000 20 30 5
Z-02 15,000 25 30 8
Z-03 20,000 30 40 14
Z-04 25,000 32 45 10
Z-05 30,000 35 50 20

Class Y
Item Quantity Unit Cost Unit SP Unit Cost to Sell

APPLIED AUDITING PART I

INVENTORIES – APPLIED AUDITING
Y-01 20,000 22 25 2
Y-02 22,000 28 30 5
Y-03 28,000 25 40 10
Y-04 25,000 30 35 10
Y-05 30,000 15 30 5

1. What is the carrying value of inventories if the lower of cost or NRV valuation
employed on an item per item basis?
A. 5,515,000 C. 5,981,000
B. 5,831,000 D. 6,100,000

2. What is the loss on inventory write down, assuming that direct write off
method is used under requirement 1?
A. none C. 150,000
B. 119,000 D. 466,000

3. What is the carrying value of inventories if the lower of cost or NRV

valuation employed on a per class basis?
A. 5,515,000 C. 5,981,000
B. 5,831,000 D. 6,100,000

4. What is the loss on inventory write down, assuming that direct write off
method is used under requirement 2?
A. none C. 150,000
B. 119,000 D. 466,000

EXERCISE 7
October Inc, a manufacturing company, had the following information about its
inventories as of December 31, 2014.

Finish Goods Inventory

Item Cost Selling Price Cost to Sell
A 500,000 1,000,000 20% of SP
B 1,200,000 1,500,000 30% of SP
C 800,000 1,200,000 10% of SP

Work in process Inventory

Item Direct Direct Overhead Cost to Selling Price Cost to
Materials Labor Complete after sell
completion
A 30,000 50,000 25,000 50,000 200,000 20%
B 45,000 65,000 40,000 60,000 250,000 30%
C 75,000 25,000 80,000 40,000 240,000 10%

Raw materials inventory: Finished Goods A

Item Cost Replacement
cost
RM A-01 120,000 125,000
RM A-02 95,000 90,000

Raw materials inventory: Finished Goods B

Item Cost Replacement
cost
RM B-01 80,000 100,000
RM B-02 105,000 98,000
RM B-03 110,000 100,000

Raw materials inventory: Finished Goods C

Item Cost Replacement
cost
RM C-01 175,000 170,000
RM C-02 40,000 45,000

1. What is the correct carrying value of finished goods inventory?

APPLIED AUDITING PART I

INVENTORIES – APPLIED AUDITING
A. 2,500,000 C. 2,930,000
B. 2,350,000 D. 3,000,000

2. What is the correct carrying value of work in process inventory?

A. 435,000 C. 401,000
B. 396,000 D. 445,000

3. What is the correct carrying value of raw materials inventory?

A. 725,000 C. 728,000
B. 708,000 D. 698,000

4. Assuming direct write-off method is used to account for inventory write down,
how much should be recognize in the profit/loss as a result of the lower of cost
or net realizable value valuation of inventories?
A. 201,000 C. 210,000
B. 206,000 D. 216,000

5. Assuming allowance method and the following allowance for inventory write down
existed at the beginning of the year (FG – 60,000, WIP – 70,000, RM – 0), how
much should be recognize in the profit/loss as a result of the lower of cost or
net realizable value valuation of inventories?
A. 107,000 C. 138,000
B. 76,000 D. 145,000

EXERCISE 8
You observed the inventory count of the Salsons Company as of December 31, 2014.
The client prepared the summary presented below and gave it to you for
verification.

Quantity Cost NRV Amount

A 360 units 3.60/dozen 3.64/dozen 1,310.40
B 24 units 4.70 each 4.80 each 112.80
C 28 units 16.50 each 16.50 each 1,353.00
D 43 units 5.15 each 5.20 each 176.80
E 400 units 9.10 each 8.10 each 3,640.00
F 70 dozens 2.00 each 2.00 each 140.00
G 95 grosses 144.00 per gross 132.00 per 13,780.00
gross

1. How much should the inventory be presented in the 2014 balance sheet?
A. 107,000 C. 138,000
B. 76,000 D. 145,000

APPLIED AUDITING PART I