9

TANTIVE TESTS OF
NTORIES AND COST
OF GOODS SOLD
CHAPTER

9-1. ​Substantiation of the figure for inventories is an especially challenging task because of the
variety of acceptable methods of valuation. In addition, the variety of materials found in
inventories calls for considerable experience and skill to do an efficient job of identifying and
test-counting goods on hand. The possibilities of obsolescence and of excessive stocks also
create problems. Finally, the relatively large size of inventories and their significance in the
determination of net income make purposeful misstatement by the client a possibility which the
auditors must guard against.

9-2. ​During an audit of a manufacturing company, the auditors review the cost system
for the following purposes:

(1) To determine that costs are properly allocated to current and future periods and
hence that cost figures used in arriving at balance sheet and income statement amounts
are supported by internal records.

(2) To obtain assurance that the cost system, as an integral part of the system of
internal control, provides proper accounting control over costs incurred and related
inventories.

(3) To ascertain, as a service to management, that the cost system is economical and
effectively provides information for reducing or controlling costs and for determining
the cost and profitability of products, and other related data necessary for informed
managerial decisions.

9-3. ​The auditors make test counts of inventory quantities during their observation of the taking
of the physical inventory to ascertain that an accurate count is being made by the individuals
taking the inventory. The extent of test counting will be determined by the inventory-taking
procedures; for example, the number of the auditors’ test counts would be reduced if there were
two teams, one verifying the other, taking the inventory. On the other hand, the auditors’ test
counts would be expended if they found errors in the inventory counts.

9-4. ​The statement is not true. The auditors’ responsibilities with respect to inventories include
not only quantities and pricing, but also the quality or condition of the goods, the accuracy of
extensions, footing, and summaries, and the evaluation of internal control. Weakness in internal
control may cause large
9-2 ​Solutions Manual to Accompany Applied Auditing, 2006 Edition

losses from excessive stockpiling, obsolescence, inaccurate cost data, and many other
sources, even though the ending inventory is properly counted and priced.

9-5. ​The independent auditors utilize the client’s backlog of unfilled sales orders in the
determination of net realizable value of finished goods and goods-in-process, and in the
determination of losses, if any, on firm sales commitments for which no production has yet been
undertaken.

9-6. ​Beed Company

Since Beed Company obtained all of its merchandise inventory from the president of
the company in a related-party transaction, the auditors must determine the cost of the
merchandise to the president in his operation of a similar business as a single
proprietor. In this related-party transaction, the auditors must look beyond form--a total
cost of P100,000 for the original stock of merchandise--to substance. Substantively, the
merchandise of Beed Company should be priced, on a specific identification basis if
feasible, at its cost from the suppliers of the sole proprietorship. Any difference
between cost as thus determined and amounts charged by the president to Beed
Company represents unamortized discount on the notes payable. The entire transaction
should be fully disclosed in a note to the financial statements of Beed Company.

9-7. ​Jay Company

The following procedures should be undertaken:

(a) The oral evidence that the motors are on consignment should be substantiated by a
review of the client’s records of consigned inventory, examination of contracts and
correspondence with consignors, and confirmation of consigned stocks by direct
communication with consignors.

(b) The location of the machine in the receiving department, together with the presence
of the “REWORK” tag, suggests that the machine had been shipped to a customer but
rejected and returned by the customer. The auditors should examine the receiving
report for the machine, the accounts receivable confirmation from the customer, and
records of the client’s quality control department, to ascertain who has title to the
machine. If the customer has title, the machine should not be included in inventory,
and a liability for rework costs should be established. If the client has title, the
customer’s account should be credited for the sales return and the machine should be
included in the client’s inventory at estimated realizable value.

(c) The “Material Inspection and Receiving Report” signed by the Navy Source
Inspector, is evidence that title to the machine passed to the Phil. Naval Base on
 November 30, 2006. Accordingly, the auditors should ascertain that the sales value of
the machine is included in accounts receivable, and that the

Substantive Tests of Inventories and Cost of Goods Sold ​9-3

cost of the machine is not in the perpetual inventory or the physical inventory.

(d) The location of the storeroom and the dusty condition of the goods suggest that the
items may be obsolete, or at least slow moving. The auditors should inspect perpetual
inventory records for usage of the materials, and should inquire of production
personnel whether the materials are currently useful in production. The materials may
have to be valued at scrap value.

9-8. ​Pancho Manufacturing Corporation

(a) ​Consignment out.

1. Obtain from the client a complete list of all consignees together with
copies of the consignment contracts. 2. Evaluate the consignment contract provisions relative to the
following
areas: (a) Payment of freight and other handling charges. (b) Extension of
credit. (c) Rates and computation of commissions to consignees. (d)
Frequency and contents of reports and remittances received from
consignees. 3. Discuss with the client any variations found in the contracts which do not
seem justified by the circumstances. 4. Following review of the consignment contracts, communicate
directly with the consignees to obtain complete information in writing on
merchandise remaining unsold, receivables resulting from sales, unremitted
proceeds, and accrued expenses and commissions, which should be reconciled
with the client’s records for the period covered by the engagement. 5. Determine
that merchandise on consignment with consignees is valued on the same basis as
merchandise on hand, and included as part of the inventory. Ascertain that any
arbitrary mark-ons are deducted and that shipping and related charges for the
transfer of merchandise to the consignees are reflected as part of the inventory. 6.
Ascertain that quantities of goods in hands of consignees at the close of the period
under audit appear in the balance sheet and are separately designated as
“Merchandise on Consignment.”

(b) ​Finished merchandise in public warehouse pledged as collateral for

outstanding debt. 1​ . Determine that goods pledged to obtain funds are covered by
warehouse receipts. (The examination of warehouse receipts alone is not a
sufficient verification of goods stored in public warehouses.) 2. Request direct
confirmation from the warehouses in which the
merchandise is held.
 9-4 ​Solutions Manual to Accompany Applied Auditing, 2006 Edition

3. If available, obtain independent accountants’ reports on a warehouses’

internal controls over custody of stored goods. 4. Review the client’s procedures for acceptance and
evaluation of the
performance of warehouses, and review supporting documents. 5. Review the loan agreements
collateralized by warehouse receipts. These agreements usually provide for certain
payments to be made by the borrower as pledged goods are sold. 6. Consider
observing a physical inventory of goods stored at the public
warehouses.

9-9. ​a. ​(2) b​ . ​(3) ​c. ​(2) ​d. ​(2)

e. ​(4) f​ . ​(2)

9-10. ​a. Principal problems the auditor will face are related by:

1. Verification of existence of the inventory owned by the company as

against inventory belonging to the customers.

2. Proper valuation since the perpetual inventory records reflect quantities

only.

b. Steps that should be undertaken to enable the auditor to render an unqualified

opinion:

1. Verify postings to the perpetual ledger at the plant office for both stock owned
and stock being held for customers against original cost sheet to determine
amounts debited and credited to the account.

2. Require that an annual physical inventory taking be done by the client and
arrangements for the presence and observation of the auditor be done.

3. Confirm with customers unclaimed merchandise still in the possession of

the client as of the balance sheet date.

9-11. ​1. Existence or occurrence 2. Existence or occurrence

3. Valuation or allocation 4. Completeness 5. Completeness
6. Valuation or allocation 7. Completeness 8. Completeness
9. Existence or occurrence and completeness 10.
Completeness
 Substantive Tests of Inventories and Cost of Goods Sold 9
​ -5

9-12. ​a. When the inventory is a material item in the financial statements that the auditor is
examining, observation of the taking of the physical inventory is in compliance with the
auditing standard pertaining to field work that requires obtaining sufficient competent evidential
matter to afford a reasonable basis for an opinion regarding the financial statements.
Observation is a generally accepting auditing procedure applied in the examination of the
physical inventory.

By observing the taking of the physical inventory, the CPA is seeking to satisfy
himself or herself as to the effectiveness of the methods of inventory taking and
the measure of reliance that can be placed on the client inventory records and their
representations as to inventory quantities. The CPA must ascertain that the
physical inventory actually exists, that the inventory quantities are being
determined by reasonably accurate methods, and that the inventory is in a salable
or usable condition.

b. The CPA makes test counts of inventory quantities during observation of the taking
of the physical inventory to become satisfied that an accurate count is being made by
the individuals taking the inventory. The extent of test counting will be determined by
the inventory-taking procedures. For example, the number of test counts would be
reduced if there were two teams taking the inventory, one checking the other. On the
other hand, the CPA’s test count would be expanded if errors were found in the
inventory counts.

Some test counts are recorded by the CPA for the purpose of subsequent
comparison with the client’s compilation of the inventory. The comparison
procedure goes beyond the mere determination that quantities have been
accurately transcribed. In addition, the CPA seeks assurance that the description
and condition of the inventory items are accurate for pricing purposes and that the
quantity information, such as dozen, gross, and cartons, is proper.

c. 1. The CPA does not regard the inventory certificate of an outside service company
as a satisfactory substitute for his or her own audit of the inventory. The service
company has merely assumed the client’s function of taking the physical inventory,
pricing it, and making the necessary extensions. To the extent that the service company
is competent, internal control with regard to the inventory has been strengthened.
Nevertheless, as under other strong systems of internal control, the CPA would
investigate the system to become satisfied that it is operating in a satisfactory manner.
The CPA’s investigation would necessarily entail an observation of the taking of the
inventory and testing the pricing and calculation of the inventory.
9-6 ​Solutions Manual to Accompany Applied Auditing, 2006 Edition

2. The inventory certificate of the outside specialists would have no effect on the
CPA’s report. The CPA must be satisfied that the inventory is fairly stated by
observing the taking of the inventory and by testing the pricing and calculation of
the inventory.

However, if the taking of the inventory was not observed and no audit tests
were applied to the computation of the inventory, the CPA would be
compelled to disclaim an opinion on the financial statements as a whole if the
amount of the inventory is material.

If it has been impracticable or impossible for the CPA to observe the taking of
the physical inventory but he or she has been satisfied by the application of
other auditing procedures, the CPA would make no reference to the matter in
the report.

3. The CPA would make no reference to the certificate of the outside specialists in
the report. The outside specialists are serving as adjuncts of the company’s staff of
permanent employees and, as such, are in somewhat the same position as
temporary employees. The outside specialists are not independent in that they are
not imbued with third- party interests. The CPA is compelled, under certain
circumstances, to mention in the report the reports of other independent auditors,
but this compulsion does not extend to the certificate of outside specialists who are
not independent auditors.

9-13. ​a. For a client to dispose of the chemical compound in a manner that meets legal
requirements is admirable. However, ethical behavior frequently calls for individual persons and
companies to exhibit behavior that exceeds the minimum standards set by law. Due to the harm
to cattle and the pollution that has resulted. Remote is involved in a matter that entails ethical
issues.

b. Most auditors are hesitant to serve as judge and jury for clients on ethical matters.
For example, declining to serve this client probably would not cause any alteration of
its behavior. Further, serving the client does not facilitate any unethical behavior.
Further, serving the client does not facilitate any unethical behavior. Hence, an auditor
might choose to discuss the matter with the board and encourage them to act as
responsible citizens.
 Substantive Tests of Inventories and Cost of Goods Sold 9
​ -7

​
9-14. ​JCRequirement (1)

Inventory, as given ......................................................... P271,500 Deduct

(adjustments to cost):
50% markup in (a) [P250,000 – (P250,000 ÷ 1.5)]. P83,333 60% markup in (b)
(P10,000 x 0.60)....................... 6,000 Exclusion of
(c)....................................................... 4,000 Incorrect amount used in (e)
(P2,500 – P1,000)...... 1,500 94,833

P176,667 Add:​Freight on goods in transit in (d)............................. 800 Corrected

​
ending inventory..................................... P177,467

Requirement (2)

Income Statement
a. Ending inventory overstated (P250,000 – P177,467) ............ P72,533 b. Cost
of goods sold understated .............................................. 72,533 c. Gross margin
overstated ........................................................ 72,533 d. Pretax income
overstated ....................................................... 72,533 e. Income taxes overstated
(P72,533 x 0.40) ............................. 29,013 f. Net income overstated (P72,533 –
P29,013).......................... 43,520

Balance Sheet:
Current assets, inventory overstated ............................................ 72,533 Current
liabilities, income taxes payable overstated.................... 29,013 Retained
earnings overstated ....................................................... 43,520

Requirement (3)

Retained earnings (prior period adjustment) .................. 43,520 Income

taxes payable ..................................................... 29,013
Inventory................................................................. 72,533

9-15. ​Beginning inventory P 38,000 Purchases 19,000 Cost of goods available for
sale P 57,000 Cost of goods sold (net sales of P51,000 ÷ 1.50) 34,000 Ending
inventory before theft P 23,000 Ending inventory after theft 15,000 Inventory lost P
8,000
 9-8 ​Solutions Manual to Accompany Applied Auditing, 2006 Edition

9-16. ​LRT Company

LRT COMPANY Computation of Value of
Inventory Lost February 16, 2006

Sales P 40,000 Less: Gross profit (40%) 16,000 Cost of goods

sold P 24,000 Finished goods, February 16 75,000 Cost of goods
available for sale P 99,000 Less: Finished goods, December 31,
2005 72,000 Cost of goods manufactured and completed P 27,000

Raw materials, December 31, 2005 P 65,000 Raw materials purchases 20,000 Raw
materials available for production P 85,000 Raw materials before flood 70,000
(P35,000 ÷ 1/2) Raw materials used P 15,000 Direct labor 30,000 Manufacturing
overhead cost 15,000 Goods in process, December 31, 2005 80,000 Cost of
production P 140,000 Less: Cost of goods completed (from above) 27,000 Goods in
process inventory lost in flood P 113,000

Total value of inventory = Raw materials lost + Goods in process lost

destroyed by flood
= (P70,000 - P35,000) + P113,000

= P148,000

9-17. ​Y Company

a. Necessary adjustments to client’s physical inventory:

Material in Car #AR38162--received in

warehouse on January 2, 2007 P 8,120 Materials stranded en route
(Sales price P19,270/125%) 15,416 Total 23,536 Less
unsalable inventory 1,250*
Total adjustment P22,286

* If freight charges have been included in the client’s inventory, the amount
would be P1,600 and the amount of the total adjustment would be P21,936.
Journal entry 6 probably would have a credit to purchases of P1,600 in this case.

Substantive Tests of Inventories and Cost of Goods Sold 9

​ -9
 b. Auditor’s worksheet adjusting entries:

1. Purchases P 2,183
Accounts Payable P 2,183
To record goods in warehouse but not
invoiced-received on RR 1060.

2. No entry required. Title to goods had passed.

3. Accounts receivable 12,700

Sales 12,700
To record goods as sold which were
loaded on December 31 and not
inventories-SI 968.

4. Sales 19,270
Accounts receivable 19,270
To reverse out of sales material included in
both sales (SI 966) and in physical inventory
(after adjustment).

5. No adjustment required.

6. Claims receivable 1,600

Purchases 1,250 Freight In 350
To record claim against carrier for
merchandise damaged in transit.

7. Inventory 22,286
Cost of goods sold 22,286
To adjust accounts for changes in physical
inventory quantities.

8. Sales 15,773
Accounts receivable 15,773
To reverse out of sales invoices #969, #970, #971.
The sales book was held open too long. This
merchandise was in warehouse at time of physical
count and so included therein.

9-18. ​Engine Warehouse Supply Company

a. Cutoff errors will exist for accounts payable whenever the liability for a purchase is
recorded in the wrong period. The following rules should be followed for recording
purchases:

1. Record as of date received when shipped FOB destination. 2.

Record as of date shipped when shipped FOB origin.
9-10 ​Solutions Manual to Accompany Applied Auditing, 2006 Edition
 On this basis, the receiving reports would be evaluated as follows:
Receiving Report
No. Amount
Was Recorded in August
679 P 860 8-29 8-31 Destination Yes Yes 680 1,211 8-27 9-01 Origin Yes Yes 681 193 8-20 9-01 Origin Yes Yes 682 4,674 8-27
9-01 Destination No Yes 683 450 8-30 9-02 Destination No No 684 106 8-30 9-02 Origin Yes No 685 2,800 9-06 9-02 Origin No
No 686 686 8-30 9-02 Destination No No
The entry to adjust the records as of August 31 for cutoff errors in accounts payable is as follows:
Dr. Accounts payable P4,568
Cr. Purchases P4,568
To adjust accounts payable for cutoff errors in recording inventory purchases:
RR No. 682 P4,674 RR No. 684 ( 106)
P4,568
b. Sales should be recorded as of the date shipped. The following shipping
documents were dated on September 1 and recorded in August:
311 P 56 312 3,194 313 635 314 193 P4,078
The adjusting entry will be:
Dr. Sales P4,078
Cr. Accounts receivable P4,078
To adjust sales for cutoff errors at August 31.
Should be Date
Recorded Shipped
in August Date Received FOB Point

Substantive Tests of Inventories and Cost of Goods Sold 9

​ -11

c. 1. Inventory received near the balance sheet date should be included in inventory if it
is recorded as a purchase and excluded if it is not recorded as a purchase. 2. Inventory
shipped near the balance sheet date should be excluded from inventory if it is recorded
as a sale and included if it has not been recorded as a sale.

These principles lead to the following analysis.

Receipt of Goods

1. Inventory for all receiving reports up to 684 are included in inventory.

2. Using the analysis in part a, column 6, inventory for all receiving reports up to
684, except 682 and 683, should be included in accounts payable and inventory.
Was Included in
Inventory
Report No. Amount Was Included in
Should be Included in Inventory
Purchases and Inventory

679 860 Yes Yes 680 1,211 Yes Yes 681 193 Yes Yes 682* 4,674
 No Yes 683* 450 No Yes 684 106 Yes Yes 685 2,800 No No 686
686 No No

* Requires removal from inventory.

3. Inventory for receiving reports 682 and 683 should therefore be removed
from the physical count:
Amount 682 4,674 683 450 5,124

Shipment of Goods

1. Inventory for shipping documents 314 to 317 were included in inventory.

All inventory for documents 313 and earlier were excluded.

2. Sales, after adjustments, were included only for shipments 310 and those
preceding, as shown in the analysis in part b.

3. Inventory for shipping documents 311 to 313 should therefore be added to

inventory. The amount of the cost of the inventory cannot be
9-12 ​Solutions Manual to Accompany Applied Auditing, 2006 Edition
determined without reference to inventory costs. Presumably, cost will be less than the sales value shown in part b.
Shipping Document No.
Included in Physical
Recorded as Sale After Adjustments in Part b 3​ 10 No Yes 311* No No 312* No No 313* No No 314 Yes No 315 Yes
No 316 Yes No 317 Yes No 318 Yes No
* Requires addition to inventory at cost.
Shipping Document No.
Selling Price 311 P 56 312 3,194 313 635 Inventory cost 3,885 (70% of selling price) 2,719
Summary
Reduction of inventory due to physical count error
resulting from receipt of goods. P5,124.00
Increase of inventory due to physical count error
resulting from shipment of goods. 2,719.50
Net reduction of inventory required P2,404.50
d. The accuracy about September 1 receipts and shipments of goods could be
verified by reference to bills of lading.

Substantive Tests of Inventories and Cost of Goods Sold 9

​ -13

9-19. ​Green Company

Requirement (a)

Green Company Inventory 12.31.06​Per Audit Item

​ Quantity Unit Price * Amount Per
 Client A – 510 720 units P 2.64 / doz. P 218.40 P 2,592.00 A – 520 48 units 4.70 each
225.60 252.60 A – 530 146 units 16.50 each 2,409.00 2,706.00 A – 540 86 units 5.15 each
442.90 353.60 A – 550 80 units 8.50 each 680.00 7,280.00 A – 560 140 units 2.00 each
3,360.00 280.00 A – 570 910 gross 132 gross 120,120.00 27,360.00

Total P127,455.90 P 40,824.20 Add: AJE (1) __________ 86,631.70

P127,455.90 P127,455.90

* Lower of cost or market

Requirement (b)

Inventory 86,631.70
Cost of sales 86,631.70

9-20.
Requirement (a) Requirement (b)

1. Exclude Title to the goods passed to the client on January 3, 2007 or upon receipt
because the term of shipment was FOB Destination.

2. Exclude Goods held on consignment are not owned by the client.

3. Include Regular stock item even if segregated but not actually delivered as of the end
of the year is still part of the client’s inventory.

4. Include Title to the goods passed to the client on December 31, 2006 or upon
shipment because the invoice showed FOB supplier’s warehouse.

5. Exclude Goods fabricated to order for a customer are considered

sold as soon as completed even if not yet delivered.

9-14 ​Solutions Manual to Accompany Applied Auditing, 2006 Edition

9-21. ​Isabela Company

ISABELA COMPANY Worksheet to

Correct Selected Accounts 12-31-06

Inventory Accounts Payable Sales

Initial amounts P1,250,000 P1,000,000 P9,000,000 Adjustments

Increase (Decrease)
1 P (155,000) P (155,000) None 2 (22,000) None None 3 None
None P 40,000 4 210,000 None None 5 25,000 25,000 None 6
2,000 2,000 None 7 (5,300) (5,300) None
 Total adjustments P 54,700 P (133,300) P 40,000

Adjustment amounts P1,304,700 P 866,700 P9,040,000

9-22. ​Stockroom W

Stockroom W
Reconciliation of
Inventory
Inventory
Opening Inventory Receipts Withdrawals
Ending

Balance per Accounting Department P 22,600 P28,000 P 26,000 P 24,600

Add (Deduct) Reconciling Items
1) Receipt of materials
erroneously posted by the Accounting Department to Stockroom W. 480
480 2) Correction of error in the
AccountingDepartment. ( 600) ( 600) 3) Shortage not recorded in the
Accounting Department. _______ ______ 90 (90)

Balance per Factory Records P 22,000 P28,480 P 25,490 P 24,990

Substantive Tests of Inventories and Cost of Goods Sold 9

​ -15

9-23. ​Pinas Company

Requirement (1)

Audit Adjustments, 12.31.06

1. Retained earnings 300

Purchases 300

2. Inventory, January 1, 2006 700

Retained earnings 700

3. Accounts receivable 500

Sales 500

4. Purchases 500
Accounts payable 500

5. Inventory, Dec. 31, 2006 B/S 400

Inventory, Dec. 31, 2006 I/S 400
 6. a. Purchases 1,200
Accounts payable 1,200

b. Inventory, Dec. 31, 2006 B/S 1,200

Inventory, Dec. 31, 2006 I/S 1,200

7. Accounts payable 800

Purchases 800

Requirement (2)

Pinas Company
Cost of Sales 2006

Per Adjustments Per Client Dr Cr Audit ​Inventory,Jan.1 P 3,200 P 700 (2) P3,900 Purchases
21,100 500 (4) P 300 (1)
_______ 1,200 (6a) 800 (7) 21,700 Total available 24,300 25,600 Less: Inventory, Dec.
31 4,300 400 (5)
_______ ______ 1,200 (6b) 5,900 Cost of sales P 20,000 P 2,400 P 2,700 P19,700

9-16 ​Solutions Manual to Accompany Applied Auditing, 2006 Edition

9-24. ​Bers Company

Uncorrected Items for Correction Corrected

Amounts (a) (b) (c) (d) (e) Amounts ​Income statement:
Sales revenue ............................ P90,000 – 12,000 – 15,000 P 63,000 Cost of goods sold .................... 50,000 + 6,000 +
15,000 – 8,000 63,000 Gross margin............................. 40,000 0 Expenses ................................... 30,000 + 7,000 37,000
Income ...................................... P10,000 – 7,000 – 12,000 – 6,000 – 15,000 – 7,000 P(37,000) Balance sheet:
Accounts receivable.................. P42,000 – 12,000 – 15,000 P15,000 Inventory................................... 20,000 – 15,000 +
8,000 13,000 Remaining assets ...................... 30,000 30,000 Accounts payable...................... 11,000 * + 6,000 17,000 *
Remaining liabilities................. 6,000 * + 7,000 13,000 * Share capital, ordinary.............. 60,000 * 60,000 * Retained
earnings †​ ​................... 15,000 * – 7,000 – 12,000 – 6,000 – 15,000 – 7,000 (32,000)
Totals..................................... P 0 P 0

* Credits. ​† ​Retained Earnings is negative after correction.

Substantive Tests of Inventories and Cost of Goods Sold 9

​ -17

9-25.
 1. ​Jap Co.

P150,000 – (P150,000 X .20) = P120,000; P120,000 – (P120,000 X

.10) = P108,000, cost of goods purchased

2. ​Fred Company

P1,100,000 + P69,000 = P1,169,000. The P69,000 of goods in transit on which

title had passed on December 24 (f.o.b. shipping point) should be added to
12/31/06 inventory. The P29,000 of goods shipped (f.o.b. shipping point) on
January 3, 2007, should remain part of the 12/31/06 inventory.

3. B. May Corp.

Because no date was associated with the units issued or sold, the periodic (rather
than perpetual) inventory method must be assumed.

FIFO inventory cost: 1,000 units at P24 P 24,000 1,100 units at 23 25,300 Total
P 49,300

Average cost: 1,500 at P21 P 31,500 2,000 at 22 44,000 3,500 at 23 80,500 1,000
at 24 24,000 Totals 8,000 P180,000

P180,000 ÷ 8,000 = P22.50

Ending inventory (2,100 X P22.50) is P47,250.

4. ​Emmett Lopez Inc.

The inventoriable costs for 2007 are:

Merchandise purchased P909,400 Add: Freight-in 22,000 931,400 Deduct:

Purchase returns P16,500
Purchase discounts 6,800 23,300 Inventoriable cost P908,100

9-18 ​Solutions Manual to Accompany Applied Auditing, 2006 Edition

9-26.

(a) (1) 8/10

Purchases 9,000
Accounts Payable 9,000

8/13 Accounts Payable 1,200

 Purchase Returns and Allowances 1,200

8/15 Purchases 12,000

Accounts Payable 12,000

8/25 Purchases 15,000

Accounts Payable 15,000

8/28 Accounts Payable 12,000

Cash 12,000

(2) Purchases—addition in cost of goods sold section of income

statement.

Purchase returns and allowances—deduction from purchases in cost

of goods sold section of the income statement.

Accounts payable—current liability in the current liabilities section of

the balance sheet.

(b) (1) 8/10

Purchases 8,820
Accounts Payable (P9,000 X .98) 8,820

8/13 Accounts Payable 1,176

Purchase Returns and Allowances 1,176
(P1,200 X .98)

8/15 Purchases 11,880

Accounts Payable (P12,000 X .99) 11,880

8/25 Purchases 14,700

Accounts Payable (P15,000 X .98) 14,700
Substantive Tests of Inventories and Cost of Goods Sold 9
​ -19
8/28 Accounts Payable 11,880 Purchase Discounts Lost 120
Cash 12,000
(2) 8/31
Purchase Discounts Lost 156
Accounts Payable
(.02 X [P9,000 – P1,200]) 156
(3) Same as part (a) (2) except:
Purchase Discounts Lost—treat as financial expense in income statement.
(c) The second method is better theoretically because it results in the inventory being carried net of purchase discounts,
and purchase discounts not taken are shown as an expense. The first method is normally used, however, for practical
reasons.
9-27. ​MAR Company
(a) Purchases
Total Units
Sales Total Units April 1 (balance on hand) 100 April 5 300 April 4 400 April 12 200 April 11 300 April 27 800 April
18 200 April 28 100 April 26 500 Total units 1,400 April 30 200 Total units 1,700 Total units sold 1,400 Total units
(ending inventory) 300
Assuming costs are not computed for each withdrawal:
(1) First-in, first-out.
Date of Invoice No. Units Unit Cost Total Cost
April 30 200 P5.80 P1,160 April 26 100 5.60 560 P1,720
9-20 ​Solutions Manual to Accompany Applied Auditing, 2006 Edition
(2) Average cost.
Cost of Part X available.
Date of Invoice No. Units Unit Cost Total Cost
April 1 100 P5.00 P 500 April 4 400 5.10 2,040 April 11 300 5.30 1,590 April 18 200 5.35 1,070 April 26 500 5.60
2,800 April 30 200 5.80 1,160 Total Available 1,700 P9,160
Average cost per unit = P9,160 ÷ 1,700 = P5.39. Inventory, April 30 = 300 X P5.39 = P1,617.
(b) Assuming costs are computed for each withdrawal:
(1) First-in, first out.
The inventory would be the same in amount as in part (a), P1,720.
(2) Average cost.
Purchased Sold Balance
Date
No. of units
Unit cost
No. of units
Unit cost No. of
units
Unit cost* Amount April 1 100 P5.00 100 P5.0000 P 500.00 April 4 400 5.10 500 5.0800 2,540.00 April 5 300 P5.0800
200 5.0800 1,016.00 April 11 300 5.30 500 5.2120 2,606.00 April 12 200 5.2120 300 5.2120 1,563.60 April 18 200 5.35
500 5.2672 2,633.60 April 26 500 5.60 1,000 5.4336 5,433.60 April 27 800 5.4336 200 5.4336 1,086.72 April 28 100
5.4336 100 5.4336 543.36 April 30 200 5.80 300 5.6779 1,703.36
Inventory April 30 is P1,703.
*Four decimal places are used to minimize rounding errors.

Substantive Tests of Inventories and Cost of Goods Sold 9

​ -21

9-28. ​Timmy Turner

Requirement (a)

Merchandise on hand, January 1 P38,000

Purchases P72,000 Less purchase returns and allowances 2,400 Net purchases 69,600
Freight-in 3,400 73,000 Total merchandise available for sale 111,000 Cost of goods
sold* 75,000 Ending inventory 36,000 Less undamaged goods 10,900 Estimated fire
loss P 25,100
 33 1/3% ​
*Gross profit = ​ = 25% of sales. ​100% + 33 1/3%

Cost of goods sold = 75% of sales of P100,000 = P75,000.

Requirement (b)

Cost of goods sold = 66 2/3% of sales of P100,000 =

P66,667 Ending inventory [P111,000 (as computed
above) –
P66,667] P44,333 Less undamaged goods 10,900 Estimated fire loss P33,433

9-29. ​Cosmo and Wanda Company

Beginning inventory P170,000 Purchases 390,000 560,000 Purchase returns (30,000)

Total goods available 530,000 Sales P650,000 Sales returns (24,000) Net sales 626,000
Less gross profit (40% X P626,000) (250,400) 375,600 Estimated ending inventory
(unadjusted for
damage) 154,400 Less goods on hand—undamaged (at cost)
P21,000 X (1 – 40%) (12,600) Less goods on hand—damaged (at net
realizable value) (5,300) Fire loss on inventory P136,500