AUDITING PROBLEMS

MIDTERM EXAM - INVENTORY

PROBLEM 1:
The ff. items were included on MM’s inventory account on Dec. 31, 2017:
*merchandise out on consignment, at sales price, including a mark-up of 40% on selling price, 40,000
*goods purchased, in transit, shipped fob shipping point, 36,000
*goods held on consignment by MM, 27,000
By what amount should MM’s inventory account at Dec. 31, 2017, be reduced? _______________

PROBLEM 2:
MM inventory at Dec. 31, 2017, was 1,500,000 based on physical count priced at cost, and before any
adjustments for the ff.:
-merchandise costing 90,000, shipped fob shipping point from a vendor on Dec. 30, 2017, was received and
recorded on Jan. 5, 2018.
-goods in the shipping area were excluded from the inventory although shipment was not made until Jan. 4,
2018. The goods billed to a customer fob shipping point on Dec. 30, 2017, costing 120,000.
What amount should MM report as inventory on Dec. 31, 2017? ______________________

PROBLEM 3:
MM’s accounts payable balance at Dec. 31, 2017, was 2,200,000 before considering the ff. data:
-goods shipped to MM fob shipping point on Dec. 22, 2017 were lost in transit. The invoice cost of 40,000 was
not recorded by MM. on Jan. 7, 2018, MM filed 40,000 claim against the common carrier.
-on Dec. 27, 2017, a vendor authorized MM to return, full credit, goods shipped and billed at 70,000 on Dec. 3,
20017. The return goods were shipped by MM on Dec. 28, 2017. A 70,000 credit memo was received and recorded by
MM on Jan. 25, 2018.
-goods shipped to MM fob destination on Dec. 20, 2017, were received on Jan. 6, 2018. Invoice cost was 50,000.
What amount should MM report as accounts payable on its Dec. 31, 2017 balance sheet? ___________

PROBLEM 4:
MM Co. usual sales terms are net 60 days, FOB shipping point. Sales, net of returns and allowances, totaled
2,300,000 for the year ended Dec. 31, 2017, before year-end adjustments. Additional data are as follows:
-on Dec. 27, 2017, mm authorized a customer to return, full credit, goods shipped and billed at 50,000 on Dec. 1,
2017. The return goods were received by MM on Jan. 4, 2018, and a 50,000 credit memo was issued and recorded on
the same date.
-goods with an invoice amount of 80,000 were billed and recorded on Jan. 3, 2018. The goods were shipped on
Dec. 30, 2017.
-goods with an invoice amount of 100,000 were billed and recorded on Dec. 30, 2017. These goods were
shipped on Jan. 3, 2018.
MM’s adjusted sales for 2017 should be _________________

PROBLEM 5:
MM Inc. maintains mark up of 60% based on cost. The company selling and administrative expenses average
30% of sales. Annual sales were 1,440,000, how much should the corporation record
COST OF SALES _________________
PROFIT ________________

PROBLEM 6.
MM had 150,000 units of product A on hand at Jan. 1 costing 21 each. Purchases of this product during the
month of Jan. were as follows:
Units Unit cost
January 10 200,000 22
18 250,000 23
28 100,000 24
A physical count on Jan. 31 shows 250,000 units of product A on hand. What is the cost of the inventory on Jan.
31 under FIFO method? ________________
PROBLEM 7.
On April 1, 2018, MM had 6,000 units of merchandise on hand that cost 120 per unit. During the month, the
entity had the ff. transactions with regard to the merchandise:
April 5 purchased on account 15,000 units at 140/unit
8 returned 1,000 units from the April 5 purchase
29 sold on account 16,000 units at 200/unit
The entity used perpetual inventory system and a FIFO cost flow.
What is the COGS for April? _______________________

PROBLEM 8.
MM is a wholesaler of office supplies. The FIFO periodic inventory is used. The activity for inventory of
calculators during August is as follows:
Units Cost
August 1 inventory 20,000 36
7 purchase 30,000 37.20
12 sale 36,000
21 purchase 48,000 38
22 sale 38,000
29 purchase 16,000 38.60
What is the value of inventory on August 31? ________________

PROBLEM 9.
MM used the moving average method to determine the cost of the inventory. During January of the current
year, the entity recorded the ff. information pertaining to its inventory.
Units Unit cost Total cost
Balance Jan. 1 40,000 50 2,000,000
Sold on Jan. 17 35,000
Purchased on Jan. 28 20,000 80 1,600,000
What is the amount of inventory should be reported on Jan. 31? ________________________

PROBLEM 10.
During Jan. of current year, MM which maintains a perpetual inventory system, recorded the ff. information
pertaining to its inventory:
Units Unit cost Total cost Units on hand
Balance on 1/1 10,000 100 1,000,000 10,000
Purchased on 1/7 6,000 300 1,800,000 16,000
Sold 1/20 9,000 7,000
Purchased 1/25 4,000 500 2,000,000 11,000
Under moving average, what amount should MM report as inventory on Jan. 31? ________________
Under the FIFO method, what amount should MM report as inventory on Jan. 31? ________________

PROBLEM 11.
MM manufactures 3 models of gear shift components for bicycle that are sold to bicycle manufacturers. Since
beginning in 1984, MM has used normal absorption costing and has assumed a FIFO cost flow in its perpetual inventory
system. The balances of inventory accounts at Dec. 31, 2018 are shown below. The inventories are stated at cost before
any year-end adjustments.
Finished goods 2,588,000
Work-in-process 450,000
Raw materials 960,000
Factory supplies 276,000
The ff. information relates to MM’s inventory and operations:
*the finished goods inventory consists of the items analyzed below:
Cost NRV
Down tube shifter 1,080,000 1,056,000
Bar end shifter 728,000 750,400
Head tube shifter 780,000 787,800
Total 2,588,000 2,594,000
 *one-half of the head tube shifter finished goods inventory is held by another company in consignments.
*three-quarters of the bar end shifter has been pledged as a collateral for a bank loan.
*one-half of raw materials balance was acquired at a contracted price 20% above the current market price. The
replacement cost of the rest of the raw materials is 509,600.
*the NRV of work-in-process inventory is 434,800
*included in the cost of factory supplies are obsolete items with a historical cost of 16,800. The cost of the
remaining supplies is 263,600.
Based on the above and the result of your audit, determine the ff.
FGs inventory on Dec. 31, 2018 ___________________________
Raw materials inventory on Dec. 31, 2018 _________________
Factory supplies inventory on Dec. 31, 2018 ___________________
Total inventories to be recognized on Dec. 31, 2018 ______________________

PROBLEM 12.
The ff. audited balances of pertain to MM Co.
Accounts payable:
Jan. 1, 2018 286,924
Dec. 31, 2018 737,824
Inventory balance:
Jan. 1, 2018 815,386
Dec. 31, 2018 488,874

COGS- 2018: 1,859,082

How much was paid by MM to its suppliers in 2018? _____________________________

PROBLEM 13.
The ff. information was provided by the bookkeeper of MM Inc.:
*sales for the month of June totaled 286,000 units
*the ff. purchases were made in June:
Date Quantity Unit cost
June 4 50,000 13.00
8 62,500 12.50
11 75,000 12.00
24 70,000 12.40
*there were 108,500 units on hand on June 1, with a total cost of 1,450,000
MM uses periodic FIFO costing system. The company’s gross profit for June was 2,058,750.

How many unit were on hand on June 30? _____________________

What is the FIFO cost of the company’s inventory on June 30? ________________________
What is the total COGS in June? ________________________
The 286,000 units sold in June had a unit selling price of _______________________________

PEROBLEM 14. (GPM)

MM prepares monthly income statement. A physical inventory is taken only at year-end; hence, month-end
inventories must be estimated. All sales are made on account. The rate of mark-up on cost is 50%. The ff. information
relates to the month of June:
AR, June 1 102,000
AR, June 30 153,000
Collection of AR during June 255,000
Inventory, June 1 183,600
Purchases of inventory during June 163,200
How much is the estimated cost of June 30 inventory? _______________________
PROBLEM 15. (GPM)
On the eve of June 15, 2018, a fire destroyed the entire inventory of MM Corp. The merchandised was not
insured with any insurance company. The ff. data were gathered:
Inventory, Jan. 1 250,000
Purchases, Jan. 1 to June 15 1,500,000
Sales, Jan. 1 to June 15 2,000,000
Mark-up percentage on cost 25%
What is the estimated value of inventory destroyed by fire? ________________________

PROBLEM 16. (GPM)

The ff. information is available for MM Co. for the three months ended March 31, 2018:
Inventory, Jan. 1 1,200,000
Purchases 4,500,000
Freight-in 300,000
Sales 6,400,000
Gross margin on sales 25%
What is the inventory balance at March, 31, 2018? _______________________________

PROBLEM 17. (GPM)

On Sept. 30, 2018, a flood at MM Co.’s warehouse caused severe damage to its entire inventory. Based on
recent history, MM has a gross profit of 25% of net sales. The ff. data were gathered for the nine months ended Sept.
30:
Inventory, Jan. 1 520,000
Purchases 4,120,000
Purchase returns 60,000
Sales 5,600,000
Sales discounts 400,000
A physical inventory disclosed usable damaged items which MM estimates can be sold to a jobber for 70,000.
How much is the estimated cost of inventory loss? ______________________

PROBLEM 18. (GPM)

The ff. information appears in MM records for the year ended Dec. 31, 2018:
Inventory, Jan. 1 325,000
Purchases 1,150,000
Purchase returns 40,000
Freight-in 30,000
Sales 1,700,000
Sales discounts 10,000
Sales returns 15,000
On Dec. 31, the company conducted a physical inventory which revealed that the ending inventory was only
210,000. MM’s gross profit on net sales has remained constant at 30% in recent years. MM suspects that some
inventory may have been pilfered by one of the company’s employee. How much is the estimated cost of the missing
inventory? ____________________________

PROBLEM 19. (GPM)

On Sept. 14, 2018, a typhoon damaged the warehouse of MM Corp. The entire company and many accounting
records stored in the warehouse were completely destroyed. Although the inventory was not insured, a portion could be
sold for scrap. Through the use of microfilmed records, the ff. data were gathered:
Inventory, Jan. 1 375,000
Purchases, Jan. 1 to Sept. 14 1,385,000
Cash sales, Jan. to Sept. 14 225,000
Collections of AR, Jan. 1 to Sept. 14 2,115,000
AR, Jan. 1 175,000
AR, Sept. 14 265,000
Salvage value of damage inventory 5,000
GPR on sales 32%
How much is the value of inventory loss? ___________________
How much is the total sales from Jan. 1 to Sept. 14? ________________________
PROBLEM 20. (GPM)
On Dec. 24, 2018, a fire destroyed totally the raw materials “bodega” of MM Manufacturing. There were no
purchases of raw materials from the time of the fire until Dec. 31, 2018.
INVENTORIES JAN. 1, 2018 DEC. 1, 2018
Raw materials 180,000 ?
Factory supplies 12,000 10,000
Goods in process 370,000 420,000
Finished goods 440,000 450,000
The accounting records shows the ff. data:
Sales 2,400,000
Purchases of raw materials 800,000
Purchases of factory supplies 60,000
Freight-in for raw materials 30,000
Direct labor 440,000
Manufacturing overhead, 75% of direct labor; GPR, 35% of sales.
What is the cost of raw materials destroyed by fire? ________________________

PROBLEM 21. (RETAIL)

MM uses the retail inventory method to estimates its inventory for interim statement purposes. Data relating to
the inventory computation at June 30, 2018 are as follows:
COST RETAIL
Inventory, Jan. 1 820,000 1,262,800
Net purchases 2,280,000 3,607,200
Net mark-ups 450,000
Net mark-downs 320,000
Sales 4,350,000
Sales returns 300,000
Employee discount 100,000
Sales discount 80,000
Normal shrinkage 50,000
What is the estimated cost of June 30 inventory? ____________________________

PROBLEM 22. (RETAIL)

Presented below is information related to MM Inc.:
COST RETAIL
Inventory, Jan. 1 250,000 390,000
Purchases 914,500 1,460,000
Purchase returns 60,000 80,000
Purchase discounts 18,000 -
Gross sales (after employee discounts) 1,260,000
Sales returns - 97,500
Markups - 120,000
Markup cancellations - 40,000
Markdowns - 45,000
Markdown cancellations - 20,000
Freight-in 79,000 -
Employee discount granted - 8,000
Loss from breakage - 2,500
MM uses the conventional/conservative/LCA method, how much would be the cost of ending inventory on Dec. 31,
2018? __________________
PROBLEM 23. (RETAIL)
MM, a dept. store, uses the retail inventory method to estimate inventory. The ff. data are available for the year
ended Dec. 31, 2018:
COST RETAIL
Inventory, Jan. 1 61,700 105,700
Purchases 128,100 215,800
Purchase returns 2,100 3,500
Sales - 236,500
Freight-in 3,100
How much would be the inventory pilferage if the physical count revealed an ending inventory at retail of
78,000? _________________________

PROBLEM 24. (RETAIL)

MM uses the retail inventory method to estimate its inventory for interim financial purposes. Data relating to
the inventory computation at Sept. 30, 2018 follows:
COST RETAIL
Inventory, July 1, 2018 360,000 500,000
Purchases 2,040,000 3,150,000
Net markups 350,000
Net markdowns 250,000
Sales 3,410,000
Normal shoplifting losses 40,000
What is the estimated cost of inventory under the conventional or market method? ________________

PROBLEM 25. (RETAIL)

MM inventory shows the ff. information at Dec. 31, 2018:
Inventory beginning
Cost 560,000
Retail 1,400,000
Purchases
Cost 4,960,000
Retail 10,320,000
Freight-in 150,000
Markups 1,000,000
Markup cancellations 120,000
Markdowns 500,000
Markdown cancellations 100,000
Sales 10,000,000
Estimated normal shrinkage 2.5% of sales
MM uses retail inventory method of estimating inventory. How much is the estimated cost of inventory in 2018?
_____________________________