MODULE -5 AUDIT OF INVENTORIES Inventory Cycle for Manufacturers, Retailers, and Distributors The term inventory cycle means different things to different companies in different verticals. For companies that source, assemble, and create inventory, it refers to a time-based process which is basic to understanding how to maximize resources and cash flow. To businesses that buy, store, and sell inventory, it focuses on the process of understanding, planning, and managing inventory levels from the point of purchase through more-efficient auditing 3 Phases of the Cycle for Manufacturers The term inventory cycle refers to a three-phase process: 4, The ordering or administrative phase 2. The production phase 3. The finished goods and delivery phase. The first phase, the ordering phase, is the amount of time it takes to order and receive raw materials. The production phase is the work in progress phase. The last phase entails the finished goods (i. products produced by the manufacturer) that remain in stock and includes the delivery time for products to reach the customer. The inventory cycle is measured by the number of days it takes from the beginning of phase one, through delivery For Retailers and Distributors To a retailer or distributor, the inventory cycle is the process of understanding, planning, and managing their inventory levels, which includes: + Accurate ordering of required inventory based on demand and terms, by product, «Reduced time to reorder products on a periodic basis + An accurate history of individual product sales and department sales + Increased customer satisfaction Inventory control can be applied to any system, whether i's manual or computerized. Inventory's Impact The most important part of the inventory cycle process (also called cycle inventory) is to frequently and regularly perform inventory counts to understand the turnover rate or demand for a particular item Accycle count is an auditing procedure whereby a small subset of inventory, usually in a specific location, is counted at a specific day or time. The goal is to move through all inventory on a regular basis. Cycle counting yields more accurate inventory results. Retailers may also look at cycle stock inventory, or on-hand inventory, which is the sum of what is on the shelves and what is in the warehouse or storeroom. The quantity of a cycle stock inventory is equal to the total on-hand inventory. If the safety stock inventory is maintained, it does not count. The goal is to prevent running out of stock, while managing cash flow, and economize as much as possible on shipping and storage.Internal Control Internal controls are reviews, procedures or guidelines to protect and safeguard a company’s, business and financial information. Business owners and managers are responsible for developing and implementing internal controls to keep costs down and minimize or avoid problems. Inventory represents an expensive and sizable physical asset for most companies. Internal controls are necessary for inventory, because companies can rarely survive if they consistently lose inventory to theft, spoilage and obsolescence. Inventory System inventory systems are accounting methods for managing the financial transactions relating to a company’s physical inventory items. Two common systems are the periodic and perpetual systems. Periodic inventory systems update the accounting ledger once a month or quarterly. A better and more controlling method is the perpetual inventory system, which updates inventory after each purchase, sale and adjustment. Inventory systems give owners and managers a better idea of inventory cost and its effects on the balance sheet, which is an important part of internal controls. Order Process internal controls create specific limitations on a company’s inventory ordering process. Owners and managers usually divide inventory ordering duties among multiple employees. This ensures an individual does not order inventory and steal it as it comes into the company’s warehouse. Separating out the purchase order and payment process is also important, since an employee could “order” inventory from a fake company and send the payment to a post office box rented by the employee. Storage Storage is a physical inventory control procedure. Companies must find secure warehouses and distributors, so inventory is not stolen or damaged. Adequate warehousing also ensures the company has enough space to properly receive and store inventory products. Companies must have enough space for driving forklifts, moving pallets and allowing workers to walk through the warehouse safely without damaging inventory. Physical counts Physical counts reconcile the company’s accounting ledger with the actual amount of inventory on hand. Companies typically use cycle counts or an annual inventory count for this process. Cycle counts are ongoing counts where companies require employees to count a specific number of items each week. High value or popular items may be a constant feature of cycle counts to ensure these items are not comprised. Annual physical counts happen once a year, when the company counts its entire inventory at one time rather than a weekly counting process,Audit Assertions for Inventory In the audit of ™ we ™ test the audit assertions included in the table below: Inventory balances reported on financial statements actually exist at the Existence reporting date Inventory reported on the balance sheet includes all inventory transactions Se eee that have occurred during the accounting period Al inventory reported on financial statements as at the reporting date really belongs to the company. Inventory balances truly reflect its economic value. Presentation and __ Inventory is properly classified and sufficiently disclosed in the notes to disclosure financial statements. In the audit of inventory, we usually focus more on existence and valuation. This is due to we concern more about whether the inventory does actually exist; and that it has been properly valued in accordance with applicable accounting standards. Audit Procedures: Confirm existence of inventories Inventories are the accounting balance in the balance sheet. And if auditor decided to perform their review on the entity's inventories, existence is one of the financial statements assertions that auditor needs to confirm. Physical verification is one of the procedure that auditor use to confirm this assertion. The auditor may consider to join the observation of a client's year-end inventories count or perform their own sampling, Physical verification is not only helping the auditor to confirm the existence of inventories that report in the balance sheet, but it also helps auditors to assess the condition of inventories, physical controls and asses the procedures that client use to perform their year-end counts. When auditor assesses the counting procedures that perform by its client, auditors should focus on three main areas including the procedures before the count, during the count, and the procedure after the count. These procedures are really important for the client to ensure that any error to the quantity of inventories report is identified and reflected financial statements.Review ownership Inventories are the current assets and entity could recognize the inventories in its financial statements only if those inventories meet the definition provided by PFRS Conceptual Framework Normally, auditor review the ownership (Right and Obligation) of the entity over the inventories by reviewing the Contracts, Quotation, Invoices, and Delivery Noted. Term and Condition in the contract are very important for ownership verification. Assess the value of inventories PAS 2 is the current standard that issued by PFRS for dealing with inventories measurement, recognition, and disclosure and so on. Measurement of inventories should be at the lowest of cost and net realizable value. Normally, the cost of inventories including cost of acquisition, cost of conversion, and others related cost that bring inventories into their present location Inventories are: + items held for sale, or + goods to be used in the production of goods to be sold. INITIAL VALUATION Costs - includes cash acquisition price and costs directly connected with bringing the goods to the buyer's place of business and converting such goods to a salable condition. Classification Four accounts + Raw materials + Work in process + Finished goods + Mfg. supplies ACCOUNTING FOR INVENTORIES: Perpetual System 1. Purchases of merchandise are debited to Inventory. 2. Freight-in is debited to Inventory. Purchase returns and allowances and purchase discounts are credited to Inventory. 3. Cost of goods sold is debited and Inventory is credited for each sale. 4. Subsidiary records show quantity and cost of each type of inventory on hand. The perpetual inventory system provides a continuous record of Inventory and Cost of Goods Sold.Periodic System 1. Purchases of merchandise are debited to Purchases. 2. Ending Inventory determined by physical count 3. Calculation of Cost of Goods Sold! Beginning inventory Xx Purchases, net XX Goods available for sale XX Ending inventory XX Cost of goods sold XX Inventory Control All companies need periodic verification of the inventory records by actual count, weight, or measurement, with the counts compared with the detailed inventory records. Companies should take the physical inventory near the end of their fiscal year, to properly report inventory quantities in their annual accounting reports. Valuation requires determining + The physical goods (goods on hand, goods in transit, consigned goods, special sales agreements). + The costs to include (product costs). +The cost flow assumption (specific Identification, average cost, FIFO, retail, etc.) Goods Included in Inventory A company should record purchases when it obtains legal title to the goods.General Rule Inventory is buyer's when received, excep FOB shipping point — Buyer's at time of delivery to common Carrier Consignment goods — Seller's, not buyer's Sales with buybacks Seller's, not buyer's Sales with high rates — Buyer's, if you can estimate of returns returns Sales on installments Buyer's, if you can estimate collectibility ‘Subsequent Valuation of Inventory Net Realizable Value Estimated selling price in the normal course of business less estimated costs to complete and estimated costs to make a sale Use of an Allowance Instead of crediting the Inventory account for net realizable value adjustments, companies generally use an allowance account Loss due to decline toNRV xx Allowance to reduce inventory toNRV xx Recovery of Inventory Loss + Amount of write-down is reversed. + Reversal limited to amount of original write-down, ‘Assume the net realizable value increases. Entity makes the following entry, using the loss method Allowance to reduce inventory toNRV xx Recovery of inventory loss wx Inventory EstimatesGross Profit Method (1) Provides an estimate of ending inventory (2) Uses past percentages in calculation. (3) Ablanket gross profit rate may not be representative. '4) Normally unacceptable for financial reporting purposes. IFRS requires a physical inventory as additional verification. Retail Inventory Method A method used by retailers, to value inventory without a physical count, by converting retail prices to cost Requires retailers to keep: (1) Total cost and retail value of goods purchased. (2) Total cost and retail value of the goods available for sale. (3) Sales for the period. Special Items Freight costs Purchase returns Purchase discounts and allowances Transfers-in Normal spoilage Abnormal shortages Employee discounts Purchase commitments A firm Purchase commitment is “an agreement with an unrelated party, binding on both parties and usually legally enforceable, that ‘a. Specifies all significant terms, including the price and timing of the transactions, and b. Includes a disincentive for non-performance that is sufficiently large to make performance highly probable.” (PFRS 5. Appendix) A contracting party under a firm purchase commitment cannot cancel the contract without suffering penalty. Thus, the buyer has to accept future delivery even if the goods promised to be purchased become impaired. In such a case the buyer recognizes loss on purchase commitment. When prices subsequently increase, the buyer recognizes gain on purchase commitment, however the gain should not exceed the loss previously recognizedIllustrative Problem: Sales and purchases cutoff The Rosalina Company is on a calendar year basis. The following data were found during your audit: a. Goods in transit shipped FOB destination by a supplier, in the amount of 100,000, had been excluded from the inventory, and further testing revealed that the purchase had been recorded b. Goods costing 50,000 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 costing 250,000 and billed on December 30 at a selling price of 320,000, had been segregated in the warehouse for 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 70,000 was out on consignment with Hermie Company. Since the monthly statement from Hermie Company listed those materials as on hand, the items had been excluded from the final inventory and invoiced on December 31 at 80,000. e. The sale of 150,000 worth of materials and costing 120,000 had been shipped FOB point of shipment on December 31. However, this inventory was found to be included in the final inventory. The sale was properly recorded in 2020. f. Goods costing 100,000 and selling for 140,000 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 170,000 had been included in the inventory count, but no entry had been made for their purchase |. Merchandise costing 200,000 had been recorded as a purchase but not included as inventory. Terms of sale are FOB shipping point according to the supplier's invoice which had arrived at December 31 Further inspection of the client's records revealed the following December 31, 2020 balances: Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable, P690,000; Net sales, 5,050,000; Net purchases, P2,300,000; Net income, P510,000. QUESTIONS: Based on the above and the result of your audit, determine the adjusted balances of following as of December 31, 2020:oaene Inventory Accounts payable Net sales Net purchases Net incomeSolution; Question Nos. 1 to § Inventory: Unadjuste d 1,100,000 balances @) b) (60,000) (c) 250,000 (a) 70,000 (e) (120,000) f) 100,000 (9) - (h) —200,000 Adjusted balances P1,550,000 Accounts Payable P690,00 0 (100,000 ) (60,000) 170,000 Net Sales 5,050,000 (320,000) (80,000) Net Purchases 2,300,000 (100,000) (60,000) 170,000 Net Income 510,000 100,000 (70,000) (10,000) (120,000) 100,000 (170,000)MODULE #5 Posttest ‘APPLIED AUDITING. ‘AUDIT OF INVENTORY Mutiple Choice Identity the choice that best completes the statement or answers the question. PROF. U.C. VALLADOLID 1. Presented below is a list of items that may or may not reported as inventory in a company's December 31 statement of financial position, Goods out on consignment at another company’s store Goods sold on installment basis Goods purchased f.0.b. shipping point that are in transit at December 31 Goods purchased f.0.b. destination that are in transit at December 31 oR ene has signed an agreement to repurchase at a set price that covers all costs related to the inventory 6. Goods sold where large returns are predictable 7. Goods sold f.0.b. shipping point that are in transit December 31 8. Freight charges on goods purchased 9. Factory labor costs incurred on goods stil unsold 10. Interest cost incurred for inventories that are routinely manufactured 11. Costs incurred to advertise goods held for resale 12. Materials on hand not yet placed into production 13. Office supplies 14, Raw materials on which a the company has started production, but which are not completely processed 16. Factory supplies 16. Goods held on consignment from another company 17. Costs identified with units completed but not yet sold 18. Goods sold f.0.b. destination that are in transit at December 31 19. Temporary investment in stocks and bonds that will be resold in the near future Goods sold to another company, for which our company 800,000 100,000 120,000 200,000 300,000 280,000 120,000 80,000 50,000 40,000 20,000 350,000 10,000 280,000 20,000 450,000 260,000 40,000 500,000How much of these items would typically be reported as inventory in the financial statements? a. 2,300,000 . 2,260,000 . 2,000,000 d. 2,220,000 Sales and purchases cutoff The Rosalina Company is on a calendar year basis. The following data were found during your audit: a. Goods in transit shipped FOB destination by a supplier, in the amount of 100,000, had been excluded from the inventory, and further testing revealed that the purchase had been recorded. b. Goods costing 50,000 had been received, included in inventory, and recorded as a purchase. However, upon your inspection the goods were found tobe defective and would be immediately returned. c. Materials costing 250,000 and billed on December 30 at a selling price of 320,000, had been segregated in the warehouse for 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 70,000 was out on consignment with Hermie Company. Since the monthly statement from Hermie Company listed those materials as on hand, the items had been excluded from the final inventory and invoiced on December 31 at 80,000. e. The sale of 150,000 worth of materials and costing 120,000 had been shipped FOB point of shipment on December 31. However, this inventory was found to be included in the final inventory. The sale was properly recorded in 2017, f. Goods costing 100,000 and selling for 140,000 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 170,000 had been included in the inventory count, but no entry had been made for their purchase. h. Merchandise costing 200,000 had been recorded as a purchase but not included as inventory. Terms of sale are FOB shipping point according to the supplier's invoice which had arrived at December 31.Further inspection of the client's records revealed the following December 31, 2017 balances: Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable, P690,000; Net sales, 5,050,000; Net purchases, P2,300,000; Net income, P510,000. QUESTIONS: Based on the above and the result of your audit, determine the adjusted balances of following as of December 31, 2017: 1. Inventory a. 1,230,000 . 1,550,000 b. 1,650,000 4. 1,480,000 2. Accounts payable a. 710,000 . 810,000 b. 840,000 4. 760,000 3. Net sales a. 4,550,000 ¢. 4,730,000 b. 4,650,000 4. 4,970,000 4. Net purchases a. 2,370,000 c. 2,180,000 b. 2,420,000 4. 2,320,000 5. Net income a. 220,000 ¢. 40,000 b. 290,000 4. 550,000 Joseph Sales Company uses the firstin, first-out method in calculating cost of goods sold for the three products that the company handles. Inventories and purchase information concerning the three products are given for the month of October Product C ProductP Product A Oct. 1 Inventory 50,000 units at 30,000 units 65,000 units P6.00 at P10.00 at PO.90 Oct.1-15 Purchases 70,000 units at 45,000 units 30,000 units P6.50 at P10.50 at P1.25 Oct. 16-31 Purchases 30,000 units at 8.00 Oct. 1-31 Sales 105,000 units §0,000 units 45,000 units Oct.31 Sales Pe.0O/unit P11.00/unit —-P2.00/unit priceOn October 31, the company's suppliers reduced their prices from the most recent purchase prices by the following percentages: product C, 20%: product P, 10%; product A, 8%. Accordingly, Joseph decided to reduce its sales prices on all items by 10%, effective November 1. Joseph'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. 585,000 c. 557,310 b, 655,500 d. 617,500 2. The amount of Inventory to be reported on the company's statement of financial position at October 31 is a, 869,850 ¢, 559,350 b. 543,810 . 595,350 3. The Allowance for inventory write down at October 31 is a. 5,650 ¢. 85,650 b. 13,500 4, 60,150 4. The cost of sales after loss on inventory write down for the month of October is a. 1,298,500 ¢. 1,022,260 b. 1,290,650 4. 1,208,000 You were engaged by Alfredo Corporation for the audit of the company’s financial statements for the year ended December 31, 2020. The company is engaged in the wholesale business and makes all sales at 25% over cost. The following were gathered from the client's accounting records: SALES PURCHASES Date Reference — Amount Date Reference — Amount Balance forwarded P7,800,000 Balance forwarded 4,200,000 1227 S| No, 60,000 12/28. RR#2059 36,000 865 12728 SI No. 225,000 12/30 RR #2061 105,000 866 12128 SI No, 15,000 12/31: RR#2062 63,000 867 12981 SI No. 69,000 12/31 RR#2063, 96,000 869 12181 Sl No. 102,000 12/31 Closing 870 entry (4,500,000)1231 Sl No. 24,000 871 12/31 Closing entry (8.295.000) e Note: SI = Sales Invoice RR = Receiving Report Accounts receivable 750,000 Inventory 900,000 Accounts payable 600,000 You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was properly taken When performing sales and purchases cut-off tests, you found that at December 31, the last wt wi and that no shipments had been made on any Sales Invoices whose number is larger than No. 868. 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 Receiving Report No. 2060 but for which the invoice was not received until the following year. Cost was P27,000. b) On the evening of December 31, there were two trucks in the company siding: Truck No. XXX 888 was unloaded on January 2 of the following year and received on Receiving Report No. 2083. The freight was paid by the vendor. Truck No. MGM 357 was loaded and sealed on December 31 but leave the company premises on January 2. This order was sold for P150,000 per Sales Invoice No. 868, c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to ABC Trading Corporation. ABC received the goods, which were sold on Sales Invoice No. 866 terms FOB Destination, the next day. d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report No. 2064, The goods were shipped FOB Destination, and freight of 2,000 was paid by the client. However, the freight was deducted from the purchase price of P800,000. Based on the above and the result of your audit, determine the following: 1. Sales for the year ended December 31, 2020 a. 8,100,000 . 7,875,000 b. 7,725,000 4. 8,025,000Purchases for the year ended December 31, 2020 a. 4,500,000 ¢. 5,631,000 b, 6,727,000 ¢. 4,627,000 Accounts receivable as of December 31, 2020 a. 330,000 ¢. 525,000 b. 655,000 4. 180,000 Inventory as of December 31, 2020 a, 1,452,000 . 1,200,000 b. 1,221,000 4. 1,296,000 Accounts payable as of December 31, 2020 a, 600,000 ¢. 631,000 b. 627,000 4. 1,827,000 The following accounts were included in the unadjusted trial balance of Alfredo Company as of December 31, 2020: Cash P 481,600 Accounts receivable 4,127,000 Inventory 3,025,000 Accounts payable 2,100,500 Accrued expenses 218,500 During your audit, you noted that Alfredo held its cash books open after year-end. in addition, your audit revealed the following: 1. Receipts for January 2021 of 327,300 were recorded in the December 2020 cash receipts book. The receipts of 180,050 represent cash sales and 147,250 represent collections from customers, net of 5% cash discounts. Accounts payable of 186,200 was paid in January 2021. The payments, on which discounts of 6,200 were taken, were included in the December 2020 check register. Merchandise inventory is valued at 3,025,000 prior to any adjustments. The following information had been found relating to certain inventory transactions. a, Goods valued at 137,500 are on consignment with a customer. These goods are not included in the inventory figure. b. Goods costing 108,750 were received from a vendor on January 4, 2021. The related invoice was received and recorded on January 6, 2021. The goods were shipped on December 31, 2020, terms FOB shipping point.c. Goods costing 318,750 were shipped on December 31, 2020, and were delivered to the customer on January 3, 2021. The terms of the invoice were FOB shipping point. The goods were included in the 2020 ending inventory even though the sale was recorded in 2020. d. A 91,000 shipment of goods to a customer on December 30, terms FOB destination are ‘oot included in the year-end inventory. The goods cost 65,000 and were delivered to the customer on January 3, 2021. The sale was properly recorded in 2021. fe. The invoice for goods costing 87,500 was received and recorded as a purchase on December 31, 2020. The related goods, shipped FOB destination were received on January 4, 2021, and thus were not included in the physical inventory. f. Goods valued at 306,400 are on consignment from a vendor. These goods are not included in the physical inventory. Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2020: 1. Cash a. 481,600 c. 334,300 b. 340,500 4. 346,700 2. Accounts receivable a. 1,454,300 c. 1,127,000 b. 1,282,000 4. 1,274,250 3. Inventory a. 3,017,500 ¢. 2,930,000 b. 3,040,000 4. 2,505,000 4. Accounts payable a, 2,395,450 2,286,500 b. 2,307,950 4. 2,301,750 5. Current ratio a. 2.00 6.1.84 b. 1.83 4.2.01 Mavis, Inc., owner of a trading company, engaged your services as auditor. There is a discrepancy between the company’s income and the sales volume. The owner suspects that the staff is committing theft, You are to determine whether or not this is true. Your investigations revealed the following1. Physical inventory, taken December 31, 2020 under your observation showed that cost was 265,000 and net realizable value (NRV), P244,000. The inventory on January 1, 2020 showed cost of P390,000 and net realizable value of P375,000. It is the corporation's practice to value inventory at “lower of cost or NRV.” Any loss between cost and NRV is included in “Other expenses.” 2. The average gross profit rate was 40% of net sales. 3. The accounts receivable as of January 1, 2020 were 136,000. During 2020, accounts receivable written off during the year amounted to 10,000. Accounts receivable as of December 31, 2020 were 375,000. 4. Outstanding purchase invoices amounted to 300,000 at the end of 2020. At the beginning of 2020 they were 375,000, 5. Receipts from customers during 2020 amounted to 3,000,000. 6. Disbursements to merchandise creditors amounted to 2,000,000. Based on the above and the result of your audit, determine the following 1. The total sales in 2020 is a, 3,240,000 ¢, 3,250,000 b. 3,230,000 4. 2,770,000 2. The total purchases in 2020 is , 2,000,000 ¢. 1,950,000 b. 2,075,000 4. 1,925,000 3. The amount of inventory shortage as of December 31, 2020 is a, 106,000 ¢. 100,000 b. 175,000 a 0 A.recent fire severely damaged Penguin Company's administration building and destroyed many of ts financial records. You have been contracted by Penguin’s management to reconstruct as much financial information as possible for the month of July. You learn that Penguin makes a physical inventory count at the end of each month to determine monthly ending inventory values. You also find out that the company applies the average cost method. You are able to gather the following information by examining various documents: Inventory, July 34 180,000 units Total cost of goods available for sale in July 356,400 Cost of goods sold during July 297,000 Gross profit on sales for July 203,000Cost of inventory, July 4 0.35 per unit The following are Penguin's July purchases of merchandise Date Quantity Unit Cost July 6 180,000 PO.40 12 150,000 0.41 16 120,000 0.42 17 150,000 0.45 1. Number of units on hand July 1 a. 450,000 b. 848,571 169,714 d. 300,000 2. Units sold during July a. 600,000 b. 300,000 ¢. 750,000 d. 450,000 3. Unit cost of inventory at July 31 a. 0.35 b. 0.396 0.419 d. 0.279 8 Dundas Mart uses the average retail inventory method. The following information is available for the current year: Cost Retail Beginning inventory P 1,100,000 P 2,200,000 Purchases 15,800,000 26,300,000 Freight in 400,000 Purchase returns 600,000 1,000,000 Purchase allowances 300,000 Departmental transfer in 400,000 800,000 Net markups 600,000 Net markdowns 900,000 Sales 24,700,000 Sales returns 350,000 Sales discounts 200,000 Employee discounts 600,000 Loss from breakage 50,000 Based on the above and the result of your audit, answer the following: 1. The cost ratio using the average retail inventory method is a, 58.13% ¢. 62.00% b, 61.07% 60.00% 2. The estimated ending inventory at retail isa. 3,000,000 c. 2,800,000 b. 3,600,000 d. 3,650,000 3. The estimated ending inventory at cost is a. 1,743,945 c. 1,832,143 b. 2,198,571 d. 1,800,000 4, The estimated cost of goods sold is a, 15,267,857 ¢. 18,000,000 b. 14,901,429 . 15,056,055 5. If the inventory at retail based on physical count at December 31 is P1,700,000, the estimated inventory shortage is a, 780,000 ¢. 785,709 b. 793,929 a 0 9. On November 17, 2020, Matet Airways entered into a non-cancelable commitment to purchase 3,000 barrels of aviation fuel for 9,000,000 on March 31, 2021. Matet entered into this purchase commitment to protect itself against the volatility in the aviation fuel market. By December 31, 2020, the purchase price of aviation fuel had fallen to 2.200 per barrel. However, by March 31, 2021, when Matet took delivery of the 3,000 barrels, the price of aviation fuel had risen to 3,100 per barrel. Based on the above and the result of your aucit, answer the following: 1. The loss on purchase commitment on December 31, 2020 is a. 1,500,000 ¢. 2,400,000 b. 900,000 a. 0 2. The gain on purchase commitment on March 31, 2021 is a, 2,700,000 ¢. 2,400,000 b. 300,000 d 0 10. Biological assets; Agricultural produce A public limited company, Windsor Dairy Products, produces milk on its farms. As of January 1, 2021 Windsor has a stock of 1,050 cows (average age, 2 years old) and 150 heifers (average age, 1 year old). Additional information: Windsor purchased 375 heifers, average age 1 year, on July 1, 2021. No animals were bom or sold during the year."1 ‘The Company produced milk with a fair value of 660,000 (that is determined at the time of milking) in the year ended 31 December 2021. The Company also estimated the following costs Commissions to brokers and dealers 20,000 Transport and other costs necessary to get milk toa market 10,000 The fair values less costs to sell were 1 - year old animal at December 31, 2021 P3,200 2- year old animal at December 31, 2021 4,500 1.5 - year old animal at December 31, 2021 3,600 3 - year old animal at December 31, 2021 5,000 1 - year old animal at January 1, 2021 and July 1, 2021 3,000 2- year old animal at January 1, 2021 4,000 QUESTIONS: Based on the above and the result of your audit, answer the following: 1. The milk should be valued at a. 660,000) . 650,000 b. 640,000 d. 630,000 2. The increase in value of biological assets in 2021 due to price change? a, 460,000 630,000 b. 555,000 1,500,000 3. The increase in value of biological assets in 2021 due to physical change? a. 870,000 ¢. 590,000 b. 720,000 4. 780,000 4. The carrying amount of the biological assets as of January 1, 2021 is a, 4,650,000 c. 5,150,000 b. 5,205,000 4. 3,160,000 5. The carrying amount of the biological assets as of December 31, 2021 is a. 6,150,000 c. 7,325,000 b. 6,825,000 4. 7,275,000 Pickering Corp. produces milk on its farms. The entity produces 20% of the community's milk that is consumed, Farmville Incorporated owns 5 farms and had a stock of 4,200 cows and 2,100 heifers.The farms produce 1,600,000 kilograms of milk a year and the average inventory held is 30,000 kilograms of milk. However, on December 31, 2021 the entity is currently holding 100,000 kilograms of milk in powder. On December 31, 2021, the biological assets are Purchased before January 1.2021. (3 years old) 4,200 cows Purchased on January 1,2021. _( 2 years old) 600 heifers Purchased on July 1,2021 (1.5 years old) 1,500 heifers No animals were born or sold during the current year. The unit fair value less cost of disposal is as follows: January 1, 2024 1-year old. 3,000 2-year old 4,000 July 1, 2021 ‘year old 3,000 December 31, 2021: 1-year old. 3,200 2-year old, 4,500 1 5-year old. 7.200 3.year old 40,000 1. What is the fair value of biological assets on January 1, 20217 a. 18,600,000 b. 19,200,000 c. 16,800,000 d. 14,400,000 2. What is the fair value of biological assets purchased on July 1, 20217 a, 4,500,000 b. 6,000,000 c. 7,500,000 d. 6,750,000 3. What is the fair value of biological assets on December 31,2021? a, 29,100,000 b. 31,500,000 ¢. 30,450,000 4. 23,700,000 4. What is the increase in fair value of biological assets on December 31,2021? a. 6,000,000 b. 10,500,000 c. 9,900,000 d. 12,300,00012 5. What is the increase in fair value of biological assets due to physical change? a. 2,620,000 b. 3,480,000 . 6,000,000 d. 2,880,000 The following account balances are presented by OUR Company: Merchandise Inventory 150,000 ‘90,000 Cash 180,000 2 Accounts Receivable 240,000 180,000 Accounts payable 405,000 200,00 Assuming all sales and purchases are on account. The amount of cost of goods sold is 360,000 during the current year. The gross profit margin on sales is 20%. 1. Whats the 2021 cash balance? a, 105,000 b. 35,000 , 65,000 4. 185,000 2. What is the amount of purchases? a, 300,000 b. 210,000 ¢. 240,000 4. 310,000