AC-20

QUIZ 3
AUDIT OF INVENTORY AND COST OF GOODS SOLD

PROBLEM 1
Your client furnished you with the following data:

Merchandise Inventory, January 1 P60,000

Purchases, January 1 to October 31 415,000
Purchases returns and allowances 5,000
Transportation in 10,000
Sales, January 1 to October 31, at 35% above 540,000
cost
Merchandise not damaged by fire on October 42,000
31

1. Using the gross profit test, what was the estimated loss in inventory due to the fire? A. a. a.
a. 38,000
b. 60,000
c. 80,000
d. None of the above

PROBLEM 2
The following information is available for Crocodile Company for 2020:
Net Sales P1,200,000
Freight-in 45,000
Purchase discounts 25,000
Ending inventory 120,000

2. The gross margin is 40% of net sales. What is the cost of goods available for sale?
a. 840,000
b. 960,000
c. 1,200,000
d. 1,220,000
PROBLEM 3
You observed the inventory count of the Dog Company as of December 31, 2020. The client
prepared the summary personnel below and gave it to you for verification:
Quantity Cost Market Amount
A 360 units P3.6/doz. P3.64/doz. 1,310.4
B 24 units 4.7 each 4.8 each 112.8
C 28 units 16.5 each 16.5 each 1,353
D 43 units 5.15 each 5.15 each 176.8
E 400 units 9.10 each 8.1 each 3.640
F 70 dozen 2.0 each 2.0 each 140
G 95 grosses 144.0/gross 132.0/gross 13,780

3. You determined from your examination that the proper value for Item A should be
a. 1,250
b. 1,296
c. 1,526
d. 108

4. You have also determined that the value for item E is:
a. Correct
b. 3,200
c. 3,240
d. 3,280

5. Based on your findings, Item C should be valued at

a. 12,380
b. 12,540
c. 13,680
d. 462

6. Based on your working papers, the proper value of the inventory as of December 31, 2020 is
a. 18,364.25
b. 19,604.25
c. 20,513,20
d. 20,315.00
PROBLEM 4
On May 21, 2020, a fire destroyed the entire merchandise inventory on hand of Natural
Corporation. The following information is available:
Sales, Jan 1 through May 2, 2020 P360,000
Inventory, Jan 1 80,000
Merchandise purchases, January 1 through 330,000
May 2 (including P40,000 of goods in transit
in May 2 shipped FOB shipping point)
Mark-up percentage on cost 20%

7. What is the estimated inventory on May 2, 2020 immediately prior to the fire?
a. 70,000
b. 82,000
c. 110,000
d. 122,000

PROBLEM 5
On May 31, 2020, a fire completely destroyed the work-in-process inventory of Alpha paints.
Physical inventory figures were published as follows:
As of January 1, 2020 As of May 31, 2020
Raw Materials P15,000 P30,000
Work-in-Process 50,000 -
Finished Goods 70,000 60,000

Sales for the first five months of 2020 were P150,000. Raw materials purchased were P50,000.
Freight on purchases was P5,000. Direct labor for the five months was P40,000. To determine
the value of the lost inventory, the insurance adjusters have agreed to use an average gross
profit rate of 32.5%. Assume that manufacturing overhead was 45% of direct labor cost.

8. The value of the goods manufactured and completed as of May 31.

a. 60,000
b. 90,000
c. 91,250
d. 95,000

9. Raw materials used during the first five months of 2020 were
a. 25,000
b. 35,000
c. 40,000
d. 45,000
10. The total value of goods put in process during the five-month period amounted to:
a. 143,000
b. 150,000
c. 168,000
d. 148,000

11. The value of the destroyed work-in-process inventory as determined by the Insurance
adjusters would be
a. 56,750
b. 65,750
c. 86,750
d. 57,650

PROBLEM 6
A physical inventory of merchandise taken for Daniel Company as of June 30, 2020 amounted to
P96,000.

The following information was disclosed from the company’s records:

Inventory, December 31, 2019 90,000
Sales for six months ended June 30, 2020 960,000
Purchases for six months ended June 30, 2020 720,000

Gross profit on sales have averaged 40% for past three years.

Your audit disclosed the following items:

Goods received in June 2020 and included in P7,500
the physical inventory but recorded as July
purchase
Shipment in transit on June 30, 2020 for P5,000
goods purchased FOB shipping point not
recorded as liability
Merchandise shipped to a consignee, costing
P4,000 of which P2,500 had been sold as of
June 30m 2020. No report or remittance was
received from the consignee until July 15,
2020.

12. The gross profit percentage on sales for the six months ended June 30, 2020 was
a. 25%
b. 25.625%
c. 36.45%
d. 25.32%
PROBLEM 7
During your audit of the records of the MUGAO Corporation for the year ended December 31,
2020, the following facts were disclosed:
Raw materials inventory, 1/1/2020 P720,200
Raw materials purchases 5,232,800
Direct labor 6,300,000
Manufacturing overhead applied (150% of 9,450,000
direct labor)
Finished goods inventory, 1/1/2020 1,240,000
Selling expenses 8,112,800
Administrative expenses 7,377,200

Your examination disclosed the following additional information

a. Purchases of raw materials
MONTH UNITS UNIT PRICE AMOUNT
January-February 55,000 17.76 P976,800
March-April 45,000 20.0 900,000
May-June 25,000 19.6 490,000
July-August 35,000 20.0 700,000
September-October 45,000 20.4 918,000
November- 60,000 20.8 1,248,000
December

b. Data with respect to quantities are as follows:

Explanation 1/1/2020 (units) 12/31/2020 (units)
Raw materials 35,000 ?
Work in process (80% 0 25,000
completed)
Finished goods 15,000 40,000
Sales, 205,000 units

c. Raw materials are issued at the beginning of the manufacturing process. During the year,
no returns, spoilage, or wastage occurred. Each unit of finished goods contains one unit
of raw materials.
d. Inventories are stated at cost as follows:
Raw materials – according to the FIFO method
Direct labor – at an average rate determined by correlating total direct labor cost with
effective production during the period.
Manufacturing overhead – at an applied rate of 150% of direct labor cost
 Based on the above and the result of your audit, answer the following:

13. The raw materials inventory as of December 31, 2020 is

a. 1,976,000
b. 1,352,000
c. 936,000
d. 897,800

14. The work in process inventory as of December 31, 2020 is

a. 1,780,000
b. 1,751,294
c. 1,885,565
d. 1,776,000

15. The finished goods inventory as of December 31, 2020 is

a. 3,352,000
b. 3,334,000
c. 3,553,130
d. 3,284,588

16. The cost of goods sold for the year ended December 31, 2020 is
a. 16,897,000
b. 16,568,304
c. 15,867,000
d. 16,875,000

PROBLEM 8
PACERS Company, a manufacturer of small tools, the following information from its accounting
records for the year ended December 31, 2020:
Inventory at December 31, 2020 (based on P1,520,000
physical count on December 31, 2020)
Accounts payable at December 31, 2020 1,200,000
Net sales (sales less sales returns) 8,150,000

Additional information follows:

a. Included in the physical count were tools billed to a customer FOB shipping point on
December 31, 2020. These tools had a cost of P31,000 and were billed at P40,000.
The shipment was on Pacers’ dock waiting to be picked up by the common carrier.
b. Goods were in transit from a vendor to Pacers on December 31, 2020. The invoice cost
was P71,000 and the goods were shipped FOB shipping point on December 29, 2020.
c. Work in process inventory costing 30,000 was sent to an outside processor for plating on
December 30, 2020.
d. Tools returned by customers and held pending inspection in the returned goods area on
December 31, 2020, were not included in the physical count. On January 8, 2021, the
 tools costing P32,000 were inspected and returned to inventory. Credit memos totaling
P47,000 were issued to the customers on the same date.
e. Tools shipped to a customer FOB destination on December 26, 2020, were in transit at
December 31, 2020 and had a cost of P21,000. Upon notification of receipt by the
customer on January 2, 2021, Pacers issued a sales invoice for P42,000.
f. Goods, with an invoice cost of P27,000, received from a vendor at 5:00pm on December
31, 2020, were recorded on a receiving report dated January 2, 2021. The goods were
not included in the physical count, but the invoice was included in accounts payable at
December 31, 2020.
g. Goods received from a vendor on December 26, 2020, were included in the physical
count. However, the related P56,000 vendor invoice was not included in accounts
payable at December 31, 2020, because the accounts payable copy of the receiving
report was lost.
h. On January 3, 2021, a monthly freight bill in the amount of P6,000 was received. The bill
specifically related to merchandise purchased in December 2020, one half of which was
still in the inventory at December 31, 2020. The freight charges were not included un
either inventory and accounts payable at December 31, 2020.

Based on the above and the result of your audit answer the following:
17. The adjusted balance of inventory as of December 31, 2020 is
a. 1,673,000
b. 1,704,000
c. 1,672,000
d. 1,670,000

18. The adjusted balance of Accounts Payable as of December 31, 2020 is

a. 1,333,000
b. 1,262,000
c. 1,327,000
d. 1,330,000

19. The adjusted Net Sales for the year ended December 31, 2020 is
a. 8,103,000
b. 8,110,000
c. 8,150,000
d. 8,063,000

20. When auditing merchandise inventory at year end, the auditor performs a purchase cut off
test to obtain evidence that
a. All goods purchased before year end are received before the physical count.
b. No goods held on consignment for customers are included in the inventory balance.
c. All goods owned at year end are included in the inventory balance
d. No goods observed during the physical count are pledged or sold
21. Which of the following audit procedures would provide the least reliable evidence that the
client has legal title to inventories?
a. Analytical review of inventory balances compared to purchasing the sales activities
b. Confirmation of inventories at locations outside the client’s facilities
c. Observation of physical inventory counts
d. Examination of paid vendors’ invoices

22. In obtaining evidence to establish the existence of inventories, which one of the following is
unlikely to be used by the auditor?
a. Reconciliation
b. Inspection
c. Observation
d. Confirmation

PROBLEM 9
You audit of JJ Company for the year 2020 disclosed the following:
1. The December 31 Inventory was determined by a physical count on December 28 and
based on such count, the inventory was recorded by:
Inventory 1,400,000
Cost of Sales 1,400,000
2. The 2020 ledger shows a sales balance of P20,000,000
3. The company sells a mark-up of 20% based on sales.
4. The company recognizes sales upon passage of title to the customers
5. All customers are within a four-day delivery area.

The sales register for December, 2020 and January 2021 showed the following details:
December Register
INVOICE No. FOB Terms DATE shipped Amount
300 Destination 12/30 P50,000
301 Shipping point 12/30 62,500
302 Destination 12/23 47,500
303 Destination 12/24 82,500
304 Shipping point 01/02 56,000
305 Shipping point 12/29 90,000

January Register
INVOICE No. FOB Terms DATE shipped Amount
306 Destination 12/29 P67,500
307 Shipping point 12/29 74,500
308 Destination 01/02 140,000
309 Shipping point 01/04 73,000
310 Shipping point 12/27 67,500
Questions:
23. The Sales for December is over/(under) by:
a. 36,000 under
b. 36,000 over
c. 106,000 under
d. 106,000 over

24. The inventory for December is over/(under) by:

a. 235,600 over
b. 181,600 over
c. 245,412 under
d. 245,412 over

25. The adjusted inventory at December 31, 2020 is

a. 1,645,412
b. 1,218,400
c. 1,164,400
d. 1,154,588

26. The adjusted sales at December 31, 2020 is

a. 20,106,000
b. 20,036,000
c. 19,964,000
d. 19,894,000

27. How much sales for the month of December 2020 were erroneously recorded in January
2021
a. 282,000
b. 272,000
c. 198,000
d. 142,000

28. How much sales for the month of January 2021 were erroneously recorded in December
2020?
a. 228,500
b. 188,500
c. 180,500
d. 106,000

29. An auditor tests physical security controls over inventory by

a. Test counts and cut-off procedures
b. Examination and reconciliation
c. Inspection and recomputation
d. Inquiry and observation
30. An auditor has accounted for a sequence of inventory tags and is now going to trace
information on a representative number of tags to the physical inventory sheets. The
procedure is to obtain assurance that:
a. The final inventory is valued at cost
b. All inventory represented by an inventory tag is listed on the inventory sheets
c. All inventory represented by an inventory tag is bona fide.
d. Inventory sheets do not include untagged inventory items