PROBLEM NO.

9 – AUDIT OF INVENTORIES

The cost of goods sold section of the income statement prepared by your client for the year ended

December 31 appears as follows:

Inventory, January 1 P 240,000

Purchases 4,800,000

Cost of goods available for sale P5,040,000

Inventory, December 31 300,000

Cost of goods sold P4,740,000

Although the books have been closed, your working paper trial balance is prepared showing all

accounts with activity during the year. This is the first time your firm has made an examination.

The January 1 and December 31 inventories appearing above were determined by physical count

of the goods on hand on those dates and no reconciling items were considered. All purchases

are FOB shipping point.

In the course of your examination of the inventory cutoff, both at the beginning and end of the

year, you discovered the following facts:

Beginning of the Year

1. Invoices totaling P75,000 were entered in the voucher register in January, but the goods were

received during December.

2. December invoices totaling P39,600 were entered in the voucher register in December, but

the goods were not received until January.

End of the Year

3. Sales of P129,000 (cost of P38,700) were made on account on December 31 and the goods

delivered at that time, but all entries relating to the sales were made on January 2.

4. Invoices totaling P45,000 were entered in the voucher register in January, but the goods were

received in December.

5. December invoices totaling P54,000 were entered in the voucher register in December, but
the goods were not received until January.

6. Invoices totaling P36,000 were entered in the voucher register in January, and the goods

were received in January, but the invoices were dated December.

1. What working paper adjustment should be made at the end of the current year for item no.

1?

A. Purchases 75,000

Retained earnings 75,000

B. Retained earnings 75,000

Purchases 75,000

C. Inventory, beginning 75,000

Purchases 75,000

D. No adjusting entry is necessary.

2. The working paper adjustment to correct the error described in item no. 3 should include a

debit to

A. Accounts receivable of P129,000

B. Sales of P129,000

C. Inventory of P38,700

D. Retained earnings of P90,300

3. The company’s statement of financial position as of the end of the current year should show

inventory of

A. P390,000

B. P300,000

C. P279,600

D. P351,300

4. What is the net adjustment to purchases of the current year?

A. P81,000 increase

B. P75,000 decrease

C. P6,000 increase
D. P6,000 decrease

5. The cost of goods sold for the current year is

A. P4,683,600

B. P4,659,600

C. P4,740,000

D. P4,695,600