Ch. 1.

Inventories
Class Exercises
Ex. 2. Mike, an auditor, is performing a review of ABC Group’s inventory account. ABC’s did not have a good year and top
management is under pressure to boost reported income. According to its records, the inventory balance at year-end was Br650,000.
However, the following information was not considered when determining that amount.
1. Included in the company’s count were goods with a cost of Br200,000 that the company is holding on consignment. The goods
belong to Bosnia Enterprises.
2. The physical count did not include goods purchased by ABC with a cost of Br40,000 that were shipped FOB shipping point on
December 28 and did not arrive at ABC’s warehouse until January 3.
3. Included in the inventory account was Br15,000 of office supplies that were stored in the warehouse and were to be used by the
company’s supervisors and managers during the coming year.
4. The company received an order on December 28 that was boxed and was sitting on the loading dock awaiting pick-up on
December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB
shipping point. The goods had a selling price of Br40,000 and a cost of Br30,000. The goods were not included in the count
because they were sitting on the dock.
5. On December 29, ABC shipped goods with a selling price of Br80,000 and a cost of Br60,000 to Oman Sales FOB shipping point.
The goods arrived on January 3. Oman Sales had only ordered goods with a selling price of Br10,000 and a cost of Br8,000.
However, a ABC’s sales manager had authorized the shipment and said that if Oman wanted to ship the goods back next week, it
could.
6. Included in the count was Br30,000 of goods that were parts for a machine that the company no longer made. Given the high-tech
nature of ABC’s products, it was unlikely that these obsolete parts had any other use. However, management would prefer to keep
them on the books at cost, “since that is what we paid for them, after all.
Instructions: Prepare a schedule to determine the correct inventory amount.
Solution
EI - as reported Br650,000
Less: #1 (200,000)
#3 (15,000)
#6 (30,000)
Add: #2 40,000
#4 30,000
#5 52,000
Correct inventory Br527,000