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AUDITING PROBLEMS – REVIEW


INVENTORY

PROF. U.C. VALLADOLID


Multiple Choice:
Identify the letter of the choice that best completes the statement or answers the question.

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.

1. Goods out on consignment at another company’s store P800,000


2. Goods sold on installment basis 100,000
3. Goods purchased f.o.b. shipping point that are in transit at
December 31 120,000
4. Goods purchased f.o.b. destination that are in transit at December
31 200,000
5. Goods sold to another company, for which our company has signed
an agreement to repurchase at a set price that covers all costs
related to the inventory 300,000
6. Goods sold where large returns are predictable 280,000
7. Goods sold f.o.b. shipping point that are in transit
December 31 120,000
8. Freight charges on goods purchased 80,000
9. Factory labor costs incurred on goods still unsold 50,000
10. Interest cost incurred for inventories that are routinely manufactured
40,000
11. Costs incurred to advertise goods held for resale 20,000
12. Materials on hand not yet placed into production 350,000
13. Office supplies 10,000
14. Raw materials on which a the company has started production, but
which are not completely processed 280,000
15. Factory supplies 20,000
16. Goods held on consignment from another company 450,000
17. Costs identified with units completed but not yet sold 260,000
18. Goods sold f.o.b. destination that are in transit at
December 31 40,000
19. Temporary investment in stocks and bonds that will be resold in the
near future 500,000

How much of these items would typically be reported as inventory in the financial statements?
a. P2,300,000 c. P2,260,000
b. P2,000,000 d. P2,220,000

2. In connection with your audit of the Rosalina Manufacturing Company, you reviewed its inventory as of December 31,
2017 and found the following items:

(a) A packing case containing a product costing P100,000 was standing in the shipping room when the physical
inventory was taken. It was not included in the inventory because it was marked “Hold for shipping instructions.” The
customer’s order was dated December 18, but the case was shipped and the costumer billed on January 10, 2018.

(b) Merchandise costing P600,000 was received on December 28, 2017, and the invoice was recorded. The invoice was
in the hands of the purchasing agent; it was marked “On consignment”.

(c) Merchandise received on January 6, 2018, costing P700,000 was entered in purchase register on January 7. The
invoice showed shipment was made FOB shipping point on December 31, 2017. Because it was not on hand during
the inventory count, it was not included.

(d) A special machine costing P200,000, fabricated to order for a particular customer, was finished in the shipping room
on December 30. The customer was billed for P300,000 on that date and the machine was excluded from inventory
although it was shipped January 4, 2018.
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(e) Merchandise costing P200,000 was received on January 6, 2018, and the related purchase invoice was recorded
January 5. The invoice showed the shipment was made on December 29, 2017, FOB destination.

(f) Merchandise costing P150,000 was sold on an installment basis on December 15. The customer took possession of
the goods on that date. The merchandise was included in inventory because Rosalina still holds legal title. Historical
experience suggests that full payment on installment sale is received approximately 99% of the time.

(g) Goods costing P500,000 were sold and delivered on December 20. The goods were included in the inventory
because the sale was accompanied by a purchase agreement requiring Rosalina to buy back the inventory in
February 2018.

Based on the above and the result of your audit, how much of these items should be included in the inventory balance at
December 31, 2017?
a. P1,300,000 c. P1,650,000
b. P 800,000 d. P1,050,000

3. Joseph Sales Company uses the first-in, 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 Product P Product A
Oct. 1 Inventory 50,000 units at 30,000 units at 65,000 units at
P6.00 P10.00 P0.90
Oct. 1-15 Purchases 70,000 units at 45,000 units at 30,000 units at
P6.50 P10.50 P1.25
Oct. 16-31 Purchases 30,000 units at
P8.00
Oct. 1-31 Sales 105,000 units 50,000 units 45,000 units
Oct. 31 Sales price P8.00/unit P11.00/unit P2.00/unit

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. P565,000 c. P557,310
b. P655,500 d. P617,500

2. The amount of Inventory to be reported on the company’s statement of financial position at October 31 is
a. P569,850 c. P559,350
b. P543,810 d. P595,350

3. The Allowance for inventory write down at October 31 is


a. P 5,650 c. P85,650
b. P13,500 d. P60,150

4. The cost of sales after loss on inventory write down for the month of October is
a. P1,298,500 c. P1,022,260
b. P1,290,650 d. P1,208,000

4. The management of Raindrops Company has engaged you to audit its 2017 financial statements. The company’s
accounting period ends on December 31. You verified that on November 30, the correct inventory level was 60,000 units.
A review of the December purchases orders to various suppliers showed the following. Only merchandise received up to
December 31,2017 were recorded as purchase by Raindrops.

Date of Invoice Date Quantity in Units Date Shipped Date Received Terms
Purchase order
12-02-2017 01-04-2018 10,000 01-03-2018 01-04-2018 Shipping point
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12-11-2017 01-04-2018 12,000 12-22-2017 12-23-2017 Destination


12-14-2017 01-03-2018 14,000 12-28-2018 01-03-2018 Shipping point
12-23-2017 12-26-2017 10,000 01-03-2018 01-04-2018 Shipping point
12-28-2017 01-10-2018 8,000 12-31-2017 1-10-2018 Destination
12-31-2017 01-10-2018 15,000 01-04-2018 01-11-2018 Destination

During the month of December, the company recorded the sale of 50,000 units at P125 selling price per unit. This
includes the sale of 14,000 units shipped to Rose Company, a consignee. A letter received from Rose Company indicates
that as of December 31, 2017, it had sold 10,000 units and was still trying to sell the remaining units.

Inventories presented on the client prepared statement of financial position pertain to inventories actually on hand at
yearend.

What is the number of units that should be included in the December 31, 2017 inventory?
a. P 40,000 c. P30,600
b. P35,000 d. P34,400

5. You were engaged by Alfredo Corporation for the audit of the company’s financial statements for the year ended
December 31, 2017. 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 P4,200,000
12/27 SI No. 865 60,000 12/28 RR #2059 36,000
12/28 SI No. 866 225,000 12/30 RR #2061 105,000
12/28 SI No. 867 15,000 12/31 RR #2062 63,000
12/31 SI No. 869 69,000 12/31 RR #2063 96,000
12/31 SI No. 870 102,000 12/31 Closing
entry (4,500,000)
12/31 SI No. 871 24,000 P -
12/31 Closing
entry (8,295,000)
P -
Note: SI = Sales Invoice RR = Receiving Report

Accounts receivable P750,000


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 Receiving Report which had
been used was No. 2063 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.
2063. 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.
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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 P2,000 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, 2017


a. P8,100,000 c. P7,875,000
b. P7,725,000 d. P8,025,000

2. Purchases for the year ended December 31, 2017


a. P4,500,000 c. P5,631,000
b. P5,727,000 d. P4,527,000

3. Accounts receivable as of December 31, 2017


a. P330,000 c. P525,000
b. P555,000 d. P180,000

4. Inventory as of December 31, 2017


a. P1,452,000 c. P1,200,000
b. P1,221,000 d. P1,296,000

5. Accounts payable as of December 31, 2017


a. P600,000 c. P 531,000
b. P627,000 d. P1,827,000

6. The following accounts were included in the unadjusted trial balance of Alfredo Company as of December 31, 2017:

Cash P 481,600
Accounts receivable 1,127,000
Inventory 3,025,000
Accounts payable 2,100,500
Accrued expenses 215,500

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 2018 of P327,300 were recorded in the December 2017 cash receipts book. The receipts of
P180,050 represent cash sales and P147,250 represent collections from customers, net of 5% cash discounts.

2. Accounts payable of P186,200 was paid in January 2018. The payments, on which discounts of P6,200 were taken,
were included in the December 2017 check register.

3. Merchandise inventory is valued at P3,025,000 prior to any adjustments. The following information had been found
relating to certain inventory transactions.

a. Goods valued at P137,500 are on consignment with a customer. These goods are not included in the inventory
figure.

b. Goods costing P108,750 were received from a vendor on January 4, 2018. The related invoice was received
and recorded on January 6, 2018. The goods were shipped on December 31, 2017, terms FOB shipping point.

c. Goods costing P318,750 were shipped on December 31, 2017, and were delivered to the customer on January
3, 2018. The terms of the invoice were FOB shipping point. The goods were included in the 2017 ending
inventory even though the sale was recorded in 2017.
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d. A P91,000 shipment of goods to a customer on December 30, terms FOB destination are not included in the
year-end inventory. The goods cost P65,000 and were delivered to the customer on January 3, 2018. The sale
was properly recorded in 2018.

e. The invoice for goods costing P87,500 was received and recorded as a purchase on December 31, 2017. The
related goods, shipped FOB destination were received on January 4, 2018, and thus were not included in the
physical inventory.

f. Goods valued at P306,400 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,
2017:
1. Cash
a. P481,600 c. P334,300
b. P340,500 d. P346,700

2. Accounts receivable
a. P1,454,300 c. P1,127,000
b. P1,282,000 d. P1,274,250

3. Inventory
a. P3,017,500 c. P2,930,000
b. P3,040,000 d. P2,505,000

4. Accounts payable
a. P2,395,450 c. P2,286,500
b. P2,307,950 d. P2,301,750

5. Current ratio
a. P2.00 c. P1.84
b. P1.83 d. P2.01

7. 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, 2017 under your observation showed that cost was P265,000 and net
realizable value (NRV), P244,000. The inventory on January 1, 2017 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, 2017 were P135,000. During 2017, accounts receivable written off during
the year amounted to P10,000. Accounts receivable as of December 31, 2017 were P375,000.

4. Outstanding purchase invoices amounted to P300,000 at the end of 2017. At the beginning of 2017 they were
P375,000.

5. Receipts from customers during 2017 amounted to P3,000,000.

6. Disbursements to merchandise creditors amounted to P2,000,000.

Based on the above and the result of your audit, determine the following:

1. The total sales in 2017 is


a. P3,240,000 c. P3,250,000
b. P3,230,000 d. P2,770,000

2. The total purchases in 2017 is


a. P2,000,000 c. P1,950,000
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b. P2,075,000 d. P1,925,000

3. The amount of inventory shortage as of December 31, 2017 is


a. P106,000 c. P100,000
b. P175,000 d. P 0

8. Having been engaged as external auditor of Mojofly Company on February 28, 2018, you were unable to observe the
taking of inventory on December 31, 2017 which was reported in the amount of P360,000. You were able to gather the
following data.

Inventory, December 31, 2016 P 320,000


Purchases during 2017 1,410,000
Cash Sales during 2017 350,000
Shipment received on December 26, 2017 included in
physical inventory, but not recorded as purchases 10,000
Deposits made with suppliers, entered as purchases
Goods were not received in 2017 20,000
Collections on account receivable, 2017 1,800,000
Accounts Receivable, January 1, 2017 250,000
Accounts Receivable, December 31, 2017 300,000
Gross profit percentage on sales 40%

The estimated inventory shortage at December 31, 2017 was

a. P5,000
b. P40,000
c. P50,000
d. P60,000

9. A recent fire severely damaged Penguin Company’s administration building and destroyed many of its 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 31 150,000 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 303,000
Cost of inventory, July 1 P0.35 per unit

The following are Penguin’s July purchases of merchandise:


Date Quantity Unit Cost
July 6 180,000 P0.40
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
c. 169,714 d. 300,000

2. Units sold during July


a. 600,000 b. 300,000
c. 750,000 d. 450,000

3. Unit cost of inventory at July 31


a. 0.35 b. 0.396
c. 0.419 d. 0.279
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10. You obtained the following information in connection with your audit of Eglinton Corporation:

Cost Retail
Beginning inventory P1,987,200 P2,760,000
Sales 7,812,000
Purchases 4,688,640 6,512,000
Freight in 94,560
Mark ups 720,000
Mark up cancellations 120,000
Markdown 240,000
Markdown cancellations 40,000

Eglinton Corp. uses the retail inventory method in estimating the values of its inventories and cost of goods sold.

Based on the above and the result of your audit, answer the following:

1. The cost ratio to be used considering the provisions of PAS 2 is


a. 68.58% c. 70.00%
b. 69.20% d. 75.78%

2. The estimated ending inventory at retail is


a. P2,300,000 c. P1,940,000
b. P2,060,000 d. P1,860,000

3. The estimated ending inventory at cost is


a. P1,412,786 c. P1,302,000
b. P1,275,588 d. P1,287,120

4. The estimated cost of goods sold is


a. P5,468,400 c. P5,357,614
b. P5,494,812 d. P4,685,117

11. 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% c. 62.00%
b. 61.07% d. 60.00%

2. The estimated ending inventory at retail is


a. P3,000,000 c. P2,800,000
b. P3,600,000 d. P3,650,000

3. The estimated ending inventory at cost is


a. P1,743,945 c. P1,832,143
b. P2,198,571 d. P1,800,000
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4. The estimated cost of goods sold is


a. P15,267,857 c. P15,000,000
b. P14,901,429 d. P15,056,055

5. If the inventory at retail based on physical count at December 31, 2014 is P1,700,000, the estimated inventory
shortage is
a. P780,000 c. P755,709
b. P793,929 d. P 0

12. On November 17, 2017, Matet Airways entered into a noncancelable commitment to purchase 3,000 barrels of aviation
fuel for P9,000,000 on March 31, 2018. Matet entered into this purchase commitment to protect itself against the volatility
in the aviation fuel market. By December 31, 2017, the purchase price of aviation fuel had fallen to P2,200 per barrel.
However, by March 31, 2018, when Matet took delivery of the 3,000 barrels, the price of aviation fuel had risen to P3,100
per barrel.

Based on the above and the result of your audit, answer the following:
1. The loss on purchase commitment on December 31, 2017 is
a. P1,500,000 c. P2,400,000
b. P 900,000 d. P 0

2. The gain on purchase commitment on March 31, 2018 is


a. P2,700,000 c. P2,400,000
b. P 300,000 d. P 0

13. The Isabela Company is a wholesale distributor of automotive replacement parts. Initial amounts taken from Isabela’s
accounting records are as follows:

Inventory at December 31, 2017 (based on physical count of goods in warehouse on December 31, 2017): P1,250,000

Accounts Payable at December 31,2017:

Vendor Terms Amount

A Company 2/10, n/30 P265,000

B Company n/30 210,000

C Company n/30 300,000

D Company n/30 225,000

E Company n/30 ---

F Company n/30 ---

Total P1,000,000

Sales were P9,000,000.

Additional information is as follows:

Parts held on consignment from B Company to Isabela, the consignee, amounting to P155,000, were included in
the physical count of goods in Isabela’s warehouse on December 31, 2017 and in accounts payable at
December 31, 2017.

P22,000 of parts which were purchased from E Company and paid for in December 2017 were sold in the last
week of 2017 and appropriately recorded as sales of P28,000. The parts were included in the physical count of
goods in Isabela’s warehouse on December 31, 2017, because the parts were on the loading dock waiting to be
picked up by customers.

Parts in transit on December 31,2017, to customers, shipped FOB shipping point, on December 28,2017,
amounted to P34,000. The customers received the parts on January 6, 2018. Sales of P40,000 to the customers
for the parts were recorded by Isabela on January 2, 2018.
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Retailers were holding P210,000 at cost (P250,000 at retail) of goods on consignment from Isabela, the
consignor, at their stores on December 31, 2017.

Goods were in transit from F Company to Isabela on December 31, 2017. The cost of goods was P25,000 and
they were shipped FOB shipping point on December 29, 2017.

A quarterly freight bill in the amount of P2,000 specifically relating to merchandise purchases in December 2017,
all of which was still in inventory at December 31, 2017, was received on January 3, 2018. The freight bill was
not included in either the inventory or in accounts payable at December 31, 2017.

All of the purchases from A Company occurred during the last seven days of the year. These items have been recorded in
accounts payable and accounted for in the physical inventory at cost before discount. Isabela’s policy is to pay invoices in
time to take advantage of all cash discounts, adjust inventory accordingly, and record accounts payable, net of cash
discount

1. The adjusted Sales for 2017 were


a. P8,750,000
b. P8,790,000
c. P9,000,000
d. P9,040,000

2. The correct inventory balance is


a. P1,304,700
b. P1,308,000
c. P1,310,000
d. P1,338,700

3. The correct Accounts Payable balance is


a. P841,700
b. P847,000
c. P866,700
d. P872,000

4. The net effect of the adjustments is an understatement (overstatement) in cost of sales of


a. P(222,000)
b. P(188,000)
c. P(78,600)
d. P78,600

14. The following accounts were included in the unadjusted trial balance of Super Text Company as of December 31, 2017:

Cash 240,800
Accounts Receivable 563,500
Merchandise Inventory 1,512,500
Accounts Payable 1,050,250
Accrued Expenses 107,750
During your audit, you noted that Super Text held its cash receipts books open after year-end. In addition, your audit
revealed the following:

Receipts for January 2018 of 163,650 were recorded in the December 2017 cash receipts journal. The
receipts of ?90,025 represent cash sales and 73,625 represents collections from the customers, net of
5% cash discounts.

Accounts payable of 93,100 was paid in January 2018. The payments, on which discounts of 3,100
were taken, were included in the December 2017 check register.

Merchandise Inventory is valued at 1,512,500 prior to any adjustments. The following information has
been found relating to certain inventory transactions:

o Goods valued at 68,750 are on consignment with a customer. These goods are not included in
the 1,512,500 inventory figure.
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o Goods costing 54,375 were received from a vendor on January 4, 2018. The related invoiced
was received and recorded on January 6, 2018. The goods were shipped on December 31,
2017, terms FOB Shipping Point.

o Goods costing 159,375 were shipped on December 31, 2017 and were delivered to the
customers on January 3, 2018. The terms of the invoice were FOB Shipping Point. The goods
were included in the 2017 ending inventory even though the sale was recorded in 2017.

o A 45,500 shipment of goods to a customer on December 30, terms FOB Destination are not
included in the year-end inventory. The goods cost 32,500 and were delivered to customers on
January 3, 2018. The sale was properly recorded in 2018.

o The invoice for goods costing 43,750 was received and recorded as a purchase on December
31, 2017. The related goods, shipped FOB Destination were received on January 4, 2018, and
thus were not included in the physical inventory.

o Goods valued at 153,200 are on consignment from a vendor. These goods are not included in
the physical inventory.

Determine the adjusted balance of:


1. Cash
a. 167,150
b. 170,250
c. 173,350
d. 240,800

2. Accounts Receivable, before allowance for sales discounts


a. 563,500
b. 637,125
c. 641,100
d. 727,150

3. Merchandise Inventory
a. 1.252,500
b. 1,465,000
c. 1,508,750
d. 1,520,00

4. Accounts Payable, before allowance for purchase discounts


a. 1,143,250
b. 1,150,875
c. 1,153,975
d. 1,197,725

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