College of Accounting Education

3/F F. Facundo Hall, B & E Bldg.

Matina, Davao City Philippines
Phone No.: (082) 305-1645

APPLIED AUDITING
Audit of Inventory

Special audit consideration for inventory

Observation. Observation by the auditor of the client’s counting of inventory is a generally accepted
auditing procedure and departure from it should be justified. During the inventory observation the
auditor seeks to determine that recorded inventory items do not exist (addressing the existence
assertion), that all items are recorded (completeness), and that the client has properly considered
the condition of the items (valuation). You should be familiar with various situations that may affect
the auditor’s observation.
(a) When a client uses statistical methods in determining inventory quantities, the auditor
should be satisfy ed that the sampling plan has statistical validity.
(b) The existence of good internal control, including an accurate perpetual inventory system,
may allow an effective count to be made prior to year-end. In such circumstances, the auditor
will rely upon internal control and tests of updating of inventory through year-end to
determine that year-end inventory exists and is properly valued. The auditor may verify the
accuracy of the perpetual inventory records by examining receiving reports and vendor
invoices.
(c) For a first-year client the auditor will probably not have been present for the count of the
beginning invent tory, a necessary input to determining cost of goods sold. If adequate
evidence is available (e.g., acceptable predecessor workpapers), no report modification may
be necessary. When adequate evidence is not available, the auditor may be required to qualify
his/her audit report due to the scope limitation. Any resulting misstatement affects both
current and prior year income and is therefore likely to result in qualification of the opinion on
the income statement. The balance sheet at year-end will be unaffected due to the self-
correcting nature of such an error.
(d) Related to (c), a first-year client may have engaged the auditor subsequent to year-end
and the auditor may also have missed the year-end inventory count. In addition, other events
may make it impossible for the auditor to be present for the client’s count of inventory. In such
circumstances, alternate procedures may sometimes be used to establish the accuracy of the
count (e.g., good internal control); however, these alternate procedures should include some
physical counts of inventory items and should include appropriate tests of intervening
transactions.
Typical substantive audit procedures for inventory
(1) Review disclosures for compliance with generally accepted accounting principles.
(2) Inquire of management about pledging of inventory and verify the adequacy of disclosure.
(3) Review purchase and sales commitments to verify whether there may be a need to either
accrue a loss and/ or provide disclosure. Generally, commitments are not disclosed in the
financial statements unless uneconomic commitments result in a need to accrue significant
losses (due to current price changes).
(4) Confirm consigned inventory and inventory in warehouses. Some companies store
inventory items in public warehouses. In such a situation, the auditor should confirm in writing
with the custodian that the goods are being held. Additionally, if such holdings are signifi cant,
the auditor should apply one or more of the following procedures:
(a) Review the client’s control procedures relating to the warehouseman.
(b) Obtain a CPA’s report on the warehouseman’s internal control.
(c) Observe physical counts of the goods.
(d) If warehouse receipts have been pledged as collateral, confi rm with lenders details of the
pledged receipts.
(5) Observe the taking of the physical inventory and make test counts to verify the existence
(and to a limited extent the ownership and valuation) of inventory. See Section C.3.a. above.
(6) Review cutoffs of sales, sales returns, purchases, and purchase returns around year-end to
verify that transactions affecting inventory are recorded in the proper period. Know here that
the objective is to include in inventory those items for which the client has legal title.
(7) Perform test counts during the observation of the taking of the inventory and compare
them to the client’s counts and subsequently to the accumulated inventory to verify the
accuracy of the count and its accumulation.
(8) Inquire of management as to the existence of consigned inventory to verify the adequacy
of its disclo sure. Know that inventory consigned out remains the property of the client until it
is sold. Inventory consigned to the client should not be included in the physical count since it
belongs to the consignor.
(9) Perform analytical procedures to test the reasonableness of inventory. Analytical
procedures include calculation of gross profit margins by product, and inventory turnover
rates. Analytical procedures are particularly effective at identifying obsolete inventory and,
therefore, are useful in determining its proper valuation.
(10) Account for all inventory tags and count sheets to verify that inventory has been
completely recorded.
(11) Foot and extend summary inventory schedules to verify clerical accuracy.
(12) Reconcile inventory summary schedules to the general ledger to verify clerical accuracy.
(13) Test the inventory cost method to verify that it is in conformity with generally accepted

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 accounting principles. Here the auditor will determine the method of pricing used and whether
it is acceptable and consistent with the prior years (e.g., LIFO, FIFO).
(14) Test the pricing of inventory to verify that it is valued at the lower of cost or market and
that inventory and cost of goods sold transactions are accurately recorded. As a general rule,
inventories should not be carried in excess of their net realizable value. The accuracy of pricing
is determined by reference to vendor in voices (for wholesalers and retailers) and to vendor
invoices, requisitions, and labor reports (for manufacturers). In certain circumstances a
specialist may be needed to assist in valuation of inventory (see Sec tion 13, Using the Work
of a Specialist, below).
(15) Examine inventory quality and condition to assess whether there may be evidence
suggesting that it is in unsatisfactory condition.
(16) Perform any necessary additional tests of inventory obsolescence to verify the valuation
of inventory.

Multiple Choice Questions - Theory

1. Otso Manufacturing Corporation mass produces eight different products. The controller, who is
interested in strengthening internal controls over the accounting for materials used in production,
would be most likely to implement
a. A separation of duties among production personnel.
b. A perpetual inventory system.
c. An economic order quantity (EOQ) system.
d. A job order cost accounting system.

2. Which of the following control procedures would most likely be used to maintain accurate
perpetual inventory records?
a. Independent matching of purchase orders, receiving reports, and vendors' invoices.
b. Independent storeroom count of goods received.
c. Periodic independent reconciliation of control and subsidiary records.
d. Periodic independent comparison of records with goods on hand.

3. The accuracy of perpetual inventory records may be established in part by comparing perpetual
inventory records with
a. Purchase requisitions. ​c. Receiving reports.

b. Purchase orders. ​d. Vendor payments.

4. The auditor tests the quantity of materials charged to work in process by tracing these quantities
to

a. Receiving reports. ​c. Materials requisition forms.

b. Perpetual inventory records. ​d. Cost ledgers.

5. An auditor would analyze inventory turnover rates to obtain evidence concerning management’s
assertion about
a. Valuation or allocation. ​c. Presentation and disclosure.

b. Rights and obligations. ​d. Completeness

6. In auditing inventories, a major objective relates to the existence assertion. Of the following audit
procedures relating to inventories, which does not support the existence assertion?
a. The auditor reviews the client's inventory-taking instructions for such matters as proper
arrangement of goods, separation of consigned goods, and limits on movements of goods
during inventory.
b. The auditor observes the client's inventory and performs test counts as appropriate.
c. The auditor confirms inventories not on the premises.
d. The auditor performs a lower of cost or market test for major categories of inventory.

7. In a manufacturing company, which one of the following audit procedures would give the least
assurance of the valuation of inventory at the audit date?
a. Obtaining confirmation of inventories pledged under loan agreements.
b. Testing the computation of standard overhead rates.

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 c. Examining paid vendors' invoices.
d. Reviewing direct labor rates.

8. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to
obtain evidence that
a. No goods held on consignment for customers are included in the inventory balance.
b. No goods observed during the physical count are pledged or sold.
c. All goods owned at year end are included in the inventory balance
d. All goods purchased before year end are received before the physical inventory count.

9. Which of the following items should not be included in a physical inventory?

a. Materials in transit from vendors.
b. Goods in a private warehouse.
c. Goods received for repairs under warranty.
d. Consignment to an agent.

10. You were engaged to conduct an annual examination for the fiscal year ended October 31, 2016.
Because of the expected holiday, you were able to convince your client to take a complete
physical inventory, in which you were present on October 15. Perpetual inventory records are kept
and the client considers a sale to be made in the period in which goods are shipped. You had a
sales cut-off test worksheet prepared. Which item among those listed below will not require an
adjusting entry to reconcile the client's detailed inventory record with the physical inventory?
a. b. c. d.
Date Goods Shipped Oct 31 Nov 2 Oct 14 Oct 10
Transaction Recorded as Sale Nov 2 Oct 31 Oct 16 Oct 19
Date Inventory Control CreditedOct 31 Oct 31 Oct 16 Oct 12

PROBLEM 1
An audit is being made of the accounts of the Zartiga Corporation at December 31, 2015. You are
given the following merchandise inventory list:

Item ​ ​Quantity ​Price per unit ​ ​Amount

A ​ ​341 ​ ​P0.60 ​ ​ ​ 204.60

B ​ ​90 ​ ​4.50 ​ ​ ​ 405.00

C ​ ​5
2 ​ ​ 1.20
1 ​ ​ ​ 280.00

D ​ ​ 15
1 ​ ​0.85 (doz) ​ ​ 97.75

E ​ ​810 ​ ​ .18
0 ​ ​ ​1,458.00
F ​ ​37 ​ ​1.72 ​ ​ ​ 63.64

G ​ ​ 74
1 ​ ​ .05
2 ​ ​ ​ 356.70

H ​ ​1
2 ​ ​ .39
6 ​ ​ ​ 134.19

I ​ ​276 ​ ​ .55
0 ​ ​ ​ 151.80

J ​ ​41 (doz) ​1.90 ​ ​ ​ 77.90

K ​ ​0
7 ​ ​ 3.60
4 ​ ​ ​ 252.00

L ​ ​108
(doz) ​9.67 ​ ​ ​1,044.36 ​ ​ ​
​ ​ ​ ​ ​ ​ ​5,525.94
A comparison of the quantities in the inventory with those on the original tags used in making the

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 count, disclosed that item “C” should be 250 units and “H” should be 29 units instead of 21 units.
Quantities of the other items in the inventory were in agreement with the quantity on the inventory
tags.

Market prices as of the closing data were as follows:

Item A ​ ​P0.50 ​ ​Item E ​ ​P0.19 ​ ​Item

I ​ ​P0.55 ​
Item B ​ ​5.40 ​ ​Item F ​ ​1.72 ​ ​Item
J ​ ​22.20/doz
Item C ​ ​11.05 ​ ​Item G ​ ​1.80 ​ ​Item
K ​ ​2.60
Item D ​ ​0.90/doz ​Item H ​ ​6.40 ​ ​Item
L ​ ​9.50
Required:

a. Prepare the corrected inventory schedule.

b. Compute the following:
1. Inventory the will be reported at year-end.
2. Entry to adjust the recorded inventory.
PROBLEM 2
In your audit of the December 31, 2018, financial statements of Lace Company, you found the
following inventory-related transactions.

A. Goods costing P5, 000 are on consignment with a customer. These goods were not included in
the physical count on December 31, 2018.
B. Goods costing P1, 650 were delivered to Lace, Inc. on January 4, 2019. The invoice for these
goods was received and recorded on January 10, 2019. The invoice showed the shipment was
made on December 29, 2018, FOB shipping point.

C. Goods costing P2, 164 were shipped FOB shipping point on December 31, 2018, and were
received by the customer on January 2, 2019. Although the sale was recorded in 2018, these
goods were included in the 3103 ending inventory.

D. Goods costing P864 were shipped to a customer on December 31, 2018, FOB destination,
These goods were delivered to the customer on January 5, 2019, and were not included in the
inventory. The sale was properly taken up in 2019.

E. Goods costing P860 shipped by a vendor under FOB destination term, were received on
January 3, 2019, and thus were not included in the physical inventory. Because the related
invoice was received on December 31, 2018, this shipment was recorded as a purchase in
2018

F. Goods valued at P5, 100 were received from a vendor under consignment term. These goods
were included in the physical count.

G. Lace, Inc. recorded as a 2018 sale P64, 300 shipments of goods to a customer on December
31, 2018, FOB destination. This shipment of goods costing P37, 500 was received by the
customer on January 5, 2019, and was not included in the ending inventory figure.
Prior to any adjustments, Lace, Inc.’s ending inventory is valued at P445, 000 and the reported net
income for the year is P1, 648, 000.

1. Lace’s December 31, 2018, inventory should be increased by

2. What is Lace’s adjusted net income for the year 2018?
PROBLEM 3
The Cruzada Company is a wholesale distributor of automotive replacement parts. Initial amounts
taken from Cruzada’s accounting records are as follows:

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 Inventory at December 31, 2016 (based on physical count of goods in warehouse on December 31,
2016); P1,250,000.

Accounts payable at December 31, 2016:

​Dacalos Company ​ ​2% 10 days, net 30 ​ ​265,000
​Dano Company ​ ​ ​ ​Net 30 ​ ​ ​210,000
​De Lira Company ​ ​ ​ et 30
N ​ ​ ​300,000
​Dela Cruz Company ​ ​ ​Net 30 ​ ​ ​225,000
​Deza Company ​ ​ ​ ​Net 30 ​ ​ ​ -
​Encabo Company ​ ​ ​Net 30 ​ ​ ​ -___
​ ​ ​ ​ ​ ​ ​ ​ P 1,000,000

Sales in 2016 ​ ​ ​ ​ ​ ​ ​ P 9,000,000

Additional information is as follows:

a. ​
Parts held on consignment from Dano Company to Cruzada Company, the consignee,
amounting to P155,000, were included in the physical count of goods in Cruzada Company’s
warehouse on December 31, 2016 and in accounts payable at December 31, 2016.

b. ​
P22,000 of parts which were purchased from Deza Company and paid for in December 2016
were sold in the last week of 2016 and appropriately recorded as sales of P28,000. The parts
were included in the physical count of goods in Cruzada’s warehouse on December 31, 2016,
because the parts were on the loading dock waiting to be picked up by customers.

c. ​
Parts in transit on December 31, 2016, to customers, shipped f.o.b. shipping point, on
December 28, 2016, amounted to P34,000. The customers received the parts on January 6,
2007. Sales of P40,000 to the customers for the parts were recorded by Cruzada Company on
January 2, 2007.

d. ​
Retailers were holding P210,000 at cost (P250,000 at retail) of goods on consignment from
Cruzada Company, the consignor, at their stores on December 31, 2016.

e. ​
Goods were in transit from Encabo Company to Cruzada Company on December 31, 2016.
The cost of goods was P25,000 and they were shipped f.o.b. shipping point on December 29,
2016.

f. ​
A quarterly freight bill in the amount of P2,000 specifically relating to merchandise purchases
in December 2016, all of which was still in the inventory at December 31, 2016, was received on
January 3, 2007. The freight bill was not included in either the inventory or in accounts payable at
December 31, 2016.

g. All of the purchases from Dacalos 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. Cruzada’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.

​
Questions:
1. ​The adjusted inventory is:

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 2. ​The adjusted accounts payable is:

3. ​The adjusted sales is:

PROBLEM 4
Surfy Company is preparing its 2018 financial statements. Prior to any adjustments, inventory is
valued at P1, 595, 000. During your audit, you found the following information relating to certain
inventory transactions from your cut off test.

a. Goods costing P75, 000, sold for P98, 000, were shipped on December 31, 2018. The terms of the
invoice were FOB shipping point. The goods were included in the ending inventory for 2018 and
the sale was recorded in 2019.

b. A P63, 000 shipment of goods to a customer on December 31, 2018, terms FOB destination, was
recorded as a sale upon shipment. The goods, costing P40, 000 and delivered to the customer on
January 6, 2019, were not included in the 2018 ending inventory.

c. Goods valued at P108, 000 are on consignment with a customer. These goods were not included
in the ending inventory figure.
d. The invoice for goods costing P45, 000 was received and recorded as a purchase on December
31, 2018. The related goods, shipped FOB destination were received on January 2, 2019, and
thus were not included in the physical inventory.

e. Goods costing P79, 000 were received from a vendor on January 5, 2019. The related invoice was
received and recorded on January 12, 2019. The goods were shipped on December 31, 2018,
terms FOB shipping point.

f. A P51, 000 shipment of goods to a customer on December 31, terms FOB destination was not
included in the year-end inventory. The goods cost P36, 000 and were delivered to the customer
on January 8, 2019. The sale was properly recorded in 2019.

g. Goods valued at P145, 000 are on consignment from a vendor. These goods are not included in
the physical inventory.

Required: ​
1. Compute the proper inventory amount to be reported on Makati’s statement of financial
position for the year ended December 31, 2018.

2. By how much would the profit or loss have been misstated if no adjustments were made for
the above transactions?
PROBLEM 5

You audit of Clarito Company for the year 2018 disclosed the following:

1. The December 31 inventory was determined by a physical count on January 2, 2019 and based on
such count, the inventory was recorded by:

Inventory ​ ​ ​1,400,000
​Cost of sales ​ ​ ​ ​1,400,000
2. The 2018 ledger shows a sales balance of P20,000,000.
3. The company sells a mark-up of 20% based on cost.
4. The company recognizes sales upon passage of title to the customers.
5. All customers are within a three-day delivery area.
The sales register for December, 2018 and January, 2019, showed the following details:

December Register

Invoice No. ​ ​FOB Terms ​ ​ ate Shipped

D ​ ​Amount
300 ​ ​ ​Destination ​ ​ 2/30
1 ​ ​ P ​50,000
301 ​ ​ ​Shipping point ​ ​ 2/30
1 ​ ​ ​62,500

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 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 ​ ​ ate Shipped

D ​ ​ mount
A

306 ​ ​ ​Destination ​ ​ 2/29

1 ​ ​ ​ 7,500
6

307 ​ ​ ​Shipping point ​ ​ 2/29

1 ​ ​ ​ 4,500
7

308 ​ ​ ​Destination ​ ​01/02 ​ ​ 140,000

309 ​ ​ ​Shipping point ​ ​ 1/04

0 ​ ​ ​ 3,000
7

310 ​ ​ ​Shipping point ​ ​ 2/27

1 ​ ​ ​ 7,500
6

Required: Compute the following:

1. The understatement or overstatement of Sales for the month of December. ​

2. The understatement or overstatement of Inventory for the month of December.

3. The adjusted balance of inventory at December 31, 2018.

4. The adjusted balance of sales at December 31, 2018.

5. How much sales for the month of December 2018 were erroneously recorded in January 2019?

6. How much sales for the month of January 2019 were erroneously recoded in December 2018?

Problem 6
On December 15, 2016, under your observation, your client took a complete physical inventory and
adjusted the financial perpetual inventory control accounts to agree with the physical inventory.

As of December 31, 2016, you decided to accept the balance of the control account after examining
transactions recorded in that account between December 15 and December 31, 2016. The audit was
for the year ended December 31, 2016.

In the course of conducting your examination of the sales cutoffs as of December 15 and December
31, 2016, you discovered the following items:
Date Inventory
Item ​Cost Price ​Sales Price ​Date Shipped ​ ​Date
Billed ​Control Credited
A ​P 60,000 ​ 78,000
P ​12-13-16 ​ ​12-17-16 ​12-17-16
B ​ 77,000 ​ 101,400 ​01-02-17 ​ ​12-29-16 ​12-29-16
C ​ 52,000 ​ 67,600 ​12-17-16 ​ ​12-29-16 ​12-29-16

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 D ​ 87,000 ​ 113,100 ​12-14-16 ​ ​12-16-16 ​12-16-16
E ​ 49,500 ​ 64,500 ​12-25-16 ​ ​01-02-17 ​01-02-17
Question:
Based on the information above and your analysis, answer the following

1. ​The inventory at year-end is over/(under) by:

2. ​The cost of sales at year-end is over/(under) by:
3. ​The sales at year-end is over/(under) by:
4. ​The accounts receivable at year-end is over/(under) by:
PROBLEM 7
Your client, San Antonio Spurs, is an importer and wholesaler. Its merchandise is purchased from
several suppliers and is warehouse until sold to customers.
In conducting your audit for the fiscal year ended June 30, 2018, you were satisfied that the system of
internal control was good. Accordingly, you observed the physical inventory at an interim date, May
31, 2018 instead of at year end. You obtained the following information from your client’s general
ledger:
Inventory ​P1,312,500
Physical inventory, May 31, 2018 ​1,425,000
Sales for 11 months ended May 31, 2018 ​12,600,000
Sales for the year ended June 30, 2018 ​14,400,000
Purchase for 11 months ended May 31, 2018(before audit adjustments) ​10,125,000
Purchase for the year ended June 30, 2018(before audit adjustments) ​12,000,000
Your audit discloses the following information:
a) Shipment received in May included in the physical inventory but recorded
as June purchases P 112,500

b) Shipment received in unsalable condition and excluded from physical inventory

Credit memos had not been received nor chargebacks to vendors been recorded:
Total at May 31, 2018 15,000
Total at June 30, 2018(including the November unrecorded chargebacks) 22,500

c) Deposits made with vendor and charged to purchases in April, 2018. Product
was shipped in July, 2018 30,000
d) Deposits made with vendor and charged to purchases in May, 2018. Product
Was shipped FOB destination, on May 30, 2018 and was included in May 31,
2018 physical inventory as goods in transit 82,500
e) Through the carelessness of the receiving department shipment in early June
2018 inventory was damaged by rain. This shipment was later sold in the last
week of June at cost 150,000
Required:
1. Gross profit rate for 11 months ended May 31, 2018
2. Cost of goods sold during the month of June 2018 using gross profit method
3. June 30, 2018 inventory using the gross profit method
PROBLEM 8
You have been engaged for the audit of the Charmaine Company for the year ended December 31,
2011. The Charmaine Company is engaged in the wholesale business and makes all sale at 30% gross
profit based on sales price. Portions of the client’s Sales and Purchases accounts follow.

Sales
Date Reference Amount Date Reference Amount
12/31 Closing entry P4,313,000 Balance forwarded P4,000,000

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 12/27 SI No. 706 60,000
12/28 SI No. 708 80,000
12/28 SI No. 709 50,000
12/31 SI No. 710 40,000
12/31 SI No. 711 45,000
12/31 SI No. 712 38,000
P4,313,000
_________
P4,313,000

Purchases
Date Reference Amount Date Reference Amount
Balance forwarded P3,200,000 12/31 Closing entry P3,735,000
12/28 RR No. 903 100,000
12/30 RR No. 905 110,000
12/31 RR No. 906 150,000
12/31 RR No. 907 175,000
P3,735,000 _________
P3,735,000
RR – Receiving report
SI – Sales invoice

You observed the physical inventory count in the warehouse on December 31, 2011 and were satisfied
that it was properly taken. When performing sales and purchases cutoff tests, you found that at
December 31, 2011:

A. The last receiving report was No. 907.

B. The last sales invoice used with actual shipment of goods was No. 709.
You also obtained the following information:

1. Included in the physical inventory were goods purchased and received on RR No. 904 but the
invoice of which was received on January 3, 2012. Cost was P89,000.

2. In the warehouse at December 31, 2011 were goods and paid for by the customer but were held
pending shipping instructions from the customer. The good are covered by SI No. 706 and were
not included in the inventory.

3. The company uses the railroad facilities of PNR for its purchases and sales shipments. In the
evening of December 31, 2011, there were three (3) cars on the Charmaine Company siding:

a. Car No. 1 was unloaded on January 2, 2012 and received on RR No. 905. The freight was paid
by the vendor.

b. Car No. 2 was loaded and sealed on December 31, 2011, and was switched off the company’s
siding on January 2, 2012. These goods were billed on SI No. 708 and the freight was paid by
Charmaine Company.

c. Car No. 3 was loaded and sealed on December 31, 2011, and was switched off the company’s
siding on January 2, 2012. The sales price was P12,700 and the freight was paid by the
customer. This order was covered by SI No. 707.

4. The tracks were damaged in Quezon Province, thus temporarily stranding at December 31, 2011,
train trip No. 143. In the train, cars were goods in transit to a customer in Bicol. The goods were
billed on SI No. 709 and the terms FOB destination.

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 5. In transit to Charmaine Company on December 31, 2011, were goods received on RR No. 910.
The freight of P3,000 was paid by Charmaine Company on January 4,2012. However, the freight
was properly deducted from the purchase from the purchase price of P31,000.

6. Included in the physical inventory were damaged goods which were exposed to rain while in
transit and deemed unsalable. The invoice cost was P10,000, and freight charges of P700 were
paid by Charmaine.

7. In transit to Charmaine on December 31, 2011 were goods acknowledged on RR No. 915. The
freight of P2,500 was paid by the supplier. The supplier’s invoice shows a total price of P37,500.

Questions: Based on the preceding information, determine the following:

1. Total purchases for the year ended December 31, 2011

2. Total sales for the year ended December 31, 2011

3. Net increase (decrease) in accounts payable

4. The physical inventory count should be increased by

5. Amount of claims receivable from freight company

PROBLEM 9
MORE ENERGY Company operates a wholesale oil products company. MORE ENERGY believes that an
employee and a customer are conspiring to steal gasoline. The employee records sales to this
customer for less than the amount actually placed in the customer’s tank truck. In order to confirm or
refuse these suspicions, MORE ENERGY has collected the following data for the past 10 working days.
Quantity Cost per
Item (gallons) unit (gal.) Total Cost
Inventory, September 1 220, 000 P 1.45 P 319, 000
Purchases 1,560,000 1.45 2,262,000
Goods available for sale 1,780,000 P 2.581,000

MORE ENERGY had sales of P 2, 512, 000 during this 10-day period. All sales were made at P1.60 per
gallon. A physical inventory indicates that there are 192, 000 gallons of gasoline in inventory at the
close of business on September 10.
1. How much inventory should be present at the end of the 10-day period (in gallon)?
2. What is the cost of missing inventory?
PROBLEM 10
Herald Trading Corporation is in the process of filing an insurance claim in connection with a fire on
September 15, 2011 that destroyed its inventory and accounting records. As the external auditor of
the company, you were requested to assist the company to determine the amount of loss and in filing
the said insurance claim. You obtained the following information based on your investigation:

a. Inventory as reported in the latest annual financial statements, dated December 31, 2010
amounted to P632,369.40 this amount is based on the physical inventory count conducted by the
Herald under your observation on December 31, 2010.

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 b. Accounts payable and accounts receivable as reported in the latest financial statements amounted
to P330,319.23 and P405,027.54.

c. Unpaid open invoices due to the suppliers as of the date of the fire were ascertained o be
P380,836.11.

d. All sales are on account and unpaid open invoices due from customer as of the date of the fire
were ascertained to be P321,435.75.

e. Payments to vendors from December 31, 2010 to the date of the fire totaled to P1,925,614.68
while total collections on receivables during the same inclusive dates totaled to P2,628,586.50.

f. Almost all the merchandise items are sold at approximately 30% in excess of cost. As at
September 15, 2011, the total cost of inventory items not destroyed by the fire amounted to
P434,646.99.

g. The annual premium of P23,640 on the insurance carried was due and paid on January 1, 2010.
the policy, which has a face amount of P465,000 carries an 80% coinsurance clause (applied to
the estimated book value of inventories on the date of the fire)

Questions:

1. What is the estimated cost if inventory as of September 15, 2011?

2. What is the estimated amount to be recovered from the insurance company? (Hint: Recoverable
amount = [(Face of policy/ Co-insurance requirements)*Fire Loss]

3. What is the amount of loss incurred by Herald Trading as a result of the fire?
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