Dr. Filemon C.

Aguilar Memorial College of Las Pinas

Applied Auditing
QUIZ 4 - Audit of Inventories

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

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Bird Company is a manufacturer of small tools. The following information was obtained from the company's
accounting records for the year ended December 31, 2014:
Inventory at December 31, 2014 (based on physical count in Bird's
warehouse at cost on December 31, 2014) P1,870,000
Accounts payable at December 31, 2014 1,415,000
Net sales (sales less sales returns) 9,693,400
Your audit reveals the following information:
A The physical count included tools to be shipped to a customer FOB shipping point on December 31, 2014.
These tools cost P64,000 and were billed at P78,500 and were recorded as December sales. They were
physically segregated awaiting shipping instructions from the customer.
B Goods shipped FOB shipping point by a vendor were in transit on December 31, 2014. These invoice
amounting to P93,000 were received in January 2015 and were recorded as purchases upon receipt.
C Work in process inventory costing P27,000 was sent to a job contractor for further processing
D Not included in the physical count were goods returned by customers on December 31, 2014. These goods
costing P49,000 were inspected and returned to inventory on January 7, 2015. Credit memos for P67,800 were
issued to the customers at that date.
E In transit to a customer on December 31, 2014, were goods costing P17,000 shipped FOB destination on
December 26, 2014, A sales invoice for P29,400 was issued on January 3, 2015, when Bird Company was
notified by a customer that the tools had been received.
F At exactly 5:00 pm on December 31, 2014, goods costing P31,200 were received from a vendor. These were
recorded on a receiving report dated January 2, 2015. The related invoice was recorded on December 31, 2014,
but the goods were not included in the physical count.
G Included in the physical count were goods received from a vendor on December 27, 2014. However, the
related invoice for P36,000 was not recorded because the accounting department's copy of the receiving report
was lost.
H A monthly freight bill for P16,000 was received on January 3, 2015. It specifically related to merchandise
bought in December 31, 2014, one-half of which was still in the inventory at December 31, 2014. The freight
was not included in either the inventory or in accounts payable at December 31, 2014.
Based on the preceding information, compute the December 31, 2014, adjusted balance of the following;

1. Accounts payable
a. 1,552,000 c. 1,467,000
b. 1,591,200 d. 1,560,000
2. Net sales
a. 9,625,600 c. 9,614,900
b. 9,547,100 d. 9,576,500
3. Inventory
a. 2,031,200 c. 2,095,200
b. 2,045,200 d. 2,078,200

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October Inc., a manufacturing company, had the following information about its inventories as of December 31,
2014
Finished Goods Inventory:
Item Cost Selling Price Cost to Sell
A P500,000 P1,000,000 20% of Sales Price
B 1,200,000 1,500,000 30% of Sales Price
C 800,000 1,200,000 10% of Sales Price
 Work-in-process Inventory
Item Direct Direct Labor Overhead Cost to Selling
Materials Complete Price upon
Completion
A P30,000 P50,000 P25,000 P50,000 P200,000
B 45,000 65,000 40,000 60,000 250,000
C 75,000 25,000 80,000 40,000 240,000
Raw Materials Inventory: Finished Goods A
Item Cost Replacement
Cost
RM A-01 P120,000 P125,000
RM A-02 95,000 90,000

Raw Materials Inventory: Finished Goods B

Item Cost Replacement
Cost
RM B-01 P80,000 P100,000
RM B-02 105,000 98,000
RM B-03 110,000 100,000

Raw Materials Inventory: Finished Goods C:

Item Cost Replacement
cost
RM C-01 P175,000 P170,000
RM C-02 40,000 45,000

4. What is the correct carrying value of finished goods inventory?

a. 2,930,000 c. 3,000,000
b. 2,350,000 d. 2,500,000
5. Assuming allowance method and the following allowance for inventory write-down existed at the beginning of the
year (FG - P60,000; WIP - P70,000; RM - 0), how much should be recognized in the profit/loss as a result of the
lower of cost or net realizable value valuation of inventories?
a. 138,000 c. 145,000
b. 107,000 d. 86,000
6. What is the correct carrying value of work-in process inventories?
a. 401,000 c. 445,000
b. 435,000 d. 396,000
7. What is the correct carrying value of raw-materials inventories?
a. 708,000 c. 725,000
b. 698,000 d. 728,000
8. Assuming direct write-off method is used to account for inventory write-down, how much should be recognized in
the profit/loss as a result of the lower of cost or net realizable value valuation of inventories?
a. 216,000 c. 206,000
b. 210,000 d. 201,000

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The following accounts were extracted from the unadjusted trial balance of Silang Corp. as of December 31, 2014:
Cash 963,200
Accounts receivables 2,254,000
Merchandise inventory 6,050,000
Accounts payable 4,201,000
Accrued expenses 60,400
During your audit, you discovered that the client held its cash records open even after year end.
 Audit notes
A Collections for January 2015 of P654,600 were recorded in the December 2014 cash records. The receipts of
P360,100 represents cash sales with the balance representing collections from customers who paid within the
5% cash discount period.
B Accounts payable of P372,400 was paid in January 2015. The payments on which a P12,400 cash discount has
been taken were included in the December 31, 2014 check register.
C Merchandise inventory as stated in the trial balance represented the result of the count conducted on December
30, 2014 on inventories on hand. The following information were found to be relevant in your audit of
inventories:
 Goods valued at P275,000 are on consignment with a customer and were not included in the physical count
 Goods costing P217,500 were received from a vendor on January 4, 2015. The related invoice was
received and recorded on January 6, 2015. These goods were shipped by the vendor on December 31, 2014
under an FOB shipping point terms.
 Goods costing P537,500 were shipped on December 31, 2014, and were received by the customer on
January 2, 2015. The terms of the invoice were FOB shipping point. The sales of P815,000 has been
recorded in 2014.
 A shipment of goods invoiced at P182,000 to a customer on December 29, terms FOB destination was
recorded in 2015. The cost of the related goods amounted to P130,000 and were received by the customer
on January 4, 2015.
 The invoice for goods costing P175,000 was received and recorded as purchase on December 31, 2014.
The related goods, shipped FOB Destination were received on January 4, 2015.
 Goods valued at P612,800 are on consignment from a vendor. These goods were excluded from the
physical count.

Requirements: Based on the result of your audit ascertain the following:

9. Net adjustment to cost of sales:

a. debit by P57,500 c. credit by P555,300
b. credit by P580,000 d. debit by P232,500
10. Adjusted accounts payable:
a. 4,790,900 c. 4,243,500
b. 4,398,400 d. 4,615,900
11. Correct working capital ratio:
a. 2.20 c. 1.85
b. 1.80 d. 1.98
12. Adjusted balance of Accounts receivable:
a. 2,908,600 c. 2,564,000
b. 2,254,000 d. 2,548,500
13. Correct Inventory ending balance:
a. 5,860,000 c. 6,080,000
b. 6,035,000 d. 5,010,000
14. Adjusted balance of Cash:
a. 693,400 c. 681,000
b. 963,200 d. 668,600

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As part of your audit of receivables, you performed a cut-off test of sales. Results of the cut-off test revealed the
following:
Recorded as Sales in December 2014
Selling price Cost Terms Shipment Received by
Date customers
P18,000 P15,500 FOB shipping point 12/26/2014 12/29/2014
12,500 10,200 FOB destination 12/26/2014 12/29/2014
8,680 7,240 FOB destination 12/28/2014 01/02/2015
14,200 12,500 Shipped to consignee 12/29/2014 01/02/2015
9,000 7,500 FOB shipping point 12/30/2014 01/02/2015
 10,000 7,750 FOB destination 12/31/2014 01/03/2015
7,800 6,100 FOB shipping point 12/31/2014 01/02/2015
14,000 12,000 Shipped to consignee 12/31/2014 01/02/2015
Recorded Sales in January 2015
Selling price Cost Terms Shipment Received by
Date customers
P21,000 P18,200 FOB shipping point 12/31/2014 01/03/2015
10,500 8,800 FOB destination 12/31/2014 01/03/2015
4,500 3,200 FOB destination 01/02/2015 01/03/2015
6,500 5,000 FOB shipping point 01/02/2015 01/05/2015

A count of all inventories within the premises was made in the morning of December 31. 2014 prior to any
shipment made during the day. The total cost of the count was recorded as inventories as of December 31, 2014.
The goods shipped to consignees are still unsold at December 31.
The unadjusted ledger balances show the following;
Accounts receivables P276,500
Inventories 425.000
Sales 1,320,000
Cost of sales 842.000
Determine the adjusted balances of the following:

15. Cost of sales

a. 846,560 c. 828,360
b. 817,500 d. 873,560
16. Gross profit
a. 358,060 c. 476,520
b. 447,560 d. 458,060
17. Accounts receivable
a. 289,320 c. 261,120
b. 250,620 d. 229,620
18. Sales
a. 1,304,620 c. 1,294,120
b. 1,351,500 d. 1,322,320
19. Inventories
a. 449,500 c. 420,440
b. 447,440 d. 406,800

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On September 1, 2014, a fire broke out in the warehouse of Baguio Corp., destroying alt inventories and majority
of its accounting records. The following information were made available from salvaged records. All sales are
purchases were made on account:
Inventories, January 1 P1,150,800
Accounts receivable, January 1 1,044,720
Accounts receivable, September 1 1,031,120
Accounts payable, January 1 705,120
Accounts payable, September 1 982,800
Collections from customers, Jan. 1 to Sept. 1 6,030,400
Payments to suppliers, Jan. 1 to Sept. 1 3,900,000
Goods out on consignment on Sept. 1, at cost 390,000
Goods in transit at Sept. 1, purchased FOB Shipping
point, included in the Sept. 1 accounts payable
balance 139,000
The following information was also made available about the past years operations:
2011 2012 2013
Sales 5,008,000 5,640,000 5,440,000
Gross Profit 1,502,400 1,466,400 1,849,600
 Requirements:

20. What is the average gross profit ratio based on its prior years' sale?
a. 26% c. 34%
b. 29% d. 30%
21. What is the inventory fire loss?
a. 746,420 c. 448,720
b. 529,000 d. 587,720
22. What is the company's estimated inventory on September 1?
a. 1,116,720 c. 977,720
b. 587,720 d. 746,420
23. What is the company's total sates for period January 1 to September 1?
a. 6,016,800 c. 7,075,120
b. 6,044,000 d. 7,061,520
24. What is the company's total purchases from January 1 to September 1?
a. 4,038,680 c. 4,177,680
b. 3,622,320 d. 3,648,680

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Nancy Inc. had the following items of merchandise inventories with related information about estimated selling
price and cost to sell as of December 31, 2014:

Class Z:
Item Quantity Unit Cost Unit Selling Price Unit Cost to Sell
Z-01 10,000 P20 P30 P5
Z-02 15,000 25 30 8
Z-03 20,000 30 40 14
Z-04 25,000 32 45 10
Z-05 30,000 35 50 20

Class Y:
Item Quantity Unit Cost Unit Selling Price Unit Cost to Sell
Y-01 20,000 P22 P25 P2
Y-02 22,000 28 30 5
Y-03 28,000 25 40 10
Y-04 25,000 30 35 10
Y-05 30,000 15 30 5

Required

25. What is the loss on inventory write-down, assuming that direct write-off method is used under requirement 1?
a. none c. 150,000
b. 119,000 d. 466,000
26. What is the correct carrying value of inventories if the lower of cost or NRV valuation is employed on an item per
item basis?
a. 5,831,000 c. 5,515,000
b. 6,100,000 d. 5,981,000
27. What is the loss on inventory write-down, assuming that direct write-off method is used under requirement 3?
a. 466,000 c. 150,000
b. 119,000 d. none
28. What is the correct carrying value of inventories if the tower of cost or NRV valuation is employed on a per class
basis?
a. 5,981,000 c. 6,100,000
b. 5,831,000 d. 5,515,000
 THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
You are engaged in the audit of the inventory of the Kula Inc. as of December 31, 2014. The company is on
physical inventory basis. The physical inventory was actually taken on December 29, 2014 rather than the evening
of December 31, so that the company employees might enjoy the New Year's festivities. You have observed the
taking of the physical inventory. As taken, the physical inventory included only merchandise received through
December 29. The subsequent compilation of the inventory includes only the merchandise physically counted and
is not yet recorded on the books. After having completed appropriate work on the inventory as compiled, you make
additional tests to determine:
A The correct cut off the purchases account for the year 2014. (it is the company policy to recognize purchases
based on freight terms and the passage of title). The ledger balance is P650,000.
B The correct amount of the inventory to be stated on a comparable basis with acquisition costs (purchases) and
sales. The inventory summary shows a total of P27,000.

Listed in the table below are certain matters developed in the course of your tests. Certain voucher register entries
are as follows:
Dates Mdse.
F.O.B. Terms Shipped Received Invoice No. Amount
December, 2014
Destination 12-23-14 12-26-14 1401 P 250
Shipping point 12-24-14 12-30-14 9176 310
Shipping point 12-24-14 12-31-14 0010 180
Destination 12-24-14 12-29-14 1307 550
Shipping point 12-26-14 1-2-15 6609 690
Destination 12-26-14 12-31-14 6610 420
Destination 12-26-14 1-3-15 0481 750
Shipping point 12-27-14 12-30-14 3671 290
Shipping point 1-2-15 1-4-15 6098 350
January, 2015
Destination 12-26-14 1-2-15 7611 680
Shipping point 12-27-14 12-30-14 7711 460
Destination 12-27-14 12-29-14 9001 770
Destination 12-28-14 1-2-15 8345 205
Shipping point 12-28-14 1-3-15 4578 315
Shipping point 12-29-14 12-31-14 9981 595
Destination 12-29-14 12-31-14 7263 610
Destination 12-31-14 1-4-15 4915 375
Shipping point 1-2-15 1-5-15 5666 805

The physical inventory compilation includes P750 of merchandise received on consignment from a supplier.

The company has other consigned stocks on hand which were not included in the physical inventory compilation
and which cost P5,200 if purchased.

Shipments of December 31, 2014 were properly recorded on the books as sales. You computed the cost of these
sales as being P1,900.

Requirements: Adjusted balances at December 31, 2014 of:

29. Purchases
a. 651,650 c. 649,675
b. 650,585 d. 649,990
30. Inventory
a. 26,430 c. 27,300
b. 28,220 d. 30,120