AUDIT OF INVENTORIES

PROBLEM NO. 1

Malabon, 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, 2005 under your observation showed that cost was P265,000
and net realizable value (NRV), P244,000. The inventory on January 1, 2005 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, 2005 were P135,000. During 2005, accounts receivable
written off during the year amounted to P10,000. Accounts receivable as of December 31, 2005 were
P375,000.

4. Outstanding purchase invoices amounted to P300,000 at the end of 2005. At the beginning of
2005 they were P375,000.

5. Receipts from customers during 2005 amounted to P3,000,000.

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

QUESTIONS:

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

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1. The total sales for 2005 is eH w
a. P3,240,000 b. P3,250,000 c. P3,230,000 d. P2,770,000

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2. The total purchases for 2005 is
a. P2,075,000 b. P1,925,000 c. P2,000,000 d. P1,950,000
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3. The amount of inventory shortage is a. c. P175,000 d. P0

P106,000 b. P100,000
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PROBLEM NO. 2
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Navotas Company engaged you to examine its books and records for the fiscal year ended June 30, 2005.
The company’s accountant has furnished you not only the copy of trial balance as of June 30, 2005 but also
the copy of company’s balance sheet and income statement as at said date. The following data appears in
the cost of goods sold section of the income statement:

Inventory, July 1, 2004

Purchases P 125,000
Goods available for sale 900,000
Inventory, June 30, 2005 1,025,000
175,000
Cost of goods sold P850,000

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 The beginning and ending inventories of the year were ascertained thru physical count except that no
reconciling items were considered. Even though the books have been closed, your working paper trial
balance show all account with activity during the year. All purchases are FOB shipping point. The company is
on a periodic inventory basis.
In your examination of inventory cut-offs at the beginning and end of the year, you took note of the following:

July 1, 2004

a. June invoices totaling to P32,500 were entered in the voucher register in June. The corresponding
goods not received until July.
b. Invoices totaling P13,500 were entered in the voucher register in July but the goods received during
June.

June 30, 2005

c. Invoices with an aggregate value of P46,500 were entered in the voucher register in July, and the
goods were received in July. The invoices, however, were date June.
d. June invoices totaling P18,500 were entered in the voucher register in June but the goods were not
received until July.
e. Invoices totaling P27,000 ( the corresponding goods for which were received in June) were entered the
voucher register, July.
f. Sales on account in the total amount of P44,000 were made on June 30 and the goods delivered at
that time. However, book entries relating to the sales were made in July.

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QUESTIONS:

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Based on the above and the result of your cut-off tests, answer the following:
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1. How much is the adjusted Inventory as of July 1, 2004?

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a. P125,000 b. P157,500 c. P144,000 d. P92,500
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2. How much is the adjusted Purchases for the fiscal year ended June 30, 2005? a. P973,500
b. P960,000 c. P900,000 d. P978,500

3. How much is the adjusted Inventory as of June 30, 2005?

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a. P196,000 b. P223,000 c. P240,000 d. P125,000

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4. How much is the adjusted Cost of goods sold for the fiscal year ended June 30, 2005?
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a. P877,500 b. P829,000 c. P992,500 d. P891,000

5. The necessary compound adjusting journal entry as of June 30, 2005 would include:
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a. A debit to Inventory, 6/30/05 of P21,000.

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b. A debit to Purchases of P73,500.

c. A credit to Retained Earnings of P32,500.
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d. A credit to Vouchers Payable of P73,500.

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PROBLEM NO. 3

You obtained the following information from the balance sheet of Caloocan Company in connection with your
audit of the Company’s financial statements for the year 2005:

Dec. 31, 2005 Dec. 31, 2004

Cash P706,600 P200,000
Notes receivable 0 50,000
Inventory ? 399,750

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 Accounts payable ? 150,000

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 All operating expenses are paid by Caloocan with cash and all purchases of inventory are made on account.
Caloocan sells only one product. All sales are cash sales which are made for P100 per unit. Caloocan
purchases 1,500 units of inventory per month and values its inventory using periodic FIFO. The unit cost of
inventory during January 2005 was P65.20 and increased P0.20 per month during the year. During 2005,
payments to suppliers totaled P943,400 and operating expenses totaled P440,000. The ending inventory for
2004 was valued at P65.00 per unit.

QUESTIONS:

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

1. Number of units sold during 2005

a. 18,400 b. 18,900 c. 8,268 d. 8,768

2. Accounts payable balance at December 31, 2005

a. P400,000 b. P150,000 c. P380,200 d. P383,500

3. December 31, 2005, inventory quantity

a. 5,750 b. 5,250 c. 15,882 d. 15,382

4. Inventory amount at December 31, 2005

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a. P385,900 b. P352,500 c. P1,055,183 d. P1,022,483

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PROBLEM NO. 4

You are engaged in the regular annual examination of the accounts and records of Valenzuela
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Manufacturing Co. for the year ended December 31, 2005. To reduce the workload at year end, the
company, upon your recommendation, took its annual physical inventory on November 30, 2005. You
observed the taking of the inventory and made tests of the inventory count and the inventory records.

The company’s inventory account, which includes raw materials and work-in-process is on perpetual basis.
Inventories are valued at cost, first-in, first-out method. There is no finished goods inventory.

The company’s physical inventory revealed that the book inventory of P1,695,960 was understated by
P84,000. To avoid delay in completing its monthly financial statements, the company decided not to adjust
the book inventory until year-end except for obsolete inventory items.

Your examination disclosed the following information regarding the November 30 inventory:

a. Pricing tests showed that the physical inventory was overstated by P61,600.
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 b. An understatement of the physical inventory by P4,200 due to errors in footings and extensions.

c. Direct labor included in the inventory amounted to P280,000. Overhead was included at the rate of
P200% of direct labor. You have ascertained that the amount of direct labor was correct and that the
overhead rate was proper.

d. The physical inventory included obsolete materials with a total cost of P7,000. During December, the
obsolete materials were written off by a charge to cost of sales.

Your audit also disclosed the following information about the December 31 inventory:

a. Total debits to the following accounts during December were: Cost of

sales P1,920,800
Direct labor 338,800
Purchases 691,600

b. The cost of sales of P1,920,800 included direct labor of P386,400.

QUESTIONS:

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

1. Adjusted amount of physical inventory at November 30, 2005

a. P1,715,560 b. P1,845,760 c. P1,631,560 d. P1,722,560

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2. Adjusted amount of inventory at December 31, 2005

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a. P1,509,760 b. P1,502,760 c. P1,516,760 d. P1,425,760

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3.
a. P819,560
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Cost of materials on hand, and materials included in work in process as of December 31, 2005
b. P728,560 c. P812,560 d. P942,760

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4. The amount of direct labor included in work in process as of December 31, 2005 a. P618,800
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b. P338,800 c. P232,400 d. P386,400

5. The amount of factory overhead included in work in process as of December 31, 2005
a. P772,800 b. P464,800 c. P1,237,600 d. P777,600
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