Audit-Of Inventory ACHA - KJ

Audit of Inventory
Exercises - Analysis of Transactions
Moneba Company bought merchandise on January 2, 2006 from Lynn Company costing P15,000; terms, less 20%,
20% down payment, balance 2/10, n/30. Two days after, P2,000 worth of merchandise was returned due to
wrong specification. Moneba Company paid the account within the discount period. How much Moneba
Company paid to LynnCompany?
a. P7,600 b.P7,448 c.P7,408 d. P7,360
Merchandise shipped fob destination to customer was made on January 5, 2006 for P25,000. The customer issued
P10,000 12% 30-day note and the balance 2/10, n/30 on January 10, 2006, the date the goods were received.
The customer made a partial payment on January 15, 2006 for P5,000. Payment was made within the discount
period. How much discount wasgranted?
a. P0 b.P200 c.P300 d. P500
On January 10, 2006, Lao Company sold merchandise on account fob destination to Febryan Co. for P20,000.
Febryan Co. paid the freight cost of P1,500 to be deducted from its account. How much Febryan Company paid
to LaoCompany?
a. P21,500 b.P20,000 c.P19,600 d. P18,500
Goods worth P12,000 was shipped on account (2/10, n/30) to Ibuyan Company on January 15, 2006 from Rubenil
Company The term of the shipment was fob shipping point. Rubenil Company paid freight of P950. On January
12, 2006, P2,500 worth of merchandise was received by Rubenil Co. from Ibuyan Co. due to wrong
specification. Ibuyan Company made a partial payment of P5,000. How much is the subsequent collection of
Rubenil Company from Ibuyan Company assuming Ibuyan Company paid within the discountperiod?
a. P5,450 b.P5,260 c.P4,500 d. P4,410
Gabutero Company purchased merchandise on account for P10,000 from Lilibeth Company with term shipping
point. The freight cost was P1,500 and was paid by Gabutero Company Upon the arrival of the carrier, it found
out that the merchandise got lost while in transit. The carrier company accepted the loss as their fault. How
much is the subsequent collection of Lilibeth Company from GabuteroCompany?
a. P11,500 b.P10,000 c.P8,500 d. P0
Chan Company bought from Casas Company a second-hand machinery for the use of its plant for P50,000 A 50%
down payment was made and balance 2/10, n/30. Freight cost was paid by Chan Company for P2,000. Casas
Company acquired the machinery three years ago at P60,000 with 10 year life. (Straight-line method is use in
computing Depreciation). Two days after purchase, Casas Company granted the request of Chan Company for
a P5,000 price adjustments because of some defects of the machinery. Cash paid by Chan Company to Casas
Company assuming the account was paid within the discount periodis
a. P20,400 b.P20,000 c.P19,600 d. P19,000
The Ariel Company purchased land and building at lump-sum price of P300,000 from Cherely Company on January
1, 2006. The land and building was purchased by Cherely Company 3 year ago at a total cost of P300,000.
Based on the appraiser’s computation and analysis, the cost of the land is twice as much to that of the
building. Ariel Company assume a five-year life of the building with no salvage cost. Two years later, Ariel
Company sold the building at P80,000 to JaanCompany.
Ariel Company will record gain or loss from the sale of the building to Jaan Company by
Gain of P20,000
Loss ofP100,000
Neither gain norloss
Cannot bedetermined
Problem 1
Listed below are some items of inventory from Anecito Company that are in question during the audit.
The company stores a substantial portion of the merchandise in a separate warehouse and transfer
damaged goods to a special inventory account.
1. Items in receiving department returned by customer, no
communication received from customer 20,000
2. Items ordered and in receiving department, invoice not yet
received from supplier 50,000
3. Items counted in warehouse by the inventory crew 70,000
4. Invoice received for goods ordered, goods shipped but not received
(Anecito Company pays freight) 5,000
5. Items, shipped today, fob destination, invoice mailed to customer 5,000
6. Items currently used for window displays 10,000
7. Items on counter for sale per inventory count [not in (3)] 90,000
8. Items in shipping department, invoice not mailed to customer 6,000
9. Items in receiving department, refused by Anecito because of
Damage [(not in (3)] 3,000

1. Items in receiving department returned by customer, no
10.Items shipped today, fob shipping point, invoice mailed to customer 4,000
11.Items included in warehouse count, damaged, not returnable 8,000
12. Items included in warehouse count, specifically crafted and
segregated for shipment to customer in five days per sales
contract, with return privilege. 18,000
Question:
If the recorded inventory in the balance sheet is P289,000, the year-end inventory will be overstatedby:
a. P41,000 b.P23,000 c.P18,000 d.P 3,000
The following should be included from the inventory,except:

Inventory shipped today, f.o.b. shipping point, invoice mailed tocustomer.
Inventory counted in warehouse by the inventorycrew.
Inventory shipped today, f.o.b. destination, invoice mailed tocustomer.
Inventory in warehouse count, specifically crafted and segregated for shipment to customer with return
privilege.
The inventory per audit at year-endis:
a. P286,000 b.P271,000 c.P266,000 d. P248,000
Problem 2
In the event of your audit, you found the following information related to the inventories on December
31, 2006.
An invoice for P90,000, FOB shipping point, was received on December 15, 2006. The receiving report indicates
that the goods were received on December 18, 2006, but across the face of the report is the notation
“Merchandise not of the same quality as ordered, returned for credit, December 19”. The merchandise was
included in the inventory.
Included in the physical count were inventories billed to customer FOB shipping point on December 31, 2006.
These inventories had a cost of P28,000 and were billed at P35,000. The shipment was in loading dock waiting
to be picked by the commoncarrier.
Merchandise with an invoice cost of P50,000, received from a vendor at 5:00 pm on December 31, 2006, were
recorded on a receiving report dated January 2, 2007. The goods were not included in the physical count, but
invoice was included in accounts payable at December 31,2006.
Merchandise costing P15,000 to the company FOB shipping point on December 26, 2006. The purchase was
recorded, but the merchandise was excluded from the ending inventory because it was not received until
January 4, 2007.
The inventory included 1000 units erroneously priced at P9.50 per unit. The correct cost was P10.00 perunit.
The adjusting entries for:
1. Item letter “a” is;
Debit Credit
a. Cost of sales 90,000 Inventory 90,000
b. Inventory 90,000 Cost of Sales 90,000
Retainedearnings 90,000 Inventory 90,000

Noadjustment
Item letter “b”is:

Debit
Credit
Cost of sales
28,000 Inventory 28,000
b. Inventory 28,000 Cost of sales 28,000
Cost of sales 35,000 Inventory 35,000

Noadjustment
3. Item letter “c” is;
Debit Credit
a. Inventory 50,000 Cost of sales 50,000
b. Cost of sales 50,000 Inventory 50,000
c. Inventory 50,000 Retained earnings 50,000

d. No adjustment
4. Item letter “d” is: Credit

Debit
b. Inventory 15,000 Cost of sales 15,000
Inventory 15,000 Retained earnings 15,000

Noadjustment
5. Item letter “d” is:
Debit Credit
a. Cost of sales 500 Inventory 500
b. Inventory 500 Cost of sales 500
c. Cost of sales 10,000 Inventory 10,000
d. Inventory 10,000 Cost of sales 10,000
Problem 3
You have observed the physical count of DEMI CORPORATION’s inventory taken on
December 31, 2006. The following errors were discovered:
Goods that cost P7,000 was sold for P8,500 on December 29, 2006. The order was shipped December 31, 2006 with
terms fob destination. The merchandise was not included in the ending inventory. The sale was not recorded
until January 4, 2007, the date when the customer made payment of the soldgoods.
On December 29, 2006, DEMI CORPORATION purchased merchandise costing P15,000 from a supplier. The order
was shipped December 30, 2006 (terms FOB shipping point) and was still “in transit” on December 31, 2006.
Since the invoice was received on December 31, the purchase was recorded in 2006. The merchandise was
included in the inventorycount.
On January 4, 2007, goods that were included in the ending inventory at December 31, 2006, were returned to
DEMI CORPORATION because the consignee had not been able to sell it. The cost of this merchandise was
P9,500 with a selling price ofP14,500.
DEMI CORPORATION failed to make an entry for a purchase on account of P6,500 at the end of 2005, although it
included this merchandise in the inventory count. The purchase was recorded when payment was made to the
supplier in 2006.
On January 6, 2007, DEMI CORPORATION received merchandise which had been shipped to them on December 31,
2006. The terms of the purchase were fob destination. Cost of the merchandise was P6,400. The purchase
was not recorded until payment was made in January 2007 but the goods were included in the inventory as of
December 31, 2006.
Goods with a selling price of P30,000 was shipped to Herald Company, a consignee, on
December29,2005.Sincethiswasshippedbeforetheinventorycount,the
merchandise, which was billed 20% above cost, was excluded from the inventory count. Sales was not
recorded until the inventory was received on January 5, 2006. Your further investigation revealed that 50%
of these goods were sold in 2006 and the on- hand at December 31, 2006 were not yet reported in
2006inventory.
Questions: Based on the above information, answer the following:
What is the entry to adjust audit finding “a” at December 31,2006?

a. Accounts Receivable 8,500 c. Both A andB
Sales 8,500
b. Inventory 7,000 d. AccountsReceivable 8,500
Retained Earnings 7,000 Retained Earnings8,500
What is the entry to adjust audit finding number “b” at December 31,2006?
Inventory 15,000 c. Both A and B
RetainedEarnings 15,000
RetainedEarnings 15,000 d. Neither A nor B
Accounts Payable15,000
DEMICORPORATIONshoulddebitwhataccounttoadjustauditfindingnumber“c”at
December 31, 2006?
Sales c. RetainedEarnings
CostofSales d. No adjustment isnecessary
In audit finding number “d”, choose the correctstatement?
The company is correct for not making an entry on the P6,500 purchase on account even though it is already
included in the inventory count since no term of shipment isgiven.
The company should reduced its purchases at December 31, 2006 since the purchases being paid in 2006 was
the purchase for 2005.
The company is correct in recording of purchases in year 2006 since this is the time when the company made
payment onsuch.
Inventory should be recorded at December 31, 2005 since the purchases were recorded on thisyear.
The entry to adjust audit finding number “e” at December 31, 2006 is: (assume the book is notclose)
RetainedEarnings 6,400 c. Purchases 6,400 Inventory
6,400 AccountsPayable 6,400
RetainedEarnings 6,400 d. Costofsales 6,400
Accountspayable 6,400 Inventory 6,400
The entry to adjust audit finding number “f” at December 31, 2006 is: (assume the book isclose)
Inventory 25,000 c. Costof sales 25,000
AccountsReceivable25,000 Sales 25,000
Costofsales 25,000 RetainedEarnings 25,000
Sales 25,000 AccountsReceivable 25,000
Costofsales 25,000 d. RetainedEarnings 2,500

Sales 15,000 Inventory 12,500
RetainedEarnings 25,000 AccountsReceivable 15,000
AccountsReceivable 15,000
Problem 4
The PRINCE COMPANY’S year-end inventory based on physical count conducted on December 31, 2006,
amounted to P885,000. Your cut-off examination disclosed the followinginformation”:
Included in the physical count were goods billed to customer FOB shipping point on December 31, 2006. These
goods had a cost of P28,000 and were billed at P35,000. The shipment was on PRINCE’S loading dock waiting
to be picked up by the common carrier.
Goods were in transit from a vendor to PRINCE on December 31, 2006. The invoice cost was P50,000 and the
goods were shipped FOB Shipping on Dec.29,2006.
Work in process inventory costing P20,000 was sent to an outside processor for plating on Dec. 30,2006.
Goods returned by customers and held pending inspection in the returned goods area on Dec. 31, 2006, were not
included in the physical count. On January 8, 2007, the goods costing P26,000 were inspected and returned to
inventory. Credit memos totaling P40,000 wereissued.
Goods shipped to customer FOB destination on Dec. 26, 2006, were in transit at Dec. 31, 2006 and had a cost of
P25,000. Upon notification of receipt by the customer on January 2, 2007, the company issued a sales invoice
forP42,000.
Goods received from a vendor on Dec. 26, 2006, were included in the physical count. However, the related
P60,000 vendor invoice was not included in Accounts Payable as December 31, 2006, because the Accounts
Payable copy of the receiving report waslost.
On January 3, 2007, a monthly freight bill in the amount of P4,000 was received. This was specifically related to
merchandise purchased in Dec. 31, 2006. The freight charges were not included in either the inventory or in
accounts payable at Dec. 31,2006.
Question:
Sales at year-end is overstatedby:

a. P75,000 b.P40,000 c.P35,000 d. P33,000
Purchases at year-end is understatedby:

a. P110,000 b.P84,000 c.P64,000 d. P60,000
Cost of sales at year-end is overstatedby:

a. P46,000 b.P21,000 c.P11,000 d.P 7,000
The inventory per audit at year-endis:
a. P981,000 b.P959,000 c.P1,006,000 d. P1,010,000
Problem 5
On January 1, 2007, Arcenith Corporation engaged an independent CPA to perform an audit for the year
ended December 31, 2006. The company uses a periodic inventory system. The CPA did not observe the
inventory count on December 31, 2006, as a result, a special examination was made of the
inventoryrecords.
The financial statements prepared by the company (uncorrected) showed the following: ending
inventory, P72,000; accounts receivable, P60,000; accounts payable, P30,000; sales, P400,000; net
purchases, P160,000, and pretax incomeP51,000.
The following data were found during the audit:
Merchandise received on January 2, 2007, costing P800 was recorded on December 31, 2006. An invoice on hand
showed the shipment was made fob supplier’s warehouse on December 31, 2006. Because the merchandise
was not on hand at December 31, 2006, it was not included in theinventory.
Merchandise that cost P18,000 was excluded from the inventory, and the related sale for P23,000 was recorded.
The goods had been segregated in the warehouse for shipment; there was no contract for sale but a “tentative
order byphone”.
Merchandise that cost P10,000 was out on consignment for Valentin Distributing Company and was excluded from
the ending inventory. The merchandise was recorded as a sale P25,000 when shipped to Valentin on
December 29,2006.
A sealed packing case containing a product costing P900 was in Arcenith’s shipping room when the physical
inventory was taken. It was included in the inventory because it was marked “Hold for customer’s shipping
instructions.” Investigation revealed that the customer signed a purchase contract dated December 18, 2006,
but that case was shipped and the customer billed on January 10, 2007. A sale for P1,500 was recorded on
December 31,2006.
A special item, fabricated to order for a customer, was finished and in the shipping room on December 31, 2006.
The customer has inspected it and was satisfied. The customer was billed in full on that sale in the amount of
P5,000. The item was included in inventory at cost, P1,000 because it was shipped on January 4,2007.
Merchandise costing P15,600 was received on December 28, 2006. The goods were excluded from inventory, and a
purchase was not recorded. The auditor located the related papers in the hands of the purchasing; they
indicated, “On consignment from RoselynCompany”.
Merchandise costing P2,000 was received on January 8, 2007, and the related purchase invoice recorded January
9. The invoice showed the shipment was made on December 29, 2006, fob destination. The merchandise was
excluded from theinventory.
Merchandise that cost P6,000 was excluded from the ending inventory and not recorded as a sale for P7,500 on
December 31, 2006. The goods had been specifically segregated. According to the terms of the contract of
sale, ownership will not pass until actual delivery.
Merchandise that cost P15,000 was included in the ending inventory. The related purchase has not been recorded.
The goods had been shipped by the vendor fob destination, and the invoice was received on December 30,
2006. The goods was received on January 5,2007.
Merchandise in transit that cost P7,000 was excluded from inventory because it was not on hand. The shipment
from the vendor was fob shipping point. The purchase was recorded on December 29, 2006, when the invoice
wasreceived.
Merchandise in transit that cost P13,000 was excluded from inventory because it had not arrived. Although the
invoice had arrived, the related purchase was not recorded by December 31, 2006. The merchandise shipped
fob shipping point by thevendor.
Merchandise that cost P8,000 was included in the ending inventory because it was on hand. The merchandise had
been rejected because of incorrect specifications and was being held for return to the vendor. The
merchandise was recorded as a purchase on December 26,2006.
Question:
Based on your analysis and the information above, answer the following:
The adjusted balance of inventory at year-end is:

a. P101,900 b.P102,000 c.P102,800 d. P120,400
The adjusted balance of accounts receivable at year-endis:

a. P10,500 b.P12,000 c.P35,000 d. P37,000
The adjusted balance of accounts payable at year-endis:

a. P43,000 b.P35,000 c.P30,000 d. P22,000
The adjusted balance of Sales at year-endis:

a. P377,000 b.P352,000 c.P350,500 d. P347,000
The adjusted balance of Net Purchases at year-end is:

a. P152,000 b.P165,000 c.P173,000 d. P181,000
The adjusted balance of Pre-tax income at year-endis:

a. P27,300 b.P29,000 c.P29,800 d. P35,800
Problem 6
Marlisa Company’s December 31, 2005 and December 31, 2006 inventory is P35,000 and P27,000,
respectively. The beginning and ending inventories were determined by physical count of the goods on
hand on those dates, and no reconciling items were considered. All purchases are f.o.b. shipping point.
In the course of your examination of the inventory cut- off, both the beginning and ending of each year,
you discover the following facts:
Beginning of the year
Invoices totaling P3,260 were entered in the voucher register on January, but the goods were received
duringDecember.
December invoices totaling P4,100 was entered in the voucher register in December, but the goods were not
received untilJanuary.
End of the Year
Invoices totaling P7,260 were entered in the voucher register in January but the goods were received inDecember.
December invoices totaling P3,600 were entered in the voucher register in December, but the goods were not
received untilJanuary.
Invoices totaling P1,500 were entered in the voucher register in January, and the goods were received in January,
but the invoices were datedDecember.
Question:
The adjusted balance of the Jan. 1, 2006 inventoryis:

a. P35,000 b.P35,840 c.P39,100 d. P59,100
How much is the adjusted balance of the Purchases account at December 31, 2006 assuming the amount of
Purchases in the trial balance isP5,176,000?
a.P5,170,566 b.P5,180,000 c.P5,181,500 d. P5,185,200
The corrected December 31, 2006 inventoryis

a.P 52,100 b.P50,600 c.P32,100 d. P28,500
When auditing inventories, an auditor would least likely verifythat

All inventory owned by the client is on hand at the time of thecount.
The client has used properly inventorypricing.
Damaged goods and obsolete items have been properly accountedfor.
The financial statement presentation of inventories isappropriate.
Problem 7
During the 2006 audit of JONES Manufacturing Company’s year-end inventory, you found the
followingitems.
A packing case containing product costing P8,160 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 customer billed on January
10,2007.
MerchandisecostingP6,250wasreceivedonDecember28,2006,andtheinvoicewas
recorded. The invoice was marked “On Consignment.”
Merchandise received on January 6, 2007 costing P7,200 was entered in the purchase register on January 7. The
invoice showed shipment made FOB shipping point on December 31,2006.
A special machine, fabricated to order for a particular customer, was finished and in the shipping room on
December 30. The customer was billed on that date and the machine was excluded from inventory although it
was shipped January 2, 2007. The machine costs P25,000 and was sold forP45,000.
Merchandise costing P23,500 was received on January 3, 2007, and the relatedpurchase invoice was recorded
January 5. The invoice showed the shipment was made on December 29, 2006, FOBdestination.
Merchandise costing P11,000 was sold on an installment basis on December 15 at P25,000. The customer took
possession of the goods on that date. The merchandise was included in inventory because JONES still holds
legal title. Historical experience suggests that full payment on the installment sales is received approximately
99% of thetime.
Goods costing P15,000 were billed for P20,000 and delivered on December 20. The goods were included in
inventory because the sale was accompanied by a repurchase agreement requiring JONES to buy back the
inventory in February2007.
Selected account balances before considering the effects of the above items are as follows:
Accounts receivable P 185,000
Inventory 114,500
Accounts payable 67,200
Sales 942,400
Gross profit 287,990
Net income 84,680
Questions:
What is the adjusted accounts receivable balance at the end of theyear?

a. P166,000 b.P165,000 c.P150,000 d. P125,000
What is the adjusted inventory balance at the end of2006?

a. P118,860 b.P116,700 c.P112,610 d. P104,450
What is the adjusted balance of accounts payable at the end of theyear?

a. P68,150 b.P68,000 c.P 67,200 d. P65,000
The adjusted total sales in 2006is

a. P962,400 b.P925,600 c.P925,000 d. P922,400
The adjusted Cost of goods sold in 2006is

a. P640,040 b.P650,200 c.P 651,040 d. P657,250
Problem 8
CHARMAINE COMPANY is a manufacturer of small tools. The following information was obtained
from the company’s accounting records for the year ended December 31, 2006:
Inventory at December 31, 2006 (based on physical count

in Charmaine’s warehouse at cost
on December31,2006) 1,870,000
Accounts payable at December31,2006 1,415,000
Net sales (sales lesssalesreturns) 9,693,400
Your audit reveals the followinginformation:
The physical count included tools billed to a customer FOB shipping point on December 31, 2006. These tools
cost P64,000 billed at P78,500. They were in the shipping area waiting to be picked up by thecustomer.
Goods shipped FOB shipping point by a vendor were in transit on December 31, 2006.These goods with
invoice cost of P93.400 were shipped on December 29,2006.
Work in process inventory costing P27,000 was sent to a job contractor for further processing.
Not included in the physical count were goods returned by customers on December 31, 2006. These goods
costing P49,000 were inspected and returned to inventory on January 7, 2007. Credit memos for P67,800
was issued to the customers at that date.
In transit to a customer on December 31, 2006, were tools costing P17,740 shipped FOB destination on
December 26, 2006. A sales invoice for P29,400 was issued on January 3, 2007, when Charmaine Company
was notified by the customer that the tools had been received.
At exactly 5:00 pm on December 31, 2006, goods costing P31,200 were received from a vendor. These were
recorded on a receiving report dated January 2, 2007. The related invoice was recorded on December 31,
2006, but the goods were not included in the physicalcount.
Included in the physical count were goods received from a vendor on December 27, 2006. However, the
related invoice for P36,000 was not recorded because the accounting department’s copy of the receiving
report waslost.
A monthly freight bill for P16,000 was received on January 3, 2007. It specifically related to merchandise
bought in December 2006, one half of which was still in the inventory at December 31, 2006. The freight
was not included in either the inventory or in accounts payable at December 31,2006.
Question:
The inventory at year-endis:

UnderstatedbyP170,340 c. Understated byP126,340
UnderstatedbyP162,340 d. Understated byP82,140
The accounts payable at year-endis:

UnderstatedbyP93,400 c. Understated byP137,400
UnderstatedbyP106,200 d. Understated byP145,400
The amount of sales at year-endis:

OverstatedbyP67,800 c. Overstated byP29,400
OverstatedbyP38,400 d. Correctlystated
The adjusted balance of inventory at year-end is:

a. P1,952,140 b.P1,996,340 c.P2,032,340 d. P2,040,340
5 The adjusted balance of accounts payable at year-endis:
a. P1,560,400 b.P1,552,400 c.P1,521,200 d. P1,508,400
6. The adjusted balance of sales at year-end is:

a. P9,722,800 b.P9,693,400 c.P9,655,000 d. P9,625,600
Problem 9
The Cruzada Company is a wholesale distributor of automotive replacement parts.Initial
amounts taken from Cruzada’s accounting records are as follows:
Inventory at December 31, 2006 (based on physical count of goods in warehouse on December 31, 2006);
P1,250,000.
Accounts payable at December 31, 2006:
DacalosCompany 2% 10 days,net30 265,000
DanoCompany Net30 210,000

DeLiraCompany Net30 300,000
DelaCruzCompany Net30 225,000
DezaCompany Net30 -
EncaboCompany Net30 -
P1,000,000
Salesin2006 P9,000,000
Additional information is as follows:
Parts held on consigment 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, 2006 and in
accounts payable at December 31, 2006.
P22,000 of parts which sere purchased from Deza Company and paid for in December 2006 were sold in the last
week of 2006 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, 2006, because the parts were on the loading dock waiting to
be picked up bycustomers.
Parts in transit on December 31, 2006, to customers, shipped f.o.b. shipping point, on December 28, 2006,
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.
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 31,2006.
Goods were in transit from Encabo Company to Cruzada Company on December 31, 2006. The cost of goods was
P25,000 and they were shipped f.o.b. shipping point on December 29,2006.
A quarterly freight bill in the amount of P2,000 specifically relating to merchandise purchases in December 2006,
all of which was still in the inventory at December 31, 2006, was received on January 3, 2007. The freight bill
was not included in either the inventory or in accounts payable at December 31,2006.
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 cashdiscount.
Questions:
The adjusted inventoryis:

a. P1,326,700 b.P1,304,700 c.P1,276,000 d. P1,270,700
The adjusted accounts payableis:

a. P864,700 b.P866,700 c.P 872,000 d. P1,017,700
The adjusted salesis:

a. P8,960,000 b.P9,000,000 c.P9,040,000 d. P9,100,000
Problem 10
Raffy Corporation reported income before income taxes as follows:
2005 P525,000
2006 630,000
The company uses the periodic inventory system. Ending inventories for 2005 and 2006 were properly
recorded. The following additional information became available following an analysis of the
inventories:
Merchandise with a gross invoice price of P7,500 was shipped FOB shipping point by a supplier on terms of 2/10,
n/30 in 2005 and was recorded as a purchase by Raffy Corporation in 2005 when the invoice was received:
however, the goods were not included in the ending inventory because they were not received until 2006. The
company always takes advantage of the early payment discounts and accordingly, records its purchases using
the netmethod.
Merchandise that cost P3,000 was purchased FOB shipping point by Raffy Corporationon December 31, 2005 and
was shipped by the supplier that day. The merchandise was not included in the 2005 ending inventory and was
not recorded as a purchase until2006.
Merchandise costing P2,850 was shipped FOB shipping point to a customer in 2005 and not included in the ending
inventory for 2005. The sale of P4,260 was recorded in 2006 when the invoice wassent.
Goods being held by Raffy Corporation on consignment from a supplier in the amount of P4,950 were included in
the physical inventory for2005.
Retailers were holding P6,750 of goods at cost (P9,000 at retail), on consignment from Raffy, at their stores on
December 31, 2005. These goods were not included in the ending inventory of Raffy Corporation for 2005.
Question:
How much is the correct income before taxes for2005?

a. P643,410 b.P616,590 c.P538,410 d. P511,590
How much is the correct income before taxes for2006?

a. P643,410 b.P616,590 c.P538,410 d. P511,590
The cost of sales at December 31, 2006 is understated by:
a. P12,150 b.P9,750 c.P9,150 d. P6,750
The Retained earnings – beginning at December 31, 2006 is understated by: a. P13,410 b.P12,150
c.P10,410 d. P9,150
The beginning inventory (January 1, 2006) of Raffy Corporation is understated by: a. P13,410 b.P12,150
c.P 9,150 d. P5,400
Problem 11
You audit of APAS COMPANY for the year 2006 disclosed the following:
The December 31 inventory was determined by a physical count on December 28 and based on such count, the
inventory was recordedby:
Inventory 1,400,000
Costofsales 1,400,000
The 2006 ledger shows a sales balance ofP20,000,000.

The company sells a mark-up of 20% based onsales.
The company recognizes sales upon passage of title to thecustomers.
All customers are within a four-day deliveryarea.
The sales register for December, 2006 and January, 2007, showed the following details:
December Register
Invoice No. FOB Terms Date Shipped Amount
300 Destination 12/30 P 50,000
301 Shipping point 12/30 62,500
302 Destination 12/23 47,500
303 Destination 12/24 82,500
January Register
Invoice No. FOB Terms Date Shipped Amount
306 Destination 12/29 67,500
308 Destination 01/02 140,000
Questions
The Sales for December is over/(under)by:

P36,000under c. P 106,000under
b. P36,000over d. P 106,000over
The Inventory for December is over/(under)by:
a. P235,600over c. P 245,412under
b. P181,600over d. P 245,412over
The adjusted inventory at December 31, 2006is:

a. P1,645,412 b.P1,218,400 c.P1,164,400 d. P1,154,588
The adjusted sales at December 31, 2006is:

a. P20,106,000 b.P20,036,000 c.P19,964,000 d. P19,894,000
How much sales for the month of December 2006 were erroneously recorded in January 2007?
a. P282,000 b.P272,500 c.P198,000 d. P142,000
How much sales for the month of January 2007 were erroneously recorded in December 2006?
a. P228,500 b.P188,500 c.P180,500 d. P106,000
Problem 12
On December 15, 2006, 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, 2006, you decided to accept the balance of the control account after examining
transactions recorded in that account between December 15 and December 31, 2006. The audit was for
the year ended December 31, 2006.
In the course of conducting your examination of the sales cutoffs as of December 15 and December 31,
2006, you discovered the following items:
Date Inventory
Item Cost Price Sales Price Date Shipped DateBilled ControlCredited
A P 60,000 P 78,000 12-13-06 12-17-06 12-17-06
B 77,000 101,400 01-02-07 12-29-06 12-29-06
C 52,000 67,600 12-17-06 12-29-06 12-29-06
D 87,000 113,100 12-14-06 12-16-06 12-16-06
E 49,500 64,500 12-25-06 01-02-07 01-02-07
Question:
Based on the information above and your analysis, answer the following
The inventory at year-end is over/(under)by:

a. P174,500over c. P 114,500over
b. P174,500 under d. P 114,500under
The cost of sales at year-end is over/(under) by:

a. P174,500over c. P 114,500over
b. P174,500under d. P 114,500under
The sales at year-end is over/(under)by:

a. P36,900over c. P 101,400over
The accounts receivable at year-end is over/(under)by:

a. P36,900over c. P 101,400over
Problem 13
The following information was obtained from the balance sheet of LION INC.:
Dec. 31, Dec. 31, 2005

2006P706,600
Cash P200,000
0
Notes receivable 50,000
Inventory ? 399,750
Accounts payable ? 150,000
All operating expenses are paid by Lion Inc. with cash and all purchases of inventory are made on
account. Lion, Inc. sells only one product. All sales are cash sales which are made for P100 per unit.
Lion. Inc., purchases 1,500 units of inventory per month and values its inventory using the periodic
FIFO. The unit cost of inventory during January
2006 was P65.20 and increased P0.20 per month during the year. During 2006, payments to
suppliers totaled P943,400 and operating expenses totaled P440,000. The ending inventory for 2005
was valued at P65.00 per unit.
Question:
Based on the information above and your analysis, answer the following
Recorded sale during 2006is:

a. P1,840,000 b.P1,890,000 c.P2,090,000 d. P2,140,000
Number of units sold during 2006 is:

a. 21,400 b.P20,900 c.18,900 d.18,400
The accounts payable balance at December 31, 2006is:

a. P400,000 b.P250,000 c.P156,000 d. P150,000
The January 1, 2006 inventory balanceis:

a. P399,750 b.P385,900 c.P380,900 d. P355,800
The amount of inventory at December 31, 2006is:

a. P399,750 b.P385,900 c.P380,900 d. P355,800
Problem 14
Kitkat Company operates a wholesale oil products company. Kitkat believes that an employee and a
customer are conspiring to steal gasoline. The employee records sales to the customer not less than the
amount actually placed in the customer’s tank truck. In order to confirm or refuse these suspicions,
Kitkat has collected the following data for the past 10 workingdays.
Quantity Cost per

(gallons) unit (gal)
Total Cost
Inventory, September 1 220,000 P1.45 P319,000
Purchases 1,560,000 1.45 2,262,000
Goods available for sale 1,780,000 2,581,000

Kitkat had sales of P2,512,000 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.
Questions:
How much inventory should be present at the end of the 10-day period (ingallons)? a. 220,000 b.210,000
c.200,000 d.192,000
What is the cost of missing inventory?

a. P304,500 b.P40,600 c.P26,100 b. P0
Problem 15
You were assigned to audit the factory accounts of Modfood Manufacturing Corporation for the year
ended December 31, 2006. The following data were gathered:
TotalmanufacturingCost P900,000
Cost ofGoodsManufactured 800,000
FactoryOverhead 75% of direct labor and 25% of total

manufacturingcost
Beginning work-in-process inventory, January 1, was 60% of ending work-in-process inventory, December
31, 2006.
Manufacturing costs for the year ended December 31, 2006 submitted to you by the factory accountant
was as follows:
RawMaterialsUsed P400,000
DirectLabor 275,000
FactoryOverhead
225,000Total P900,000
Questions:
Assuming cost percentage relationships are stated are correct, what will be the adjustment on manufacturing cost
at December 31,2006?
a.Debit: Raw materials used 25,000
Credit Direct labor 25,000
b.Debit: Direct labor 25,000
Credit Raw materials used 25,000
c.Debit: Raw materials used 50,000
Credit Direct labor 50,000

a.Debit: Raw materials used 25,000
d.Debit: Direct labor 50,000
Credit Raw materials used 50,000
How much is the Work-in-process Inventory on December 31, 2006? a. P200,000 c.

P250,000
b. P225,000 d. P275,000
Problem 16
Following are portions of the ANTHONY CORPORATION’S SALES and PURCHASES account for
the calendar year 2006: (All sales are mark-up at 30% based on sales price)
12/31 ClosingEntry P1,411,100
P1,411,100
SalesRegister P 1,230,00012/25SI#876 15,000
12/27 877 25,500
12/29 879 55,000
12/31 880 85,600
P1,411,100
PURCHASES
12/30 549 20,000
P 792,500 P 792,500
You observed the physical inventory of goods in the warehouse on December 31, 2006 and were
satisfied that it was properly taken.
When performing sales and purchases cut-off tests, you found that at December 31, 2006, the last
Receiving Report (RR) that had been used was No. 549 and that no shipments have been made on any
Sales Invoices (SI) with number larger than No. 878.
The following information were found:
Included in the warehouse physical inventory at December 31, 2006 were chemicals that had been purchased and
received on Receiving Report No. 546 but for which an invoice was not received until 2007. Cost wasP14,500.
In the warehouse at December 31, 2006, were goods that had been sold and paid for by the customer but which
were not shipped out until 2007. They were all sold on Sales Invoice No.876.
On the evening of December 31, 2006, there were two shipments on ANTHONY CORPORATION. First shipment was
unloaded on January 3, 2007 and received on Receiving Report No. 548. The freight was paid by the vendor.
The second shipment was loaded and sealed on December 31, 2006 but was not delivered until January 2,
2007. This order was sold on Sales Invoice No. 878, P20,000 and freight was paid by thebuyer.
Temporarily stranded on December 31, 2006, on a railroad sidings were two trucks of chemicals en route to the
Nelson Neil Company. They were sold on Sales Invoice No. 879 and the term were fobdestination.
En route to ANTHONY CORPORATION on December 31, 2006 was truckload of materials that was received on
Receiving Report No. 550. The material was shipped fob destination.
Included in the physical inventory were chemicals exposed to rain while in transit and deemed unsalable. Their
invoice cost was P5,500 and freight charges of P200 had been paid on the chemicals. This was recorded as
purchases on12/31/02
Questions:
The Sales at December 31, 2006is:

s. Overstated byP70,000 c. Overstated by P155,600
b. Overstated byP55,000 d. Overstated by P15,000
The adjusted Sales at December 31, 2006is:

a. P1,396,100 b.P1,356,100 c.P1,341,100 d. P1,255,500
The adjusted Purchases at December 31, 2006is:

a.P 797,000 b.P796,800 c.P791,500 d. P782,500
The Purchases at December 31, 2006is:

UnderstatedbyP4,500 c. Overstated byP10,000
Overstated byP1,000 d. Understated by P4,300
The Inventory at December31, 2006is:
Understated byP8,300 c. Overstated byP12,500
Understated byP14,000 d. Understated by P12,500
The Cost of Sales at December 31, 2006is:

Understated byP17,000 c. Overstated byP1,200
Overstated byP9,500 d. Understated byP12,500
Problem 17
On April 15, 2007, a fire damaged the office and warehouse of KAREN MAE CORPORATION. The only
accounting record save was the general ledger, from which the trial balance below was prepared.
KAREN MAECORPORATION
TRIALBALANCE
March 31,2007
Cash 200,000
Accounts receivable 400,000
Inventory, December 31, 2006 750,000
Land 350,000
Building and equipment 1,100,000
Accumulated depreciation 413,000
Other Assets 36,000
Accounts payable 237,000
Other expense accruals 102,000
Capital stock 1,000,000
Retained earnings 520,000
Sales 1,350,000
Purchases 520,000
Operating expenses 266,000
3,622,000 3,622,000
The following data and information have been gathered:
The fiscal year of the corporation ends on December31.
An examination of the April bank statement and canceled checks revealed that checks written during the period
April 1-15 totaled P130,000: P57,000 paid to accounts payable as of March 31, P34,000 for April merchandise
shipments, and P39,000 paid for other expenses. Deposits during the same period amounted to P129,500,
which consisted of receipts on account from customers with the exception of a P9,500 refund from a vendor
for merchandise returned inApril.
Correspondence with suppliers revealed unrecorded obligations at April 15 of P106,000 for April merchandise
shipments, including P23,000 for shipments in transit on thatdate.
Customers acknowledge indebtedness of P360,000 at April 15, 2007. It was also estimated that customers owed
another P80,000 that will never be acknowledge or recovered. Of the acknowledged indebtedness, P6,000 will
probably beuncollectible.
The companies insuring the inventory agreed that the corporation’s fire loss claimshould
be based on the assumption that the overall gross profit ratio for the past two yearswas
in effect during the current year. The corporation’s audited financialstatements
disclosed this information:
Year Ended December 31
2006 2005
Net Sales 5,300,000 3,900,000
Net purchases 2,800,000 2,350,000
Beginning inventory 500,000 660,000
Ending inventory 750,000 500,000
Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of the inventory was a totalloss.
Questions:
1. Cash balance at April 15, 2007 is:
a. P 70,000 b. P143,000 c. P 190,000 d. P 199,700
2. Accounts Receivable balance at April 15, 2007 a. P350,500 is:

b. P360,000
c. P 400,000 d. P 440,000
3. Inventory at April 15, 2007 is:
a. P0 b. P35,000 c. P 58,000 d. P 93,000
4. Accounts payable at April 15, 2007 is: a. P106,000

b. P180,000
c. P 276,500 d. P 286,000
5. Sales as of April 15, 2007 is:
a. P1,470,000 b. P1,510,000 c. P 1,750,000 d. P 1,790,000
6. Net purchases as of April 15, 2007 is: a. P544,500

b. P593,500
c. P 627,500 d. P 650,500
7. Cost of Sales as of April 15, 2007 is: a. P513,000

b. P547,000
c. P 721,000 d. P 830,500
8. Estimated inventory as of April 15, 2007 is: a. P570,000

1. Cash balance at April 15, 2007 is:
a. P 70,000 b. P143,000 c. P 190,000 d. P 199,700
c. P 679,500 d. P 830,500
b. P575,500
9. Inventory loss at April 15, 2007 is:
a. P477,000 b. P512,000 c. P 535,000 d. P 570,000
10. The Average Gross Profit for two years (2005 and 2006) is:
a. 45% b.55% c.42.76% d.56.23%

PROBLEM 18
The following accounts were included in the adjusted trial balance of Jeanina Company as of December
31, 2006:
Cash P 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 Jeanina held its cash book open after year-end. In addition, your audit
reveled the following
Receipts for January 2007 of P163,650 were recorded in the December 2006 cash receipts book. The receipts of
P90,025 represents cash sales and P73,625 represents collections from customers, net of 5% cashdiscounts.
Payments to suppliers made on January 2007 of P93,100, on which discounts of P3,100 were taken, were included
in the December 2006 checkregister.
Merchandise inventory is valued at P1,512,500 prior to any adjustments . The following information has been
found relating to certain inventorytransactions.
Goods valued at P68,750 are on consignment with a customer. These goods are not included in the P1,512,500
inventoryfigure.
Goods costing P54,375 were received from a vendor on January 4, 2007. The related invoice was received and
recorded on January 6, 2007. The goods were shipped on December 31, 2006, terms FOB shippingpoint.
Goods costing P159,375 were shipped on December 31, 2006, and were delivered to the customer on
January3, 2007. The terms of the invoice were FOB shipping point. The goods were included in the 2006
ending inventory even though the sale was recorded in2006.
A P45,500 shipment of goods to a customer on December 30, terms FOB destination are not included in the
year-end inventory. The goods cost P32,500 and were delivered to the customer on January 3, 2007. The
sale was properly recorded in 2007.
The invoice for goods costing P43,750 was received and recorded as a purchase on December 31, 2006. The
related goods, shipped FOB destination were received on January 4, 2007, and thus were not included in
the physicalinventory.
Goods valued at P153,200 are on consignment from a vendor. These goods are not included in the
physicalinventory.
Questions
Based on the above and the result of your audit, determine the adjusted balances of the following as of
December 31, 2006.
Cash
a. P240,800 b.P173,500 c.P170,250 d. P167,150
2. Accounts receivable a. P
727,150
b. P 641,000 c. P 637,125 d. P 563,500
3. Merchandise inventory a. P
1,520,000
b. P 1,508,750 c. P 1,465,000 d. P 1,252,500
4. Accounts payable a. P
1,197,725
b. P 1,153,975 c. P 1,150,875 d. P 1,143,250
5. Working capital a. P
1,158,800
b. P 1,058,275 c. P 1,055,175 d. P 1,000,800
6. Current ratio a.
2.00
b. 2.01 c. 1.84 d. 1.83
PROBLEM 19
In conducting your audit of Ma. Angela Corporation, a company engaged in import and wholesale
business, for the fiscal year ended June 30, 2006, you determined that its internal control system was
good. Accordingly, you observed the physical inventory at an interim date, May 31, 2006 instead of at
June 30,2006.
You obtained the following information from the company’s general ledger
Sales for eleven months ended May 31, 2006 P1,344,000
Sales for the fiscal year ended June 30, 2006 1,536,000
Purchases for eleven months ended May 31, 2006
(before audit adjestments0 1,080,000
Purchases for the fiscal year ended June 30, 2006 1,280,000
Inventory, July 1, 2005 140,000
Physical inventory, May 31, 2006 220,000
Your audit disclosed the following additional information.

Shipments costing P12,000 were received in May and included in the physical inventory but recorded as
Junepurchases.
Deposit of P4,000 made with vendor and charged to purchases in April 2006. Product was shipped in July2006.
A shipment in June was damaged through the carelessness of the receiving department. This shipment was
later sold in June at its costs ofP16,000.
Questions:
In audit engagements in which interim physical inventories are observed, a frequently used auditing
procedure is to test the reasonableness of the year-end inventory by the application of gross profit
ratios. Based on the above and the result of your audit, you are to provide the answers to thefollowing:
The gross profit ratio for eleven months ended May 31, 2006is
a. 20% b.25% c.30% d.35%
The cost of goods sold during the month of June, 23003 using the gross profit ratio methodis
a. P132,000 b.P148,000 c.P144,000 d. P160,000
The June 30, 2006 inventory using the gross profit methodis
a. P260,000 b.P264,000 c.P268,000 d. P340,000
Problem 20
You are engaged to audit the Abam’z Company and its subsidiary, Yamas Company as of December 31,
2005. The Abam’z Company manufactures tires with it sells to its subsidiary at cost plus 30%. During the
course of the audit, you discover that the balances of the inter-company accounts are not reconciled.
Following is a copy of part of the inter-company ledgersheets:
Accounts Receivable from Yamas
Date Reference Amount Date Reference Amount
Total Forwarded P180,000 Total Forwarded P130,000
Dec. 26 SI 903 7,600 Dec.26 CR 10,000
27 SI 904 4,000 29 CR 20,000
28 SI 905 6,200 31 Balance 52,500
29 SI 906 3,700
31 SI 908 11,000
P 212,500 P 212,500
Accounts Payable to Abam’z
Date Reference Amount Date Reference Amount
Dec. 26 CD 20,000 Dec. 26 VR 1003-902 19,000
31 CD 28,000 28 VR 1004-903 7,600
31 RG 80 4,100 29 VR 1005-904 4,000
31 Balance 16,700 31 VR 1006-907 9,000

31 VR 1010-909 8,200
P 208,800 P 208,800
Legend for references:
SI – Sales register and invoices number CR –

Cash receipts book
CD – Cash disbursements book
VR – Voucher register, receiving report number, and Abam’z invoice number
RG – Returned goods register and debit memo number
A review of the inventory observation working papers discloses the following information:
Observation at Abam’z Company on December 31, 2005:
Last shipment prior to the physical inventory was billed on Invoice number 908 dated December 31,2005.
No returned merchandise was received from Yamas Company during the month of December2005.
Observation at Yamas Company on December 31, 2005:

The last shipment of merchandise returned to Abam’z in December 2005 was entered on
debit memo number 80 dated December 31, 2005.
The last receiving report used in December 2005 was number 1007 dated December31,
2005 for merchandise billed on Abam’z invoice number 905.
Questions:
What is the total unrecorded purchases of Yamas as of December 31,2005?

a. P29,900 b.P20,900 c.P14,700 d. P11,000
What is the reconciled balance of the inter-company accounts at December 31,2005? a. P7,600 b.P30,346
c.P29,400 d. P37,600
Abam’z Company’s inventory at December 31, 2005 should be increasedby

a. P3,154 b.P4,100 c.P10,077 d. P6,923
Yamas Company’s inventory at December 31, 2005 should be increasedby

a. P29,400 b.P4,100 c.P11,000 d. P14,700

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Audit of Inventory

Exercises - Analysis of Transactions

1. Items in receiving department returned by customer, no

communication received from customer 20,000

2. Items ordered and in receiving department, invoice not yet

received from supplier 50,000

3. Items counted in warehouse by the inventory crew 70,000

(Anecito Company pays freight) 5,000

5. Items, shipped today, fob destination, invoice mailed to customer 5,000

6. Items currently used for window displays 10,000

8. Items in shipping department, invoice not mailed to customer 6,000

9. Items in receiving department, refused by Anecito because of

Damage [(not in (3)] 3,000

11.Items included in warehouse count, damaged, not returnable 8,000

12. Items included in warehouse count, specifically crafted and

segregated for shipment to customer in five days per sales

contract, with return privilege. 18,000

The following should be included from the inventory,except:

The adjusting entries for:

1. Item letter “a” is;

a. Cost of sales 90,000 Inventory 90,000

b. Inventory 90,000 Cost of Sales 90,000

Retainedearnings 90,000 Inventory 90,000

Item letter “b”is:

b. Inventory 28,000 Cost of sales 28,000

Cost of sales 35,000 Inventory 35,000

3. Item letter “c” is;

a. Inventory 50,000 Cost of sales 50,000

b. Cost of sales 50,000 Inventory 50,000

c. Inventory 50,000 Retained earnings 50,000

4. Item letter “d” is: Credit

a. Cost of sales 15,000 Inventory 15,000

b. Inventory 15,000 Cost of sales 15,000

Inventory 15,000 Retained earnings 15,000

5. Item letter “d” is:

a. Cost of sales 500 Inventory 500

b. Inventory 500 Cost of sales 500

c. Cost of sales 10,000 Inventory 10,000

d. Inventory 10,000 Cost of sales 10,000

December 31, 2006. The following errors were discovered:

Questions: Based on the above information, answer the following:

What is the entry to adjust audit finding “a” at December 31,2006?

b. Inventory 7,000 d. AccountsReceivable 8,500

Retained Earnings 7,000 Retained Earnings8,500

Costofsales 25,000 d. RetainedEarnings 2,500

Sales at year-end is overstatedby:

Purchases at year-end is understatedby:

Cost of sales at year-end is overstatedby:

The following data were found during the audit:

The adjusted balance of inventory at year-end is:

The adjusted balance of accounts receivable at year-endis:

The adjusted balance of accounts payable at year-endis:

The adjusted balance of Sales at year-endis:

The adjusted balance of Net Purchases at year-end is:

The adjusted balance of Pre-tax income at year-endis:

End of the Year

The adjusted balance of the Jan. 1, 2006 inventoryis:

The corrected December 31, 2006 inventoryis

When auditing inventories, an auditor would least likely verifythat

Accounts receivable P 185,000

Accounts payable 67,200

Gross profit 287,990