Since 1977

AUDITING PROBLEMS OCAMPO/CABARLES

AP.1901-Audit of Inventories OCTOBER 2015

The Use of Assertions in Obtaining Audit Evidence

Assertions about classes of transactions and events for the

period under audit: (COCAC)
Completeness - all transactions and events that should
have been recorded have been recorded.
Occurrence - transactions and events that have been
recorded have occurred and pertain to the entity.
Classification - transactions and events have
recorded in the proper accounts.
Accuracy - amounts and other data relating to recorded
transactions and events have been recorded appropriately.
Completeness - all assets, liabilities and equity interests
that should have been recorded have been recorded.
Valuation and allocation - assets, liabilities, and equity
interests are included in the financial statements at
appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded.
been
Assertions about presentation and disclosure: (COCA)
Completeness - all disclosures that should have been
included in the financial statements have been included.

Cutoff - transactions and events have been recorded in the Occurrence and rights and obligations - disclosed events,
correct accounting period. transactions, and other matters have occurred and pertain
to the entity.

Assertions about account balances at the period end: Classification and understandability - financial information
(RECV) is appropriately presented and described, and disclosures
are clearly expressed.
Rights and obligations - the entity holds or controls the
rights to assets, and liabilities are the obligations of the
Accuracy and valuation - financial and other information
entity.
are disclosed fairly and at appropriate amounts.
Existence - assets, liabilities, and equity interests exist.

INTERNAL CONTROL MEASURES

1. Authority and responsibility for controlling the 6. Deliveries of materials, finished stock and merchandise
inventories should be centralized management and in should be made only upon specific authorizations
one person. emanating at authorized levels.
2. There should be careful selection of inventory 7. Slow-moving, obsolete and damaged stock should be
personnel and intensive training of such personnel in identified and reported following periodic reviews of
policies, objectives and system of inventory control. physical and book records by qualified employees.
Valuation on the basis of approved cost-mark-down
3. Adequate physical facilities for handling and storage of
methods should be reviewed.
inventory should be provided.
8. Safeguards against that action of the element and
4. Adequate system of procedures, forms and reports
inaccuracies in recording receipts and issues should be
related to the management of inventories should be
adopted. Example Maintaining adequate insurance
developed and implemented.
coverage.
5. Quantitative controls through perpetual inventory
records; book quantities verified with physical counts
at least once a year and differences being investigated,
promptly adjusted and reported to higher authority
should be implemented.

Page 1 of 8 www.prtc.com.ph AP.1901

EXCEL PROFESSIONAL SERVICES, INC.

SUBSTANTIVE AUDIT OF INVENTORIES

Inventory Balances Purchases

Existence: Recorded inventory exist
1. Before the client takes the physical inventory, review
and approve the clients written plan for taking it.
2. Observe the client personnel physically counting
inventory.
3. Confirm inventories on consignment and held in public
warehouses.
Completeness: All inventory of the entity recorded
4. Obtain a copy of prenumbered inventory tags used by
the client in taking inventory and reconcile the tags to
the listing.
5. For selected items, trace from tags to listing.
6. Perform cutoff procedures. Obtain the receiving report
number for the last shipment received prior to year-
end and determine that the item is included in
inventory. Also, identify the last shipping document
and determine, based on shipping terms, whether the
item was properly recorded in sales or inventory.
7. Perform analytical procedures.
Rights and obligations: Inventory is owned by the entity
8. Determine that consigned inventory has been excluded
from inventory and that inventory pledged has been
properly disclosed. Examine confirmations from
financial institutions and read minutes of the board of
directors meetings.
Valuation and allocation: Recorded inventory is valued in
accordance with GAAP
9. Considering the method the client uses for inventory
valuation, examine invoices for inventory on hand or
trace prior years inventory listing to verify cost.
10. For selected items, determine net realizable value
(NRV) of the inventory and apply the lower of cost or
NRV.
Completeness: Purchases that occurred are recorded
Trace a sequence of receiving reports to entries in the
voucher register. Test cutoff. Account for a sequence of
entries in the voucher register.
Occurrence: Recorded purchases are for items that were
acquired
Examine underlying documents for authenticity and
reasonableness. Scan voucher register for large or
unusual items. Trace inventory purchased to perpetual
records. Scan voucher register for duplicate payments.
Classification: Purchase transactions have been recorded in
the proper accounts
For a sample of entries in the purchases journal, verify the
accuracy of account coding.
Accuracy (Valuation): Purchases are recorded at proper
amounts
Recompute invoices and compare invoice price to purchase
order.
Production
Completeness: All production transactions that occurred
are recorded
Account for a sequence for production reports.
Occurrence: Recorded production transactions occurred
For selected transactions, examine signed materials
requisitions, approved labor tickets, and allocation of
overhead.
Classification: Production transactions have been recorded
in the proper accounts
For a sample of entries, verify the accuracy of account
coding.

11. Verify computations in the inventory listing. Accuracy (Valuation): Production transactions are
12. Review the obsolescence of the inventory by: recorded at proper amounts
a. being alert while observing inventory being taken
Test cost records by tracing to underlying documents, such
for damaged, slow-moving, or scrap inventory.
as bill of materials, labor tickets, authorized labor rates,
b. Scanning perpetual records for slow-moving items
and standard overhead rates. Review variances.
and discussing their valuation with client.

Presentation and disclosure: Inventory is classified and

disclosed in accordance with GAAP
- end -
13. Determine whether accounts are classified and
disclosed in the financial statements in accordance
with GAAP.

Page 2 of 8 www.prtc.com.ph AP.1901

EXCEL PROFESSIONAL SERVICES, INC.

PROBLEM NO. 1 QUESTIONS:

You were engaged by Quezon Corporation for the audit Based on the above and the result of your audit, determine
of the companys financial statements for the year ended the following:
December 31, 2015. The company is engaged in the
1. Sales for the year ended December 31, 2015
wholesale business and makes all sales at 25% over cost.
a. P5,250,000 c. P5,400,000
b. P5,150,000 d. P5,350,000
The following were gathered from the clients accounting
records: 2. Purchases for the year ended December 31, 2015
a. P3,000,000 c. P3,018,000
SALES PURCHASES
Date Ref. Amount Date Ref. Amount
b. P3,754,000 d. P3,818,000
Balance Balance 3. Inventory as of December 31, 2015
forwarded P5,200,000 forwarded P2,700,000 a. P864,000 c. P968,000
Dec. SI No. Dec. RR No. b. P800,000 d. P814,000
27 965 40,000 27 1057 35,000
Dec. SI No. Dec. RR No. 4. Accounts receivable as of December 31, 2015
28 966 150,000 28 1058 65,000 a. P350,000 c. P370,000
Dec. SI No. Dec. RR No. b. P220,000 d. P120,000
28 967 10,000 29 1059 24,000
Dec. SI No. Dec. RR No. 5. Accounts payable as of December 31, 2015
31 969 46,000 30 1061 70,000 a. P418,000 c. P 400,000
Dec. SI No. Dec. RR No. b. P354,000 d. P1,218,000
31 970 68,000 31 1062 42,000
Dec. SI No. Dec. RR No.
31 971 16,000 31 1063 64,000 PROBLEM NO. 2
Dec. Closing Dec. Closing
31 entry (5,530,000) 31 entry (3,000,000) During your audit of the Makati Corporation for the year
P - P - ended December 31, 2015, you found the following
Note: SI = Sales Invoice RR = Receiving Report information relating to certain inventory transactions from
your observation of the clients physical count and review
of sales and purchases cutoff:
Inventory P600,000
Accounts receivable 500,000 a. Goods costing P180,000 were received from a vendor
Accounts payable 400,000 on January 3, 2016. The goods were not included in
the physical count. The related invoice was received
You observed the physical inventory of goods in the and recorded on December 30, 2015. The goods were
warehouse on December 31 and were satisfied that it was shipped on December 31, 2015, terms FOB shipping
properly taken. point.
b. Goods costing P200,000, sold for P300,000, were
When performing sales and purchases cut-off tests, you shipped on December 31, 2015, and were received by
found that at December 31, the last Receiving Report the customer on January 2, 2016. The terms of the
which had been used was No. 1063 and that no shipments invoice were FOB shipping point. The goods were
had been made on any Sales Invoices whose number is included in the ending inventory for 2015 and the sale
larger than No. 968. You also obtained the following was recorded in 2016.
additional information:
c. The invoice for goods costing P150,000 was received
a) Included in the warehouse physical inventory at and recorded as a purchase on December 31, 2015.
December 31 were goods which had been purchased The related goods, shipped FOB destination were
and received on Receiving Report No. 1060 but for received on January 2, 2016, but were included in the
which the invoice was not received until the following physical inventory as goods in transit.
year. Cost was P18,000.
d. A P600,000 shipment of goods to a customer on
b) On the evening of December 31, there were two trucks December 30, 2015, terms FOB destination, was
in the company siding: recorded as a sale upon shipment. The goods, costing
Truck No. CPA 123 was unloaded on January 2 of P400,000 and delivered to the customer on January 6,
the following year and received on Receiving 2016, were not included in the 2015 ending inventory.
Report No. 1063. The freight was paid by the
vendor. e. Goods valued at P250,000 are on consignment from a
Truck No. ILU 143 was loaded and sealed on vendor. These goods are included in the physical
December 31 but leave the company premises on inventory.
January 2. This order was sold for P100,000 per
f. Goods valued at P160,000 are on consignment with a
Sales Invoice No. 968.
customer. These goods are not included in the
c) Temporarily stranded at December 31 at the railroad physical inventory.
siding were two delivery trucks enroute to Brooks
Trading Corporation. Brooks received the goods, QUESTIONS:
which were sold on Sales Invoice No. 966 terms FOB
Based on the above and the result of your audit, answer
Destination, the next day.
the following:
d) Enroute to the client on December 31 was a truckload
1. The inventory as of December 31, 2015 is understated
of goods, which was received on Receiving Report No.
by
1064. The goods were shipped FOB Destination, and
a. P230,000 c. P140,000
freight of P2,000 was paid by the client. However, the
b. P190,000 d. P290,000
freight was deducted from the purchase price of
P800,000.

Page 3 of 8 www.prtc.com.ph AP.1901

EXCEL PROFESSIONAL SERVICES, INC.

2. The cost of sales for the year ended December 31, e) Through the carelessness of the
2015 is overstated by receiving department shipment in
a. P290,000 c. P440,000 early December 2015 was damaged
b. P110,000 d. P380,000 by rain. This shipment was later sold
in the last week of December at cost. 150,000
3. The profit for the year ended December 31, 2015 is
misstated by
REQUIRED:
a. P190,000 over c. P140,000 under
b. P 10,000 over d. P290,000 under 1. Gross profit rate for 11 months ended November 30,
2015.
4. The working capital as of December 31, 2015 is
misstated by 2. Cost of goods sold during the month of December
a. P190,000 over c. P140,000 under 2015 using the gross profit method.
b. P 10,000 over d. P290,000 under
3. December 31, 2015 inventory using the gross profit
method.
SOLUTION GUIDE
Over (Under)
Inventory COS Profit WC SOLUTION GUIDE:
a (180) 180 (180) (180)
Requirement No. 1
b 200 (200) (100) (100)
c 150 - - - Sales, up to 11/30 P12,600,000
d (400) 400 200 200 Less COS, up to 11/30:
e 250 (250) 250 250 Inventory, 1/1 P 1,3,500
f (160) 160 (160) (160) Net purchases, 11/30 10,110,000
(140) 290 10 10 TGAS 11,422,500
Inventory, 11/30 ( 1,342,500) 10,080,000
Gross profit P 2,520,000
PROBLEM NO. 3
Computation of adjusted amounts:
Your client, Mandaluyong Company, is an importer and
wholesaler. Its merchandise is purchased from several Inventory, N.P.,11/30 N.P.,12/31
suppliers and is warehoused until sold to customers. 11/30 (11 mos.) (12 mos.)

In conducting your audit for the year ended December 31, Unadjusted 1,425,000 10,125,000 12,000,000
2015, you were satisfied that the system of internal control
a - 112,500 -
was good. Accordingly, you observed the physical
inventory at an interim date, November 30, 2015 instead b - ( 15,000) ( 22,500)
of at year end. You obtained the following information
from your clients general ledger: c - ( 30,000) ( 30,000)

Inventory, January 1, 2015 P 1,312,500 d ( 82,500) ( 82,500) -

Physical inventory, November 30, 2015 1,425,000
Sales for 11 months ended Nov. 30, 2015 12,600,000 e - - -
Sales for the year ended Dec. 31, 2015 14,400,000 Adjusted 1,342,500 10,110,000 11,947,500
Purchases for 11 months ended Nov. 30,
2015 (before audit adjustments) 10,125,000
Purchases for the year ended Dec. 31, Requirement No. 2
2015 (before audit adjustments) 12,000,000 Sales, up to 12/31 P14,400,000
Less sales, up to 11/30 12,600,000
Your audit disclosed the following information: Sales - December 1,800,000
a) Shipments received in November and Sales without profit ( 150,000)
included in the physical inventory but Sales with profit 1,650,000
recorded as December purchases. P 112,500 x Cost ratio .8
b) Shipments received in unsalable COS with profit 1,320,000
condition and excluded from physical COS without profit 150,000
inventory. Credit memos had not Total P 1,470,000
been received nor chargebacks to
vendors been recorded: Requirement No. 3
Total at November 30, 2015 15,000 Inventory, 1/1 P 1,312,500
Total at December 31, 2015 Net purchases, 12/31 11,947,500
(including the November TGAS 13,260,000
unrecorded chargebacks) 22,500 Less cost of sales:
c) Deposit made with vendor and charged With profit
to purchases in October, 2015. [(14.4M -.15M)x.8] P11,400,000
Product was shipped in January, Without profit 150,000 11,550,000
2016. 30,000 Estimated inventory, 12/31 P 1,710,000
d) Deposit made with vendor and charged
to purchases in November, 2015.
Product was shipped FOB destination,
on November 29, 2015 and was
included in November 30, 2015
physical inventory as goods in
transit. 82,500

Page 4 of 8 www.prtc.com.ph AP.1901

EXCEL PROFESSIONAL SERVICES, INC.

PROBLEM NO. 4 QUESTIONS:

On April 21, 2015, a fire damaged the office and Based on the above and the result of your audit, answer
warehouse of Muntinlupa Company. The only the following:
accounting record saved was the general ledger, from 1. How much is the adjusted balance of Accounts Payable
which the trial balance below was prepared. as of April 21, 2015?
a. P286,000 c. P237,000
Muntinlupa Company
b. P106,000 d. P343,000
Trial Balance
March 31, 2015 2. How much is the net purchases for the period January
DEBIT CREDIT 1 to April 21, 2015?
a. P650,500 c. P660,000
Cash P 180,000 b. P673,500 d. P683,000
Accounts receivable 400,000
3. How much is the adjusted balance of Accounts
Inventory, Dec. 31, 2014 750,000 Receivable as of April 21, 2015?
Land 350,000 a. P400,000 c. P360,000
Building 1,100,000 b. P440,000 d. P354,000
Acc. depreciation P 413,000 4. How much is the sales for the period January 1 to April
Other assets 56,000 21, 2015?
a. P1,430,000 c. P1,510,000
Accounts payable 237,000 b. P1,519,500 d. P1,506,000
Accrued expenses 180,000
Share capital, P100 par 1,000,000 5. How much is the cost of sales for the period January 1
to April 21, 2015?
Retained earnings 520,000
a. P786,500 c. P830,500
Sales 1,350,000 b. P835,725 d. P828,300
Purchases 520,000
6. How much is the estimated inventory on April 21,
Operating expenses 344,000 . 2015?
Totals P3,700,000 P3,700,000 a. P570,000 c. P623,500
b. P587,775 d. P579,500
The following data and information have been gathered:
7. How much is the estimated inventory fire loss?
a. The companys year-end is December 31. a. P579,500 c. P535,000
b. P477,000 d. P512,000
b. An examination of the April bank statement and
cancelled checks revealed that checks written during
the period April 1 to 21 totaled P130,000: P57,000 PROBLEM NO. 5
paid to accounts payable as of March 31, P34,000 for
April merchandise purchases, and P39,000 paid for You are engaged in the regular annual examination of the
other expenses. Deposits during the same period accounts and records of Valenzuela Manufacturing Co.
amounted to P129,500, which consisted of receipts on for the year ended December 31, 2015. To reduce the
account from customers with the exception of a P9,500 workload at year end, the company, upon your
refund from a vendor for merchandise returned in recommendation, took its annual physical inventory on
April. November 30, 2015. You observed the taking of the
inventory and made tests of the inventory count and the
c. Correspondence with suppliers revealed unpaid inventory records.
obligations at April 21 of P106,000 for April
merchandise purchases, including P23,000 for The companys inventory account, which includes raw
shipments in transit on that date. materials and work-in-process is on perpetual basis.
d. Customers acknowledged indebtedness of P360,000 at Inventories are valued at cost, first-in, first-out method.
April 21. It was also estimated that customers owed There is no finished goods inventory.
another P80,000 that will never be acknowledged or
The companys physical inventory revealed that the book
recovered. Of the acknowledged indebtedness, P6,000
inventory of P1,695,960 was understated by P84,000. To
will probably be uncollectible.
avoid delay in completing its monthly financial statements,
e. The insurance company agreed that the fire loss claim the company decided not to adjust the book inventory until
should be based on the assumption that the overall year-end except for obsolete inventory items.
gross profit ratio for the past two years was in effect
during the current year. The companys audited Your examination disclosed the following information
financial statements disclosed the following regarding the November 30 inventory:
information: a. Pricing tests showed that the physical inventory was
2014 2013 overstated by P61,600.
Net sales P5,300,000 P3,900,000 b. An understatement of the physical inventory by P4,200
Net purchases 2,800,000 2,350,000 due to errors in footings and extensions.
Beginning inventory 500,000 660,000
c. Direct labor included in the inventory amounted to
Ending inventory 750,000 500,000
P280,000. Overhead was included at the rate of 200%
f. Inventory with a cost of P70,000 was salvaged and of direct labor. You have ascertained that the amount
sold for P35,000. The balance of the inventory was a of direct labor was correct and that the overhead rate
total loss. 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.

Page 5 of 8 www.prtc.com.ph AP.1901

EXCEL PROFESSIONAL SERVICES, INC.

Your audit also disclosed the following information about 4. A client maintains perpetual inventory records in both
the December 31 inventory: quantities and pesos. If the assessed level of control
a. Total debits to the following accounts during December risk is high an auditor will probably
were: a. Apply gross profit tests to ascertain the
Cost of sales P1,920,800 reasonableness of the physical counts.
Direct labor 338,800 b. Increase the extent of tests of controls relevant to
Purchases 691,600 the inventory cycle.
c. Request the client to schedule the physical
b. The cost of sales of P1,920,800 included direct labor of
inventory count at the end of the year.
P386,400.
d. Insist that the client perform physical counts of
inventory items several times during the year.
QUESTIONS:
Based on the above and the result of your audit, determine 5. The physical count of inventory of a retailer was higher
the following: than shown by the perpetual records. Which of the
following could explain the difference?
1. Adjusted amount of physical inventory at November 30
a. Inventory item has been counted but the tags
a. P1,715,560 c. P1,845,760
placed on the items had not been taken off the
b. P1,631,560 d. P1,722,560
items and added to the inventory accumulation
2. Adjusted amount of inventory at December 31 sheets.
a. P1,509,760 c. P1,502,760 b. Credit memos for several items returned by
b. P1,516,760 d. P1,425,760 customers had not been recorded.
c. No journal entry had been made on the retailers
3. Cost of materials on hand, and materials included in books for several items returned to its suppliers.
work in process as of December 31 d. An item purchased FOB shipping point had not
a. P819,560 c. P728,560 arrived at the date of the inventory count and had
b. P812,560 d. P942,760 not been reflected in the perpetual records.
4. The amount of direct labor included in work in process
as of December 31 6. Purchase cut-off procedures should be designed to test
a. P618,800 c. P338,800 whether all inventory
b. P232,400 d. P386,400 a. Purchased and received before year-end was paid
for.
5. The amount of factory overhead included in work in b. Ordered before year-end was received.
process as of December 31 c. Purchased and received before year-end was
a. P 772,800 c. P464,800 recorded.
b. P1,237,600 d. P777,600 d. Owned by the company is in the possession of the
company at year-end.

PROBLEM NO. 6 7. The audit of year-end inventories should include steps

Select the best answer for each of the following:
1. Which of the following is not one of the independent
auditor's objectives regarding the audit of inventories?
a. Verifying that inventory counted is owned by the
client.
b. Verifying that the client has used proper inventory
pricing.
c. Ascertaining the physical quantities of inventory on
hand.
d. Verifying that all inventory owned by the
client is on hand at the time of the count.
2. An auditor is most likely to inspect loan agreements
under which an entitys inventories are pledged to
support managements financial statement assertion of
a. Existence or occurrence.
b. Completeness.
c. Presentation and disclosure.
d. Valuation or allocation.
3. An auditor selected items for test counts while
observing a clients physical inventory. The auditor
then traced the test counts to the clients inventory
listing. This procedure most likely obtained evidence
concerning
a. Existence. c. Rights.
b. Completeness. d. Valuation.
to verify that the clients purchases and sales cutoffs
were adequate. These audit steps should be designed
to detect whether merchandise included in the physical
count at year-end was not recorded as a
a. Sale in the subsequent period
b. Purchase in the current period
c. Sale in the current period
d. Purchase in the subsequent period
8. What form of analytical review might uncover the
existence of obsolete merchandise?
a. Inventory turnover rates.
b. Decrease in the ratio of gross profit to sales.
c. Ratio of inventory to accounts payable.
d. Comparison of inventory values to purchase
invoices.
9. An auditor is most likely to learn of slow-moving
inventory through
a. Inquiry of sales personnel
b. Inquiry of warehouse personnel
c. Physical observation of inventory
d. Review of perpetual inventory records.
10. The auditor tests the quantity of materials charged to
work in process by tracing these quantities to
a. Cost ledgers.
b. Perpetual inventory records.
c. Receiving reports.
d. Material requisitions.

- now do the DIY drill -

Page 6 of 8 www.prtc.com.ph AP.1901

EXCEL PROFESSIONAL SERVICES, INC.

DO-IT-YOURSELF (DIY) DRILL

PROBLEM NO. 1
Jay Roy Retailing Ltd is a food wholesaler that supplies independent grocery stores. The company operates a perpetual
inventory system, with the first-in, first-out method used to assign costs to inventory items. Transactions and other
related information regarding two of the items (baked beans and plain flour) carried by Jay Roy Ltd are given below for
June 2015 the last month of the company's reporting period.
Baked beans Plain flour
Unit of packaging Case containing 25 x 410g cans Box containing 12 x 4kg bags
Inventory @ 1 June 2015 35,000 cases @ P19.60 62,500 boxes @ P38.40
Purchases 1. 10 June: 20,000 cases @ P19.50 per 1. 3 June: 15,000 boxes @ P38.45
case 2. 15 June: 20,000 boxes @ P38.45
2. 19 June: 47,000 cases @ P19.70 per 3. 29 June: 24,000 boxes @ P39.00
case
Purchase terms 2/10, n/30, FOB destination n/30, FOB destination
June sales 73,000 cases @ P28.50 95,000 boxes @ 40.00
Returns and allowances A customer returned 5,000 cases that had As June 15 purchase was unloaded, 1,000
been shipped in error. The customer's boxes were discovered damaged. A credit
account was credited for P142,500. of P38,450 was received by Jay Roy
Retailing Ltd.
Physical count at 30 June
2015 32,600 cases on hand 1,500 boxes on hand
Explanation of variance No explanation found assumed stolen Boxes purchased on 29 June still in transit
on 30 June
Net realizable value at 30
June 2015 P29.00 per case P38.50 per box

QUESTIONS: The following are some of the transactions that affected

the inventory of the Bolinao Company during 2015.
Based on the above and the result of your audit, answer
the following: Jan. 8 Bolinao purchased raw materials with a list
price of P200,000 and was given a trade
1. The inventory of baked beans as of June 30, 2015 at
discount of 20% and 10%; terms 2/15, n/30.
cost, as adjusted is
Bolinao values inventory at the net invoice
a. P641,860 c. P642,360
price
b. P642,220 d. P641,360
Feb. 14 Bolinao repossessed an inventory item from a
2. The inventory of plain flour as of June 30, 2015 at
customer who was overdue in making
cost, as adjusted is
payment. The unpaid balance on the sale is
a. P134,575 c. P57,675
P15,200. The repossessed merchandise is to
b. P993,675 d. P57,725
be refinished and placed on sale. It is
3. The amount of inventory shortage is expected that the item can be sold for P24,000
a. P27,440 c. P168,560 after estimated refinishing costs of P6,800.
b. P27,580 d. P 0 The normal profit for this item is considered to
be P3,200.
4. The total inventory to be recognized in the balance
sheet as of June 30, 2015 is Mar. 1 Refinishing costs of P6,400 were incurred on
a. P699,895 c. P 699,535 the repossessed item.
b. P700,035 d. P1,623,970
Apr. 3 The repossessed item was resold for P24,000
5. Which of the following is the best procedure for on account, 20% down.
identifying shortages of specific items in an inventory of
Aug. 30 A sale on account was made of finished goods
raw materials?
that have a list price of P59,200 and a cost
a. Compare the results of a physical inventory of
P38,400. A reduction of P8,000 off the list
raw materials with perpetual inventory
price was granted as a trade-in allowance. The
records.
trade-in item is to be priced to sell at P6,400 as
b. Compare inventory turnover rates with prevailing
is. The normal profit on this type of inventory
rates from previous years.
is 25% of the sales price.
c. Estimates inventory quantities by using the gross
profit method.
QUESTIONS:
d. Review internal controls for the physical protection
of inventories. Based on the above and the result of your audit, answer
the following: (Assume the client is using perpetual
inventory system)
PROBLEM NO. 2
6. The entry on Jan. 8 will include a debit to Raw
The Bolinao Company values its inventory at the lower of Materials Inventory of
FIFO cost or net realizable value (NRV). The inventory a. P200,000 c. P141,120
accounts at December 31, 2014, had the following b. P144,000 d. P196,000
balances.
7. The repossessed inventory on Feb. 14 is most likely to
Raw materials P 650,000 be valued at
Work in process 1,200,000 a. P14,000 c. P17,200
Finished goods 1,640,000 b. P24,000 d. P14,400

Page 7 of 8 www.prtc.com.ph AP.1901

EXCEL PROFESSIONAL SERVICES, INC.

8. The journal entries on April 3 will include a 2. December invoices totaling P13,200 were entered in
a. Debit to Cash of P24,000. the voucher register in December, but goods were not
b. Debit to Cost of Repossessed Goods Sold of received until January.
P14,000.
c. Credit to Profit on Sale of Repossessed Inventory End of the Year
of P3,600.
3. Sales of P43,000 (cost of P12,900) were made on
d. Credit to Repossessed Inventory of P20,400.
account on December 31 and goods delivered at that
9. The trade-in inventory on Aug. 30 is most likely to be time, but all entries relating to the sales were made
valued at on January 2.
a. P8,000 c. P6,000
4. Invoices totaling P15,000 were entered in the voucher
b. P4,800 d. P6,400
register in January, but the goods were received in
10. How much will be recorded as Sales on Aug. 30? December.
a. P51,200 c. P57,200
5. December invoices totaling P18,000 were entered in
b. P56,000 d. P57,600
the voucher register in December, but the goods were
not received until January.
PROBLEM NO. 3 6. Invoices totaling P12,000 were entered in the voucher
register in January, and the goods were received in
The cost goods sold section of the income statement
January, but the invoices were dated December.
prepared by your client for the year ended December 31
appears as follows:
Based on the preceding information, determine the net
Inventory, January 1 P 80,000 working paper adjustment that should be made for each of
Purchases 1,600,000 the following accounts:
Cost of goods available for sale 1,680,000
11. Retained earnings
Inventory, December 31 100,000
a. P13,200 credit c. P25,000 debit
Cost of goods sold P1,580,000
b. P11,800 debit d. P38,200 debit
Although the books have been closed, your working paper 12. Purchases
trial balance is prepared showing all accounts with activity a. P27,000 debit c. P25,000 credit
during the year. This is the first time your firm has made b. P28,000 debit d. P2,000 debit
an examination. The January 1 and December 31
inventories appearing above were determined by physical 13. Beginning inventory
count of the goods on hand on those dates and no a. P25,000 credit c. P13,200 debit
reconciling items were considered. All purchases are FOB b. P38,200 debit d. P11,800 debit
shipping point. 14. Accounts receivable
a. P43,000 debit c. P30,000 debit
In the course of your examination of the inventory cutoff, b. P43,000 credit d. No adjustment
both at the beginning and end of the year, you discovered
the following facts: 15. Sales
a. P43,000 debit c. P30,000credit
Beginning of the Year b. P43,000 credit d. No adjustment

1. Invoices totaling P25,000 were entered in the voucher

register in January, but the goods were received - end of AP.1901 -
during December.

Page 8 of 8 www.prtc.com.ph AP.1901