INVENTORIES

PROBLEM NO. 1

During your audit of the records of the GML Corporation for the year ended
December 31, 2006, the following facts were disclosed:

Raw materials inventory, 1/1/2006 P

720,200
Raw materials purchases 5,232,80
0
Direct labor 6,300,00
0
Manufacturing overhead applied (150% of direct labor) 9,450,00
0
Finished goods inventory, 1/1/2006 1,240,00
0
Selling expenses 8,112,80
0
Administrative expenses 7,377,20
0

Your examination disclosed the following additional information:

a) Purchases of raw materials

Month Units Unit Amount

Price
January – February 55,000 P17.76 P976,800
March – April 45,000 20.00 900,000
May – June 25,000 19.60 490,000
July – August 35,000 20.00 700,000
September – October 45,000 20.40 918,000
November – December 60,00 20.80 1,248,0
0 00
265,00 P5,232,8
0 00

b) Data with respect to quantities are as follows:

Units
Explanation 1/1/06 12/31/06
Raw materials 35,000 ?
Work in process (80% 0 25,000
completed)
Finished goods 15,000 40,000
Sales, 205,000 units
c) Raw materials are issued at the beginning of the manufacturing process.
During the year, no returns, spoilage, or wastage occurred. Each unit of
finished goods contains one unit of raw materials.

d) Inventories are stated at cost as follows:

 Raw materials – according to the FIFO method
 Direct labor – at an average rate determined by correlating total direct labor
cost with effective production during the period
 Manufacturing overhead – at an applied rate of 150% of direct labor cost

QUESTIONS:

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

1. The raw materials inventory as of December 31, 2006 is

a. P1,976,000 c. P936,000
b. P1,352,000 d. P897,800

2. The work in process inventory as of December 31, 2006 is

a. P1,780,000 c. P1,885,565
b. P1,751,294 d. P1,776,000

3. The finished goods inventory as of December 31, 2006 is

a. P3,352,000 c. P3,553,130
b. P3,334,000 d. P3,284,588

4. The cost of goods sold for the year ended December 31, 2006 is
a. P16,897,000 c. P15,857,000
b. P16,568,304 d. P16,875,000

5. In a manufacturing company, which one of the following audit procedures

would give the least assurance of the valuation of inventory at the audit date?
a. Testing the computation of standard overhead rates.
b. Examining paid vendors’ invoices.
c. Reviewing direct labor rates.
d. Obtaining confirmation of inventories pledged under loan agreements.

PROBLEM NO. 2

The NDL Company reported income before taxes of P370,000 for 2005 and
P526,000 for 2006. A later audit produced the following information.

(a) The ending inventory for 2005 included 2,000 units erroneously priced at
P5.90 per unit. The correct cost was P9.50 per unit.
(b) Merchandise costing P17,500 was shipped to the NDL Company, FOB shipping
point, on December 26, 2005. The purchase was recorded in 2005, but the
merchandise was excluded from the ending inventory because it was not
received until January 4, 2006.

(c) On December 28, 2005, merchandise costing P2,900 was sold for P4,000 to
Kapuso Corp. Kapuso had asked NDL to keep the merchandise for it until
January 2, when it would come and pick it up. Because the merchandise was
still in the merchandise was still in the store at year-end, the merchandise was
included in the inventory count. The sale was recorded in December 2005.

(d) Kapamilya Company sold merchandise costing P1,500 to NDL Company. The
purchase was made on December 29, 2005, and the merchandise was shipped
on December 30. Terms were FOB shipping point. Because NDL Company
bookkeeper was on vacation, neither the purchase nor the receipt of goods
was recorded on the books until January 2006.

QUESTIONS:

Based on the above and the result of your audit, answer the following: (Disregard
tax implications)

1. The December 31, 2005 Inventory is understated by

a. P26,200 c. P21,800
b. P23,300 d. P20,300

2. The corrected net income for 2005 is

a. P390,700 c. P377,400
b. P390,300 d. P391,800

3. The net income for 2006 is overstated by

a. P20,700 c. P21,800
b. P7,400 d. P 0

4. By what amount did the total income before taxes change for the 2 years
combined?
a. P4,000 c. P7,200
b. P21,800 d. P 0

5. The primary objective of an auditor's observation of the physical inventory count

is to
a. Allow the auditor to supervise the count so as to obtain assurance that
inventory quantities are reasonably accurate.
b. Obtain direct knowledge that the inventory exists and has been properly
counted.
c. Establish whether a particular inventory item or group of items has been
counted.
 d. Be able to appraise the quality of the merchandise on hand on the day of the
count.

6. Which of the following controls most likely addresses the completeness

assertion for inventory?
a. Work in process account is periodically reconciled with subsidiary records.
b. Employees responsible for custody of finished goods do not perform the
receiving function.
c. Receiving reports are prenumbered and periodically reconciled.
d. There is a separation of duties between payroll department and inventory
accounting personnel.