AUDIT OF INVENTORIES

EXERCISES

Problem I
Presented below is a list of items that may or may not reported as inventory in a
company’s December 31 balance sheet.
1. Goods out on consignment at another company’s store P800,000

2. Goods sold on installment basis 100,000

3. Goods purchased f.o.b. shipping point that are in transit at December 31 120,000

4. Goods purchased f.o.b. destination that are in transit at December 31 200,000

5. Goods sold to another company, for which our company has signed an agreement 300,000
to repurchase at a set price that covers all costs related to the inventory

6. Goods sold where large returns are predictable 280,000

7. Goods sold f.o.b. shipping point that are in transit December 31 120,000

8. Freight charges on goods purchased 80,000

9. Factory labor costs incurred on goods still unsold 50,000

10. Interest cost incurred for inventories that are routinely manufactured 40,000

11. Costs incurred to advertise goods held for resale 20,000

12. Materials on hand not yet placed into production 350,000

13. Office supplies 10,000

14. Raw materials on which a the company has started production, but which are not 280,000
completely processed

15. Factory supplies 20,000

16. Goods held on consignment from another company 450,000

17. Costs identified with units completed but not yet sold 260,000

18. Goods sold f.o.b. destination that are in transit at December 31 40,000

19. Temporary investment in stocks and bonds that will be resold in the near future 500,000

Question:
How much of these items would typically be reported as inventory in the financial statements?
a. P2,300,000 c. P2,260,000
b. P2,000,000 d. P2,220,000

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Problem II

The Anda Company is on a calendar year basis. The following data were found during your audit:

a. Goods in transit shipped FOB destination by a supplier, in the amount of P100,000, had been
excluded from the inventory, and further testing revealed that the purchase had been recorded.

b. Goods costing P50,000 had been received, included in inventory, and recorded as a purchase.
However, upon your inspection the goods were found to be defective and would be immediately
returned.

c. Materials costing P250,000 and billed on December 30 at a selling price of P320,000, had been
segregated in the warehouse for shipment to a customer. The materials had been excluded from
inventory as a signed purchase order had been received from the customer. Terms, FOB
destination.

d. Goods costing P70,000 was out on consignment with Hermie Company. Since the monthly
statement from Hermie Company listed those materials as on hand, the items had been excluded
from the final inventory and invoiced on December 31 at P80,000.

e. The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB point of
shipment on December 31. However, this inventory was found to be included in the final inventory.
The sale was properly recorded in 2017.

f. Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at
December 31, and were not included in the inventory. A review of the customer’s purchase order set
forth terms as FOB destination. The sale had not been recorded.

g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not arrived
as yet. However, these materials costing P170,000 had been included in the inventory count, but no
entry had been made for their purchase.

h. Merchandise costing P200,000 had been recorded as a purchase but not included as inventory.
Terms of sale are FOB shipping point according to the supplier’s invoice which had arrived at
December 31.
Further inspection of the client’s records revealed the following December 31, 2018 balances:
Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable, P690,000; Net sales,
P5,050,000; Net purchases, P2,300,000; Net income, P510,000.

QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balances of following as of
December 31, 2018:
1. Inventory
a. P1,230,000 c. P1,550,000
b. P1,650,000 d. P1,480,000

2. Accounts payable
a. P710,000 c. P810,000
b. P540,000 d. P760,000

3. Net sales
a. P4,550,000 c. P4,730,000
b. P4,650,000 d. P4,970,000

4. Net purchases
a. P2,370,000 c. P2,150,000
b. P2,420,000 d. P2,320,000

5. Net income
a. P220,000 c. P540,000
b. P290,000 d. P550,000

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Problem III

During your audit of the records of the Manaoag Corporation for the year ended
December 31, 2018, the following facts were disclosed:

Raw materials inventory, 1/1/2018 P 720,200

Raw materials purchases 5,232,800
Direct labor 4,900,000
Manufacturing overhead applied (150% of direct labor) 7,350,000
Finished goods inventory, 1/1/2018 1,240,000
Selling expenses 8,112,800
Administrative expenses 7,377,200

Your examination disclosed the following additional information:

a) Purchases of raw materials
Month Units Unit Price Amount
January – February 55,000 P17.76 P 976,800
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 60,000 20.80 1,248,000
265,000 P5,232,800

b) Data with respect to quantities are as follows:

Units
Explanation 1/1/18 12/31/18
Raw materials 35,000 ?
Work in process - 25,000
(80% completed)
Finished goods 15,000 40,000
Sales, 200,000 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, 2018 is
a. P992,000 c. P 936,000
b. P888,000 d. P1,040,000

2. The work in process inventory as of December 31, 2018 is

a. P1,496,000 c. P1,746,000
b. P1,514,000 d. P1,776,000

3. The finished goods inventory as of December 31, 2018 is

a. P2,793,600 c. P3,553,130
b. P3,334,000 d. P2,812,000

4. The cost of goods sold for the year ended December 31, 2018 is
a. P16,897,000 c. P14,077,000
b. P14,161,400 d. P13,911,400

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Theories:

1. Otso Manufacturing Corporation mass produces eight different products. The controller, who is
interested in strengthening internal controls over the accounting for materials used in production, would
be most likely to implement
a. A separation of duties among production personnel.
b. A perpetual inventory system.
c. An economic order quantity (EOQ) system.
d. A job order cost accounting system.

2. Which of the following control procedures would most likely be used to maintain accurate perpetual
inventory records?
a. Independent matching of purchase orders, receiving reports, and vendors' invoices.
b. Independent storeroom count of goods received.
c. Periodic independent reconciliation of control and subsidiary records.
d. Periodic independent comparison of records with goods on hand.

3. The accuracy of perpetual inventory records may be established in part by comparing perpetual
inventory records with
a. Purchase requisitions. c. Receiving reports.
b. Purchase orders. d. Vendor payments.

4. The auditor tests the quantity of materials charged to work in process by tracing these quantities to
a. Receiving reports. c. Materials requisition forms.
b. Perpetual inventory records. d. Cost ledgers.

5. An auditor would analyze inventory turnover rates to obtain evidence concerning management’s
assertion about
a. Valuation or allocation. c. Presentation and disclosure.
b. Rights and obligations. d. Completeness

6. In auditing inventories, a major objective relates to the existence assertion. Of the following audit
procedures relating to inventories, which does not support the existence assertion?
a. The auditor reviews the client's inventory-taking instructions for such matters as proper arrangement of
goods, separation of consigned goods, and limits on movements of goods during inventory.
b. The auditor observes the client's inventory and performs test counts as appropriate.
c. The auditor confirms inventories not on the premises.
d. The auditor performs a lower of cost or market test for major categories of inventory.

7. 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. Obtaining confirmation of inventories pledged under loan agreements.
b. Testing the computation of standard overhead rates.
c. Examining paid vendors' invoices.
d. Reviewing direct labor rates.

8. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to obtain
evidence that
a. No goods held on consignment for customers are included in the inventory balance.
b. No goods observed during the physical count are pledged or sold.
c. All goods owned at year end are included in the inventory balance
d. All goods purchased before year end are received before the physical inventory count.

9. Which of the following items should not be included in a physical inventory?

a. Materials in transit from vendors.
b. Goods in a private warehouse.
c. Goods received for repairs under warranty.
d. Consignment to an agent.

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