Chapter 3 Inventories

CHAPTER 3
Audit of Inventories
Audit Program for Inventories
Audit Objectives:
To determine that:
1. Inventories included in the statement of financial position physically exist.

2. Inventories represent items held for sale in the ordinary course of business, in the process of
production for such sale, or n the form of materials or supplies to be used in the production
process or in the rendering of services.
3. Inventory quantities include products, materials, and supplies owned by the company (on hand,
in transit, or stored at outside locations).
4. The entity has legal title or similar rights of ownership to the inventories.
5. Inventories are properly stated at the lower of cost and net realizable value.
6. Inventories are properly described and classified in the financial statements and disclosures are
adequate.
Audit Procedures:
1. Observe physical inventory counts

 Test shipping and receiving cutoff procedures.
 Account for al inventory tags and count sheets used in recording the physical
inventory counts.
 Test the clerical accuracy of inventory listings.
 Trace test counts recorded during the physical inventory observation to the
inventory listing.
 Reconcile physical counts to perpetual records and general ledger balances and
investigate significant variations.
 Test inventory transactions between a preliminary physical inventory date and the
end of the reporting period.
2. Obtain confirmation of inventories at locations outside the entity.

3. Review perpetual inventory records, production records and purchasing records for
indications of current activities.
4. Analytically review the relationship of inventory balances to recent purchasing, production,
and sales activities, and to anticipated sales volume.
5. Examine paid vendors’ invoices, consignment agreements, and contracts.
6. Review direct labor rates.
7. Test the computation of standard overhead rates.
8. Examine analysis of purchasing and manufacturing standard cost variances.
9. Examine inventory turnover analysis.
10. Review industry experience and trends.
11. Tour the plant, inquire of production and sales personnel concerning possible excess or
obsolete inventory items.
12. Examine sales after year-end and open purchase order commitments.
13. Obtain confirmation of inventories pledged under loan agreements.
14. Review drafts of the financial statements.
15. Compare the disclosures made in the financial statement to the requirements of PFRS.
PROBLEM 3-1
Scope of PAS 2: Inventories
Your client, ALBATROSS APARTMENTS COMPANY, has recently diversified its operations to include the
purchase and resale of housing units. Albatross has made some acquisitions of properties in line with its
expansion program. These properties are being prepared for resale in the succeeding month. The
company’s management is unsure of how these assets are to be properly classified.
The properties should be classified as

A. Property, Pant and equipment under PAS 16.
B. Inventory under PAS 2.
C. Investment property under PAS 40.
D. Intangible under PAS 38.
Solution 3-1
As defined in PAS 2, inventories are assets:

a. Held for sale in the ordinary course of business;
b. In the process of production for such sale; or
c. In the form of materials or supplies to be consumed in the production process or in the
rendering of services.
Because the properties are held for the purpose of resale in the ordinary course of business, they must
be classified as inventory under PAS 2.
Answer: B
PROBLEM 3-2
Inventories of a Service Provider
FIERCE HUNTER CONSULTANCY is a business consulting firm. The firm’s inexperienced accountant seeks
your advice on how to classify some of the firm’s costs – whether as inventory or expenses.
Which of the following are to be classified as inventory – either as direct expenditure or overhead
allocation?
A. Rent of office space, new laptop computers for consultants, travel allowance for consultants, and
management time.
B. Travel allowance for consultants, sales staff’s salaries and rent of office space.
C. Management time, administrative staff’s salaries, and travel allowance for consultants.
D. Rent of office space, sales and administrative staff’s salaries, new laptop computers for
consultants, management time, and travel allowance for consultants.
Solution 3- 2
Fierce Hunter, being a business consulting firm, is a service provider. When revenues of a service
provider have not been recognized, it has inventories. The costs of inventories primarily include
labor and other costs of personnel directly engaged in providing the service, including
supervisory personnel and attributable overheads. Labor and other costs of administrative and
sales personnel are not included but should be recognized as expense when incurred.
Answer: A
Problem 3-3
Computation of Adjusted Sales and Inventories
In testing the sales cut-off for the BIG LOVE COMPANY in connection with an audit for the year ended
December 31, 2010, you find the following information.
A physical inventory was taken as of the close of business on October 31, 2010. All customers are within
a three-day delivery area of the company’s plant. The unadjusted balances of Sales and Inventories are P
7, 500, 000 and P 330, 000 respectively.
Invoice FOB Terms Date Date Sales Cost

Number Shipped Recorded
6671 Destination Oct. 20 Oct. 31 P 3, 000 2, 700
6672 Shipping Oct. 31 Nov. 2 7, 500 6, 000
point
6673 Shipping Oct. 25 Oct. 31 5, 400 3, 600
point
6674 Destination Oct. 31 Oct. 29 12, 600 9, 300
6675 Destination Oct. 31 Nov. 2 27, 600 24, 000
6676 Shipping Nov. 2 Oct. 23 19, 500 15, 300
Point
6677 Shipping Nov. 5 Nov. 6 22, 500 17, 400
point
6678 Destination Oct. 25 Nov. 3 11, 700 6, 000
6679 Shipping Nov. 4 Oct. 31 25, 800 24, 600
point
6680 Destination Nov. 5 Nov. 2 15, 000 12, 000
1. Sales
A. P 7,461,300 C. P 7,449,600
B. P 7,455,900 D. P 7,487,100
2. Inventories
A. P 354,000 C. P 348,000
B. P 363,300 D. P 357,300
Solution 3 -3
Sales Inventories
Unadjusted balances P 7,500,000 P 330,000
Invoice No. 6672 7,500 --
6674 (12,600) 9,300
6675 -- 24,000
6676 (19,500) --
6678 11,700 --
6679 (25,800) --
Adjusted Balances: P 7,461,300 P 363,300
1. Sales P 7,461,300
Answer: B
2. Inventories P 363,300
Answer: B
Problem 3-4
Cut-off test for purchases
You are conducting a financial statement audit of the BEVERLY HILS CORP. for the year ended
December 31, 2010. You have observed the taking of physical inventory and have noted that all
merchandise actually received up to the close of business on December 2, 2010, has been
recorded on the inventory sheets. The total invoice cost of the items included in the physical
count is P 300,000.
The following purchase invoices have been recorded in the purchases Journal as follows:
December 2010
Invoice Amount Invoice FOB Term Date
Number Date Received
251 P10,248 Dec. 23 Destination Dec. 24
252 8,136 Dec. 23 Destination Dec. 29
253 3,123 Dec. 26 Shipping Dec. 30
Point
254 12, 600 Dec. 26 Shipping Jan. 5
point
255 13, 833 Jan. 2 Destination Dec. 31
256 6, 309 Dec. 31 Destination Jan. 4
257 3, 486 Dec. 27 Shipping Dec. 21
point
258 21, 162 Jan. 8 Shipping Jan. 2
point
259 34, 866 Dec. 22 Destination Dec. 28
January 2011
261 P 3,672 Dec. 28 Destination Jan. 4
263 17,712 Dec. 29 Shipping Dec. 31
point
264 14, 700 Jan. 2 Shipping Jan. 5
point
265 41, 400 Dec. 28 Shipping Jan. 4
point
266 17, 877 Dec. 30 Destination Jan. 6
Required:
1. Auditor’s adjusting entries, if any, required by the above information.
2. Show the detailed composition of the value of the inventory to be used on the financial
statements. Transportation-in charges on purchases averaged 6% during the year and are to
be included in the inventory valuation.
Solution 3-4
1. Adjusting Entries
December 31, 2010
a. Accounts payable 27,471
Purchases 27,471
Invoice No. 256 P 6, 309

258 21, 162
TOTAL: P 27, 471
b. Purchases 70, 503

Accounts payable 70, 503
Invoice No. 262 P 11, 391

263 17, 712
265 41, 400
TOTAL: P 70,503
c. Freight in 3,240
Estimated freight payable 3, 240
In transit
Invoice No 254 P 12,600
265 41, 400
TOTAL: P 54,000
*Average freight in x 6%
P 3, 240
2.
Balance per client invoice cost P 300,000
Add: Invoice No. 252 P 8,136
253 3,123
254 12,600
255 13,83
263 17,712
265 41,400 96,804
Corrected inventory at invoice cost
P 396,804
Add: Ave. freight in (6% x P396,804) 23,808
Adjusted Inventory: P 420,612
Problem 3-5
Determining Items to Include in Inventory
The GOAT COMPANY reviewed its inventories and found the following items:
1. In the shipping room was a product costing P13, 400 when the physical count was taken.
Because it was marked “Hold for shipping instructions”, it was not included in the count. The
customer order was dated December 15, but the product was shipped and the customer billed
on January 4, 2011.
2. On December 27, 2010, merchandise costing P 11, 648 was received and recorded. The invoice
accompanying the merchandise was marked “on consignment.”
3. The company received merchandise costing P4,625 on January 2, 2011. The invoice, which was
recorded on January 3, 2011, showed shipment was made under FOB shipping point on
December 31, 2010. The merchandise was not included in the inventory because it was not on
hand when the physical count was taken.
4. A product, fabricated to order for a particular customer, was completed and in the shipping
room on December 31. Although it was shipped on January 5, 2011. The customer was billed on
December 31, 2010, and it was excluded form the inventory.
5. Merchandise costing P16,666 was received on January 5, 2011 and the related purchase invoice
was recorded January 6. The shipment of this merchandise was made on December 31, 2010,
FOB Destination.
6. A product costing P150, 000 was sold on an installment basis on December 10, 2010. It was
delivered to the customer on that date. The product was included in inventory because Goat still
holds legal title. The company’s experience suggests that full payment on installment sales is
reasonably assured.
7. An item costing P65,000 was sold and delivered to the customer on December 29, 2010. The
goods were included in the inventory because the sale was with a repurchase agreement that
requires Goat to buy back the inventory on January 15, 2011.
Indicate which of the above items are to be included in the inventory balance at December 31, 2010.
State your reasons for the treatment you suggest.
Solution 3-5
1. Included - Merchandise, except “special orders”, should be included in the inventory until
shipped.
2. Excluded – Goat Company does not possess legal title because the merchandise was received on
a consignment basis.
3. Included – Because the purchase was made under FOB shipping point term, the merchandise
should e included in the inventory at the shipping date.
4. Excluded – A product that is manufactured for a particular customer (special order) is considered
sold upon its completion.
5. Excluded – The merchandise was purchased under FOB Destination term and was not received
until January 5, 2011.
6. Excluded – The sale is recognized even though legal title has not passed.
7. Included – This is actually a loan transaction with the inventory as collateral.
Problem 3-6
Determining Inventory Quantity
The management of PIG , INC. has engaged you to assist in the preparation of year-end (December 31)
financial statements. You are told that on November 30, the correct inventory level was 145,730 units.
During the month of December, sales totaled 138, 630 units including 40,000 units shipped on
consignment to AA Corp. A letter received from AA indicates that as of December 31, it has sold 15, 200
units and was still trying to sell the remainder.
A review of the December purchase orders to various suppliers shows the following:
Purchase Invoice Quantity Date Date Terms
Order Date in Units shipped Received
Date
12/31/1 01/02/1 4,200 01/02/1 01/05/1 FOB
0 1 1 1 Destination
12/05/1 01/02/1 3,600 12/17/1 12/22/1 FOB

0 1 0 0 Destination
12/06/1 01/03/1 7,900 01/05/1 01/07/1 FOB

0 1 1 1 Shipping
point
12/18/1 12/20/1 8,000 12/29/1 01/02/1 FOB
0 0 0 1 Shipping
point
12/22/1 01/05/1 4,600 01/04/1 01/06/1 FOB
0 1 1 1 Destination
12/27/1 01/07/1 3,500 01/05/1 01/07/1 FOB
0 1 1 1 Destination
Pig, Inc. uses the “passing of legal title” for inventory recognition.
1. Good purchases during December totaled

A. 11, 600 units C. 19, 500 units
B. 15, 800 units D. 8, 000 units
2. How many units were sold during December?

A. 138, 630 units C. 98, 630 units
B. 113, 830 units D. 153, 830 units
3. How many units should be included in Pig, Inc.’s Inventory at December 31, 2010?
A. 18, 700 units C. 43, 500 units
B. 39, 900 units D. 47, 700 units
4. Purchase cut-off procedures should be designed to test whether all inventory
A. Purchased and received before year-end was paid for.
B. Ordered before year-end was received.
C. Purchased and received before year end was recorded.
D. Owned by the company is in the possession of the company at year-end.
5. The audit of year –end physical inventories should include steps to verify that the client’s
purchases and sales cutoffs were adequate. The audit steps should b designed to detect whether
merchandise included in the physical count at year-end was mot recorded as a
A. Sale in the subsequent period.
B. Purchase in the current period
C. Sale in the current period
D. Purchase return in the subsequent period.
Solution 3-6
Inventory Quantity 145, 730

Add: December purchases:
PO Date:
12.05.10 Purchase under FOB Destination
received 12.22.10 3,600
12.18.10 Purchased under FOB Shipping
pt. ;shipped 12.29.10 8,000 11,600
Units available for sale 157,330
Less: Units sold in December:
Consignment Sales 15,20
0
Other Sales 98,63 113,830
0
Inventory Quantity, Dec. 31 43,500
1. Good purchased in December 11,600
Answer: A
2. Goods sold in December 113,830

Answer: B
3. Inventory quantity, December 31 43,500

Answer: C
4. Purchased and received before year-end was recorded

Answer: C
5. Sale in the current period.

Answer: C
PROBLEMS 3 – 7
Computing Cash Expenditure for Inventory
The following audited balances pertains to OWL COMPANY
Accounts payable:
January 1, 2010 P286,924
December 31, 2010 737,824
Inventory balance:
January 1, 2010 815,386
December 31, 2010 488,874
Cost of goods sold – 2010 1,859,082
How much was paid by Owl Company to its suppliers in 2010?

A. P2,636,494 C. P1,734,694
B. P1,081,670 D. P1,983,470
Solutions 3 – 7
Cost of goods sold – 2010 P1,859,082

Add: Inventory, December 31, 2010 488,874
Goods available for sale 2,347,956
Less: Inventory, January 1, 2010 815,386
Purchases 1,532,570
Add: Accounts payable, January 1, 2010 286,924
Total 1,819,494
Less: Accounts payable, December 31, 2010 737,824
Amount paid to suppliers in 2010 P1,081,670
Alternative computation:
Cost of goods sold P1,859,082

Less: Decrease in inventory (P815,386 – P488,874) 326,512 1
Purchases 1,532,570
Less: Increase in accounts payable
(P737,824 – P286,924) 450,900 2
Amount paid to suppliers in 2010 P1,081,670
1 The decrease in inventory indicates that more goods were sold than purchased during the year.
Hence, such decrease in inventory level is deducted from cost of goods sold to arrive at the cost
of purchases.
2 The increase in accounts payable balance shows that purchases on account are greater than
payments made to suppliers during the period. This explains why the increase in accounts
payable is deducted from purchases to arrive at the amount paid to suppliers during the period.
Answer: B
Problem 3-8
FIFO Costing Method
The following information was provided by the bookkeeper of COW, INC.:
1. Sales for the month of June totaled 286,000 units.

2. The following purchases were made in June:
Date Quantity Unit Cost
June 4 50,000 P13.00
8 62,500 12.50
11 75,000 12.00
24 70,000 12.40
3. There were 108,500 units on hand on June 1 with a total cost of P1,450,000.
Cow, Inc. uses a periodic FIFO costing system. The company’s gross profit for June was
P2,058,750.
1. How many units were on hand on June 30?

A. 80,000 C. 28,500
B. 177,500 D.149,000
2. What is the FIFO cost of the company’s inventory on June 30?

A. P1,025,000 C. P988,000
B. P1,016,230 D. P1,069,124
3. What is the total cost of goods sold in June?
A. P3,632,200 C. P3,580,126
B. P3,617,900 D. P3,661,250
4. The 286,000 units sold in June had a unit selling price of

A. P20 C. P12.70
B. P13 D. P7.20
5. An essential procedural control to ensure the accuracy of the recorded inventory

quantities is
A. Performing a gross profit test.
B. Testing inventory extensions.
C. Calculating unit costs and valuing obsolete or damaged inventory items in
accordance with inventory policy.
D. Establishing a cutoff for goods received and shipped.
Solution 3 – 8
1. Inventory quantity, June 1 108,500

Add: Units purchased during June 257,500
Less: Units sold during June 286,000
Inventory quantity, June 30 80,000
Answer: A
2. FIFO cost of June 30 inventory:
From Quantity Unit Cost Amount

June 24 purchase 70,000 P12.40 P868,000
June 11 purchase 10,000 12.00 120,000
80,000 P988,000
Answer: C
3. Composition of June of Cost of Goods Sold:
From Quantity Unit Cost Amount

Beginning invty. 108,500 P1,450,000
June 4 purchase 50,000 P13.00 650,000
June 8 purchase 62,500 12.50 781,250
June 11 purchase (SQUEEZE) 65,000 12.00 780,000
286,000 P3,661,250
Answer: D
4. Gross Profit P2,058,750

Add: Cost of goods sold 3,661,250
Sales: P5,720,000
Divide by units sold 286,000
Sales price per unit P 20
Answer: A
5. Establishing a proper cutoff for goods received and shipped will ensure that only goods owned
by the client are included in inventory.
Answer: D
Problem 3-9
Passage of Title
In your audit of the December 31,2010, financial statements of CHICKEN, INC., you
found the following inventory-related transactions.
a. Goods costing P50,000 are on consignment with a customer. These goods were not
included in the physical count on December 31, 2010.
b. Goods costing P16,500 were delivered to Chicken, Inc. on January 4,2011. The
invoice for these goods was received and recorded on January 10, 2011. The invoice
showed the shipment was made on December 29, 2010, FOB shipping point.
c. Goods costing P21,640 were shipped FOB Shipping point on December 31,2010, and
were received by the customer on January 2,2011. Although the sale was recorded in
2010, these goods were included in the 2010 ending inventory.
d. Goods costing P8,640 were shipped t a customer on December 31, 2010, FOB
destination. These goods were delivered to the customer on January 5, 2011, and
were not included in the inventory. The sale was properly taken up in 2011.
e. Goods costing P8,600 shipped by a vendor under FOB destination term, were
received on January 3, 2011, and thus were not included in the physical inventory.
Because the related invoice was received on December 31, 2010, this shipment was
recorded as a purchase in 2010.
f. Goods valued at P51,000 were received from a vendor under consignment term.
These goods were included in the physical count.
g. Chicken, Inc. recorded as a 2010 sale a P64,300 shipment of goods to a customer on
December 31, 2010, FOB destination. This shipment of goods costing P37,500 was
received by the customer on January 5, 2011, and was not included in the ending
inventory figure.
Prior to any adjustments, Chicken, Inc.’s ending inventory is valued at P445,000 and the
reported net income for the year P1,648,000.
1. Chicken’s December 31, 2010, inventory should be increased by

A. P8,000 C. P66,000
B. P40,000 D. P61,640
2. Which of the errors described in “a to g” will not affect the company’s net income for
2010?
A. Item a C. Item e
B. Item g D. Item b
3. What is Chicken’s adjusted net income for the year 2010?

A. P1,565,800 C. P1,615,800
B. P1,607,160 D. P1,666,800
4. Purchase cutoff procedures test the cutoff and completeness assertions. A company
should include goods in its inventory if it
A. Has sold the goods.
B. Holds legal title to the goods.
C. Has physical possession of the goods.
D. Has paid for the goods.
5. When title to merchandise in transit has passed to the audit client, the auditor
engaged in the performance of a purchase cutoff will encounter the greatest
difficulty in gaining assurance with respect to the
A. Quantity C. Price
B. Quality D. Terms
Solution 3-9
Inventory 2010 Net

December Income
31,2010
Per client P445,000 P 1,648,000
a) Goods on consignment with a customer 50,000 50,000
b) Goods purchased FOB shipping point 16,500 -
c) Goods sold FOB Shipping point (21,640) (21,640)
d) Goods sold FOB Destination 8,640 8,640
e) Goods purchased FOB Destination - 8,600
f) Goods received on consignment (51,000) (51,000)
g) Goods sold FOB Destination 37,500 (26,800)
Per audit P485,000 P 1,615,800
1. Inventory per audit P485,000
Inventory per client 445,000
Adjustment increase P40,000
Answer: B
2. In item b, the goods were purchased under FOB shipping point term and they were shipped
on December 29, 2010. The company’s failure to record the purchase in 2010 will overstate its
income by P16,500. However, since the goods were not included in the year-end physical count,
the clients ending inventory is understated and the company’s net income will be understated
by P166,500. Hence, the combined effect on 2010 net income is nil.
Answer: D
3. Adjusted Net Income for 2010 P1,615,800

Answer: C
4. Holds legal title to the goods.

Answer: B
5. Quality
Answer: B
Problem 3-10
Inventory Valuation: Lower of Cost or Net realizable value
ZEBRA MUSIKAHAN CO. sells musical instruments. In your audit of the company’s
financial statements for the year ended December 31, 2010, you have gathered the
following data concerning inventory.
At December 31, 2009, the balance in Zebra’s Inventory account was 502,000, and
the Allowance for Inventory Write down had a balance of 32,000. The relevant
inventory cost and market data at December 31, 2010 are summarized in the
schedule below.
Net
Replace Realizabl
Cost ment Sales e Normal
cost Price Value Profit
89,00
Guitars 0 86,000 91,500 87,000 6,400
Xylopho
nes 94,00 92,000 93,000 85,000 7,440
0
Trumpet 125,0 129,00 11,61

s 00 135,000 0 111,000 0
194,0 205,00 20,50

Violins 00 114,000 0 197,000 0
502,0 518,50 45,95

Total 00 427,000 0 480,000 0
1. What is the proper balance in the Allowance for Inventory Write down at
December 31, 2010?
A. P75,000 C. P32, 000
B. P22, 000 D. P25, 000
2. The adjusting entry on December 31, 2010, to arrive at the proper allowance
balance should be
A. Allowance for inventory write down 7, 000
Gain on inventory recovery 7, 000
B. Loss on inventory write down 7, 000
Allowance for inventory write down 7, 000
C. Allowance for inventory write down 3, 000
Gain on inventory recovery 3, 000
D. Loss in inventory write down 43, 000
Allowance for inventory write down 43, 000
Solution:
1.
Net Lower of
Cost Realizable cost
Value or NRV
Guitars 89,000 87,000 87,000

Xylophone
s 94,000 85,000 85,000
125,00
Trumpets 0 111,000 111,000
194,00
Violins 0 197,000 194,000
502,00
Total 0 480,000 477,000
*NRV (net realizable value) = estimated price –estimated cost of completion

and cost to sell.
Required allowance for inventory write down on December 31, 2010

(P502, 000 - P477, 000) P25, 000
Inventories are usually written down to net realizable value on an item by

item basis. The practice of valuing inventories at the lower of cost or net
realizable value is consistent with the view that assets should not be carried
in excess of amounts expected to be realized from their sale or use.
Answer: D
2. Allowance for Inventory Write down 7,000

Gain on inventory recovery 7,000
Required allowance (see no. 1) P25, 000
Allowance balance 32, 000
Decrease in allowance (P7, 000)
Answer: A
Problem 3-11
FIFO cost method
Gavial, Inc. sells electric stoves. It uses the perpetual system and allocates
cost to inventory on a first-in, first-out basis. The company’s reporting date is
December 31. At December 1, 2010, Inventory on hand consisted of 350
stoves at P820 each and 43 stoves at P850 each. During the month ended
December 31, 2010, the following inventory transactions occurred (all
purchase and sales transactions are on credit):
2010
De
c 1 Sold 300 stoves for P1200 each
Five stoves were returned by customers. They
3
had originally
Cost P820 each and were sold for P1200
each.
9 Purchased 55 stoves at P910 each.
1
0 Purchased 76 stoves at P960 each.
1
5 Sold 86 stoves for P1350 each.
1 Returned one damaged stove to the supplier.

7 This stove
had been purchased on December 9.
2
2 Sold 60 stoves for P1250 each.
Purchased 72 stoves at P980 each.
2
6
1. What is the FIFO cost of Gavial’s inventory on December 31, 2010?

A. P148, 930
B. P148,980
C. P133, 607
D. P126, 280
2. What is the cost of goods sold in December 2010?
A. P367, 230
B. P371,330
C. P366,320
D. P389,930
3. What is Gavial’s gross profit in December 2010?
A. P173, 770
B. P155,170
C. P177,870
D. P183,870
4. PAS 2 requires inventories to be measured at the lower of cost and net
realizable value. Which of the following are possible reasons why the net
realizable value of the stoves on hand at December 31, 2010 may be below
their cost?
I. Inventories are damaged.
II. Inventories are wholly or partially obsolete.
III. Selling prices have declined below cost.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
5. If the net realizable value of Gavial’s inventory on December 31, 2010 falls to
P920, the inventory value should be reduced by
A. P7, 300
B. P7,250
C. P8,162
D. P0
Solution:
PURCHASES COST OF GOODS SOLD BALANCE
No. No. No.
of unit Total of unit Total of unit Total
Dat Unit Unit
e Details units cost Cost s cost Cost s cost Cost
P82
1 Beginning bal 350 0 P287,000
43 850 36,550
P246,00
1 Sales 300 P820 0 50 820 41,000
43 850 36,550
3 Sales return (5) 820 (4,100) 55 820 45,100

43 850 36,550
P91
9 Purchases 55 0 P50,050 55 910 45,100
43 850 36,550
55 910 50,050
1
0 Purchases 76 960 72,960 55 910 45,100
43 850 36,550
55 910 50,050
76 960 72,960
1
5 Sales 55 820 45,100 12 850 10,200
31 850 26,350 55 910 50,050

76 960 72,960
1
7 Purchases (1) 910 (910) 12 850 10,200
54 910 49,140
76 960 72,960
2
2 Sales 12 850 10,200 6 910 5,460
48 910 43,680 76 960 72,960

2
6 Purchases 72 980 70,560 6 910 5,460
76 960 72,960
72 980 70,560
P192,66 P367,23
0 0 154 P148,980
1. Inventory, December 31, 2010 P148980

Answer: B
2. Cost of Goods sold P367, 230
Answer: A
3. Sales P545, 100
Less: Cost of Goods sold 367, 230
Gross Profit P177, 870
Answer: C
4. Possible reasons why net realizable value may decline below cost:
1. Inventories are damaged.
2. Inventories are wholly or partially obsolete.
3. Selling prices have declined below cost.
4. As part of an overall marketing strategy, the entity may decide to sell its
products for the time being at loss.
5. Errors in processing purchase transactions.
Answer: D
5. Cost of inventory on December 31, 2010 P148,980

Net realizable value (P920 x154) P141, 680
Decline in value P 7, 300
Answer: A
PROBLEM 3-12
FIFO Costing Method
The following information was obtained from the statement of financial position of
LION, INC.:
December 31, 2010 December 31, 2009

Cash P706, 600 P200,000
Notes receivable 0 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 periodic FIFO. The unit cost of inventory
during January 2010 was P65.20 and increased P0.20 per month during the year.
During 2010, payments to suppliers totaled P943, 400 and operating expenses
totaled P440, 000. The ending inventory for 2009 was valued at P65 per unit. Based
on the preceding information, determine the following:
1. Number of units sold

A. 18,900
B. 18,400
C. 16,000
D. 21,400
2. Total cost of purchases during 2010
A.P1, 173,600 C.P1,213,200
B.P1, 191, 600 D.P1, 193,400
3. Accounts payable balance at December 31, 2010

A. P793, 400 B. P393,400
C. P400,000 D. P419,800
4. Inventory quantity at December 31, 2010
A. 5,750 B. 6,550
C. 5,250 D. 8,150
5. FIFO cost of inventory on December 31, 2010
A. P352,500 B. P439,230
C. P385,900 D. P425,830
Solution:
1. Cash balance, Jan 1, 2010 P200,000
Add: Sales (squeeze) P1, 840,000
Collection of Notes receivable 50,000 1,890,000
Total 2,090,000
Less: Cash paid for operating expenseP440, 000
Cash paid on accounts payable 943,400 1,383,400
Cash balance, December 31, 2010 P706, 600
Sales during 2010 P1, 840,000

Divide by Sales price per unit ÷ P100
Number of units sold 18,400 units
Answer: B
2. Computation of total purchases during 2010
Month Unit Cost Quantity Total cost

January P65.20 1,500 P 97,800
February 65.40 1,500 98,100
March 65.60 1,500 98,400
April 65.80 1,500 98,700
May 66.00 1,500 99,000
June 66.20 1,500 99,300
July 66.40 1,500 99,600
August 66.60 1,500 99,900
September 66.80 1,500 100,200
October 67.00 1,500 100,500
November 67.20 1,500 100,800
December 67.40 1,500 101,100
Total 18,000 P1,193,400
*Alternative method
P65.20+67.40 x (1,500 units x12)
2
P66.30 x18, 000 units= P1, 193,400

Answer: D
3. Accounts payable, Jan. 1, 2010 P150, 000

Add: Purchases (see no. 2) 1, 193, 400
Total 1, 343, 400
Less: Cash paid on Accounts payable 943, 400
Accounts payable, Dec 31, 2010 P400, 000
Answer: C
4. Inventory quantity, Jan.1,2010( 399,750/65) 6, 150
Add: Purchases (see no. 2) 18, 000
Units available for sale 24, 150
Less: units sold (see no. 1) 18, 400
Inventory quantity, Dec. 31, 2010 5,750
Answer: A
5. Computation of inventory FIFO cost at December 31, 2010
From Qty. Unit cost Total cost

December purchase 1,500 P67.40 P101,100
November purchase 1,500 67.20 100,800
October purchase 1,500 67.00 100,500
September 1,250 66.80 83,500
purchases(SQUEEZE)
5,750 P385,900
Answer: C
PROBLEM 3-13
PERPETUAL INVENTORY SYSTEM
Your client took a complete physical inventory under your observation as of

December 15 and adjusted the inventory control account (perpetual inventory
method) to agree with the physical inventory. You have decided to accept the
balance of the control account as of December 31, after reflecting transactions
recorded therein from December 16 to December 31, in connection with your
financial statement audit for the year ended December 31.
Your examination of the sales cut-off as of December 15 and December 31 revealed

the following items not previously considered.
DATE
Cost Sales price Shipped Billed Credited to
Inventory
control
P5,650 P7,200 12/14 12/17 12/17
2,430 4,650 12/13 12/20 12/13
6,870 9,200 01/03 12/31 12/31
1. What adjusting journal entries, if any, would you make for each of these
items?
2. Periodic or cycle counts of selected inventory items are made at various
times during the year rather than a single inventory count at year-end. Which
of the following is necessary if the auditor plans to observe inventories at
interim dates?
A. Complete recounts by independent teams are performed
B. Perpetual inventory records are maintained.
C. Unit cost records are integrated with production accounting records
D. Inventory balances are rarely at low levels.
3. If the perpetual inventory records show lower quantities of inventory than the
physical count, an explanation of the difference might be unrecorded
A. Sales
B. Sales discounts
C. Purchases
D. Purchase discounts
4. The physical count of inventory of a retailer was higher than shown by the
perpetual records. Which of the following could explain the difference?
A. Inventory items had been counted but the tags placed on the items had
not been taken off the items and added to the inventory accumulation
sheets.
B. Credit memos for several items returned by customers had not been
recorded.
C. No journal entry had been made on the retailer’s books for several items
returned to its suppliers.
D. An item purchased “FOB shipping point” had not arrived at the date of the
inventory count and had not been reflected in the perpetual records.
5. 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
SOLUTION:
1. ADJUSTING JOURNAL ENTRIES
1. Inventory 5,650
Inventory over and short 5,650
2. Sales 9,200
Accounts receivable 9,200
3. Inventory 6,870
Cost of sales 6,870
No adjusting entry is needed for the item shipped on December 13 because
the entries to take up sale and cost of sale were appropriately made in the current
year.
2. Perpetual inventory records are maintained.
Answer: B
3. Purchases
Answer: C
4. Credit memos for several items returned by customers had not been
recorded.
Answer: B
5. Review of perpetual inventory records
Answer: D
PROBLEM 3-14
CORRECTING INVENTORY ERRORS: PERPETUAL INVENTORY SYSTEM
CAIMAN, INC. uses a perpetual inventory system and reports inventory at the lower
of FIFO cost or net realizable value. Caiman’s inventory control account balance at
June 30, 2010 was P442, 040. Physical count conducted on that day found inventory
on hand worth P440, 400. Net realizable value for each inventory item held for sale
exceeded cost. An investigation of the discrepancy disclosed the following:
1. Goods were P13, 200 held on consignment for Bugok, Co. had been included
in the physical count.
2. Goods costing P2, 400 were purchased on credit from Amor Co. on June 27,
2010 on FOB shipping point terms. The goods were shipped on June 28, 2010
but, as they had not arrived by June 30, 2010, were not included in the
physical count. The purchase invoice was received and processed on June 30,
2010.
3. Goods costing P4, 800 were sold on credit to Acero Co. for P7, 800 on June 28,
2010 on FOB Destination terms. The goods were still in transit on June 30,
2010. The sales invoice was processed and recorded on June 29, 2010.
4. Goods costing P5, 460 were purchased on credit (FOB Destination) from San
Miguel Co. On June 28, 2010, the goods were received on June 29, 2010 and
included in the physical count. The purchase invoice was received on July 2,
2010.
5. On June 30, 2010, Caiman sold goods costing P12, 600 on credit (FOB
Shipping point) terms to Pisaro Corp. for P19, 200. The goods were
dispatched from the warehouse on June 30, 2010 but the sales invoice had
not been processed at that date.
6. Damaged inventory items valued at P5, 300 were discovered during the
physical count. These items were still recorded on June 30, 2010 but were
omitted from the physical count records pending their write-off.
1. What is the adjusted inventory balance on June 30, 2010?

A. P424, 800
B. P421,200
C. P445,000
D. P434, 400
2. What adjustment should be made to Caiman’s sales revenue for the year
ended June 30, 2010?
A. Net increase of P11,400
B. Net decrease of P11,400
C. Increase of P19, 200
D. Decrease of P7,800
3. Caiman’s Accounts payable at June 31, 2010, should be
A. Decrease by P5,460
B. Increase by P5,460
C. Decrease by P5,300
D. Increase by P160
4. The “unlocated difference” between the perpetual balance and the physical
count amounts to
A. P5,300
B. P160
C. P1,640
D. P0
5. The entry to correct the error described in item no. 2 is
A. Purchases P2,400
Accounts payable P2,400
B. Inventory P2,400
Accounts payable P2,400
C. Inventory P2,400
Cost of Sales P2,400
D. No adjusting entry is necessary
SOLUTION:
1.
Perpetual inventory Physical count
Unadjusted balance P442, 040 P440,400
Goods held on (13,200)
consignment incorrectly
counted
Goods in transit, 2,400
purchased FOB shipping
point
Sale incorrectly 4,800 4,800
recorded, FOB
Destination
Unrecorded purchase 5,460
Unrecorded sale (12,600)
Damaged inventory (5,300)
Adjusted balance P434,400 P434,400
Answer: D
2. Item no. 3 sale recorded P(7,800)
Item no. 5 unrecorded sale 19, 200
Net adjustment-increase in sales P11, 400
Answer: A
3. Item no. 4-unrecorded purchase P5,460

Answer: B
4. There is no unlocated difference.
(Please refer to the reconciliation in no. 1)
Answer: D
5. The purchase was properly recorded on June 30, 2010. Hence, no adjusting
entry is necessary.
Answer: D
PROBLEM 3-15
PURCHASES CUT-OFF TESTS
You are engaged in an audit of the financial statements of the Carabao Co. for the
year ended October 31, 2010, and have observed the physical inventory count on
that date.
All merchandise received up to and including October 30, 2010 has been included in
the physical count. The following list of invoices is for purchases of merchandise and
is entered in the purchases journal for the months of October and November 2010,
respectively:
Amount FOB Date of invoice Date merchandise

received
OCTOBER 2010
P7,200 Destination October 19 October 21
4,400 Destination October 20 October 22
9,250 Shipping point October 20 October 30
3,900 Destination October 25 November 3
2,500 Destination November 4 October 29
NOVEMBER 2010
P2,000 Destination October 29 November 4
7,220 Shipping point November 2 October 30
12,820 Shipping point October 23 November 3
14,200 Shipping point October 23 November 3
15,000 Destination October 27 November 3
No perpetual inventory records are maintained, and the physical inventory count is
to be used as a basis for the financial statements.
1. What adjusting entry is necessary for the October 25 invoice?
A. Accounts payable 3,900
Purchases 3,900
B. Purchases 3, 900
Accounts payable 3,900
C. Inventory, End 3,900
Cost of Sales 3,900
2. What adjusting entry is necessary for the November 4 invoice?
A. Purchases 2, 500
Accounts payable 2, 500
B. Accounts payable 2, 500
Purchases 2,500
C. Cost of Sales 2,500
Inventory, end 2,500
3. The journal entry to adjust the purchases account should be
A. Debit to purchases of P45, 510
B. Credit to purchases of P3, 900
C. Net debit to purchases of P41, 610
D. Net credit to purchases of P41, 610
4. The net adjustment to accounts payable is
A. P3,900 increase
B. P3,900 decrease
C. P41, 610 increase
D. P41, 610 decrease
5. Carabao’s October 31 physical inventory should be increased by
A. P31, 870
B. P41, 610
C. P45,510
D. P73,480
SOLUTION:
1. Adjusting journal entries
a. Accounts payable 3,900
Purchases 3,900
b. Purchases 45,510
Invoice date Amount
October 30 P4,850
October 27 6,420
November 2 7,220
October 23 12,820
October 23 14,200
P45,510
Answer: A
2. No adjusting entry is necessary for the November 4 invoice.
Answer: D
3. Net debit to purchases of P41, 610(P45, 510-P3900).
Answer: C
4. Net adjustment to accounts payable-P41,610 increase.
Answer: C
5. The physical inventory at October 31 should be increased by P31, 870.
Invoice date Amount
October 30 P4, 850
October 23 12,820
October 23 14,200
P31,870
Answer: A
PROBLEM 3-16
COMPUTING INVENTORY TURNOVER AND AVERAGE DAYS TO SELL
INVENTORY
The following information was taken from the audited financial statements of
Horse Co.:
Inventories:
December 31, 2010 P791,000
December 31, 2009 744,000
December 31, 2008 720,800
2010 2009
Sales P10, 832, 000 P10,053,400
Cost of goods sold 4, 482,000 4,246,000
Net profit 952,800 734,800
Based on the preceding information, compute for the following:

1. 2009 inventory turnover
A. 5.80 times
B. 5.89 times
C. 5.71 times
D. 6.12 times
2. 2010 inventory turnover
A. 5.67 times
B. 5.53 times
C. 5.84 times
D. 6.02 times
3. 2009 average days to sell inventory
A. 63.9
B. 59.6
C. 62
D. 62.9
4. 2010 average days to sell inventory
A. 64.4
B. 62.5
C. 60.6
D. 66
SOLUTION:
1. Inventory turnover=cost of goods sold÷ average inventory
2009 inventory turnover=P4, 246,000÷P732,400*= 5.80 times
*P720, 800+P744, 000=P1, 464,800÷2
Answer: A
2. 2010 inventory turnover=P4,482,000÷P767,500*=5.84 times

*P744, 000+P791, 000=P1, 535,000÷2
Answer: C
3. Average days to sell inventory =365 days÷ inventory turnover
2009 average days to sell inventory=365 days ÷ 5.80=62.9 days
Answer: D
4. 2010 average days to sell inventory=365 days ÷ 5.84=62.5 days
Answer: B
PROBLEM 3-17
RECOGNIZING LOSS ON PURCHASE COMMITMENT
On November 15, 2010, Dog Corp. entered into a six-month, P800, 000 non
cancellable purchase commitments for its raw materials. On December 31,
2010, the market value of these raw materials had fallen to P650, 500.
Prepare the journal entry necessary on December 31, 2010.
SOLUTION:
Loss on purchase commitments 150, 000
Estimated liability on purchase commitments 150,000
(P800, 000-P650, 000)
PROBLEM 3-18
FIFO COST METHOD
Seal wholesaler wholesales food products to independent grocery stores. The
company uses the perpetual inventory system and assigns costs to inventory
on a first in, first-out basis. Transactions and other related information
regarding two of the items (baked beans and plain flour) carried by Seal are
given below for December 2010, the last month of the company’s reporting
period.
Baked beans Plain flour
Unit of packaging Case containing 25 x Box containing 12 x 4
410 g cans kg bags
Inventory @December 1 350 cases at P196 625 boxes @P384
Purchases 1. Dec 10: 200 cases 1. Dec 3: 150 boxes
at P195 @P384.50
2. Dec 19: 470 cases 2. Dec 15: 200 boxes
at P197 per case @ P384.50
3. Dec. 29: 240
boxes @ P390
Purchase terms 2/10,n/30, FOB Shipping n/30, FOB Destination
December sales 730 cases @P285 950 boxes@ P400
Returns and allowances A customer returned 50 As to Dec. 15 purchase
cases that had been was unloaded, 10 boxes
shipped in error. The were discovered
customer’s account was damaged. A credit of P3,
credited for P14, 250. 845 was received by
Seal wholesaler
Physical count at 326 cases on hand 15 boxes on hand
December 31
Explanation of variance No explanation found- Boxes purchased on
assumed stolen December 29 still in
transit on Dec. 31
Net realizable value @ P290 per case P385 per box
December 31
1. What is the cost of baked beans inventory that was assumed stolen?
A. P2,744
B. P4, 060
C. P2, 730
D. P2, 758
2. What is the cost of plain flour inventory on Dec. 31, 2010?
A. P5,850
B. P5,760
C. P5,767
D. P5,775
3. What is the total cost of Seal’s inventory (baked beans and plain flour)
on December 31, 2010?
A. P69, 989
B. P72,747
C. P77,301
D. P100, 315
4. What amount of loss on decline in value of inventory should be
recognized by Seal at the end of its reporting period?
A. P38,236
B. P7,910
C. P30,326
D. P0
5. PAS 2 requires inventory to be stated at the lower of cost and
A. Fair value
B. Net realizable value
C. Nominal value
D. Net selling price
SOLUTION:
1.
Inventory of baked beans, Dec 1 350
Purchases (200+470) 670
Sales (730)
Sales returns 50
Perpetual balance 340
Physical count 326
Assumed stolen inventory 14
Multiply by unit cost( from Dec. 19 X P197
purchase)
Cost of assumed stolen inventory P2,758
Answer: D
2. Cost of plain flour inventory, Dec 31, 2010
(15 boxes per count x P384.50*) P5, 767
*from December 15 purchase
Answer: C
3. Baked beans(326 cans x P197) P64, 222
Plain Flour (15 boxes x P384.50) 5, 767
Total FIFO cost P69, 989
Answer: A
4.
Qty cost NRV Lower
Baked beans 326 P64, 222 P94, 540 Cost
Plain flour 15 5,767 5,775 Cost
Answer: D
5. Inventories should be stated at the lower of cost and net realizable
value.
Answer: B
Problem 3-19
Correcting Inventory Errors
MONKEY CO’s annual net income for the period 2006-2010 is as follows;
Year Net Income (Loss)
2006 P150,000
2007 340,000
2008 645,000
2009 (100,000)
2010 250,000
A review of the company’s records reveals the following inventory errors:

2006 P 3,000 Overstatement, end of year
2007 6,000 Understatement, end of year
1. What is the adjusted net income in 2006?

A. P 150,000 C. P153,000
B. P 159,000 D. P147,000
A. P 331,000 C. 349,000
B. 337,000 D. 340,000
A. P 651,000 C. P 639,000
B. P 648,000 D. P 645,000
4. What is the adjusted net loss in 2009?
A. P 89,500 C. P 100,000
B. P 101,500 D. P 95,500

A. P 250,000 C. P 243,500
B. P 234,500 D. P 256,500
Solution 3-19
2006 2007 2008 2009 2010
Adjusted Net Income (loss) P150,000 P340,000 P645,000 P(100,000 P250,000
2006 ending inventory OS (3,000) 3,000
2007 ending inventory US 6,000 (6,000)
2009 ending inventory US 4,500
(4,500)
2010 ending inventory US ______ ______ ______ ______ 11,000
Adjusted Net Income (Loss) P147,000 P349,000 P639,000 P(95,500) P256,500
Adjusted net income (loss) in:

1. 2006
Answer: D P 147,000
2.2007
Answer: C P 349,000
3. 2008
Answer: C P 639,000
4. 2009
Answer: D P (95,500)
5. 2010
Answer: D P 256,500
Problem 3-20
Income Effect of Inventory Errors
The SNAKE, INC. reported income before taxes of P842,650 for 2009 and P 965,350 for 2010.
The company takes its annual physical count of inventory every December 31. Your audit
revealed the following information:
a. The price used for 1,500 units included in the 2009 ending inventory was P109. The correct
cost was P190 per unit.
b. Goods costing P 23,600 were received from a vendor on January 5, 2010. The shipment was
made on December 26, 2009, under FOB shipping point term. The purchase was recorded in
2009 but the shipment was not included in the 2009, ending inventory.
c. Merchandise costing P 64,750 was sold to a customer on December 29, 2009. Snake was
asked by the customer to keep the merchandise until January 3, 2010, when the customer would
come and pick it up. Although the sale was properly recorded in 2009, the merchandise was
included in the ending inventory.
d. A supplier sold merchandise valued at P 14,000 to Snake, Inc. The merchandise was shipped
FOB shipping point on December 29, 2009, and was received by Snake on December 31, 2009.
The purchase was recorded in 2010 and the merchandise was not included in the 2009 ending
inventory.
1. What is the adjusted income before taxes for the year ended December 31, 2009?
A. P 809,500 C. P 875,800
B. P 632,800 D. P 923,000
2. What is the adjusted income before taxes for the year ended December 31, 2010?
A. P 877,000 C. P 885,000
B. P 932,200 D. P 843,850
Solution 3-20
Reported income before taxes 2009 2010

P 842,650 P 965,350
Adjustments:
a. Transposition error in unit cost
(P 190-P 109 = P 81 X 1,500) 121,500 (121,500)
b. Goods purchased FOB shipping point 23,600 (23,600)
c. Goods sold in 2009 (64,750) 64,750
d. Goods purchased FOB shipping point ______ ______
Adjusted income before taxes P923,000 P885,000
1. Adjusted income before taxes in 2009 P 923,000

Answer: D
2. Adjusted income before taxes in 2010 P 885,000

Answer: C
Problem 3-21
Correcting the Physical Inventory Count
In your audit of the RABBIT, INC, you find that a physical inventory count on December 31,
2010, showed merchandise costing P 463,000 was on hand at that date. Your examination reveals
the following items were all excluded from the inventory per count.
1. Merchandise of P20, 000 which is held on consignment.
2. Goods costing P39, 500 that were shipped FOB shipping point on December 31, 2010. These
goods were delivered to the customer on January 6, 2011.
3. Goods costing P 16,800 that were shipped FOB destination to a customer on December 29,
2010. The customer received these goods on January 2, 2011.
4. Merchandise costing P 76,150 shipped by a seller FOB destination on December 28, 2010, and
received by Rabbit, Inc. on January 3, 2011.
5. Goods costing P16, 500 shipped by a vendor FOB seller on December 31, 2010, and received
by Rabbit, Inc. on January 4, 2011.
What is the amount that should appear on Rabbit, Inc’s statement of financial position as
inventory at December 31, 2010?
A. P 539,000 C. 535,800
B. P 519,000 D. P 496,300
Solution 3-21
Inventory per physical count P 463,000
Add: (3) Goods sold FOB destination P 16,800
(5) Goods purchased FOB seller 16,500 33,300
Adjusted inventory P 496,300
Answer: D
Problem 3-22
BIRD COMPANY is a manufacturer of small tools. The following information was obtained
from the company’s accounting records for the year ended December 31, 2010:
Inventory at December 31, 2010 (based on
Physical count in Bird’s warehouse at cost on 12/31/2010) P1,870,000
Accounts payable at Dec. 31, 2010 1,415,000
Net sales (sales less sales returns) 9,693,400
Your audit reveals the following information:
1. The physical count included tools billed to a customer FOB shipping point on December 31,
2010. These tools cost P 64,000 and were billed at P 78,500. They were in the shipping area
waiting to be picked up by the customer.
2. Goods shipped FOB shipping point by a vendor was in transit on December 31, 2010. These
goods with invoice cost of P 93,000 were shipped on December 29, 2010.
3. Work in process inventory costing P 27,000 was sent to a job contractor for further processing.
4. Not included in the physical count were goods returned by customers on December 31, 2010.
These goods costing P 49,000 were inspected and returned to inventory on January 7, 2011.
Credit memos for P 67,800 were issued to the customers at that date.
5. In transit to a customer on December 31, 2010, were tools costing P 17,000 shipped FOB
shipping point on December 26, 2010. A sales invoice for P 29,400 was issued on January 3,
2011, when Bird Company was notified by the customer that the tools had been received.
6. At exactly 5:00 pm on December 31, 2010, goods costing P 31,200 were received from a
vendor. These were recorded on a receiving report dated January 2, 2011. The related invoice
was recorded on December 31, 2010, but the good were not included in the physical count.
7. Included in the physical count were goods received from a vendor on December 27, 2010.
However, the related invoice for P 36,000 was not recorded because the accounting department’s
copy of the receiving report was lost.
8. A monthly freight bill for P 32,000 was received on January 3, 2011. It specifically related to
merchandise bought in December 2010, one-half of which was still in the inventory at December
31, 2010. The freight was not included in either the inventory or in accounts payable at
December 31, 2010.
1. Bird’s December 31, 2010, inventory should be increased by

A. P 216,200 C. P 252,200
B. P 233,200 D. P 123,200
2. Bird’s accounts payable balance at December 31, 2010, should be increased by
A. P 68,000 C. P 125,000
B. P 145,000 D. P 161,000
3. The amount of net sales to be reported on Bird’s income statement for the year ended
December 31, 2010, should be
A. P 9,547,100 C. P 9,591,000
B. P 9,576,500 D. P 9,595,300
4. Bird’s statement of financial position at December 31, 2010, should report accounts payable of
A. P 1,576,000 C. P 1,540,000
B. P 1,483,000 D. P 1,431,000
5. The amount of inventory to be reported on Bird’s December 31, 2010, statement of financial
position should be
A. P 2,103,200 C. P 2,122,200
B. P 2,086,200 D. P 1,993,200
Solution 3-22
Inventory A/P Net Sales
Unadjusted Balances P 1,870,000 P1,415,000 P9,693,400
Adjustments:
1. (78,500)
2. 93,000 93,000
3. 27,000
4. 49,000 (67,800)
5. 29,400
6. 31,200
7. 36,000
8. 16,000 32,000 ________
Adjusted Balances P 2,086,200 P 1,576,000 P 9,576,500
1. Inventory per Audit P2,086,200

Inventory per count 1,870,000
Net adjustment – increase P 216,200
Answer: A
2. Accounts payable per audit P1,576,000

Accounts payable per books 1,415,000
Net adjustment – increase P 161,000
Answer: D
3. Net sales for the year ended December 31, 2010 P9,576,500
Answer: B
4. Accounts payable, December 31, 2010 P1,576,000

Answer: A
5. Inventory, December 31, 2010 P2,086,200

Answer: B
Problem 3-23
In connection with your audit of the financial statement of ORANGUTANG CO. for the year
ended December 31, 2010, you obtained the following information from the company’s voucher
register.
Item No. Date Recorded Particulars Amount Account (Dr)
1. 12/23/10 Merchandise – shipped
12/23/10, FOB destination;
Received 1/2/11 38,000 Inventory
2. 01/04/11 Merchandise – shipped
12/29/10, FOB shipping point
Received 1/3/11 22,000 Inventory
1. The journal entry to adjust the company’s accounts payable as of December 31, 2010, should
be
A. Net debit to accounts payable of 16,000.
B. Net credit to accounts payable of 16,000.
C. Debit to accounts payable of 38,000.
D. Credit to accounts payable of 22,000.
2. The company’s purchases account should be increased (decreased) by:

A. (P38,000) C. P 16,000
B. P22, 000 D. P 0
3. What is the net adjustment to the company’s inventory account?

A. P 16,000 decrease C. P38,000 decrease
B. P16,000 increase D. P 22,000 increase
Solution 3-23
1. Adjusting Journal Entries (December 31, 2010)
1. Accounts payable 38,000

Inventory 38,000
2. Inventory 22,000
Answer: A
2. The company debits the inventory account when recording purchases.

Answer: D
3. Net adjustment to inventory – decrease P 16,000

Answer: A
Problem 3-24
The cost of goods sold section of the income statement prepared by your client for the year
ended December 31 appears as follows:
Inventory, January 1 P 80,000
Purchases 1,600,000
Cost of goods available for sale P1,680,000
Inventory, December 31 100,000
Cost of goods sold P1,580,000
Although the books have been closed, your working paper trial balance is prepared showing all
accounts with activity during the year. This is the first time your firm has made an examination.
The January 1 and December 31 inventories appearing above were determined by physical count
of goods on hand on those dates and no reconciling items were considered. All purchases are
FOB shipping point.
In the course of your examination of the inventory cutoff, both at the beginning and end of the
year, you discovered the following facts:
Beginning of the Year
1. Invoices totaling P 25,000 were entered in the voucher register in January, but the goods were
received during December.
2. December invoices totaling P 13,200 were entered in the voucher register in December, but
goods were not received until January.
End of the Year

3. Sales of P 43,000 (cost of P 12,900) were made on account on December 31 and goods
delivered at that time, but all entries relating to the sales were made on January 2.
4. Invoices totaling P15, 000 were entered in the voucher register in January, but goods were
received in December.
5. December invoices totaling P18, 000 were entered in the voucher register in December, but
the good were not received until January.
6. Invoices totaling P12, 000 were entered in the voucher register in January, and the goods were
received in January, but the invoices were dated December.
1. What working paper adjustment should be made at the end of the current year for item no. 1?
A. Purchases 25,000
Retained Earnings 25,000
B. Retained earnings 25,000

Purchases 25,000
C. Inventory, beginning 25,000

Purchases 25,000
D. No adjusting entry is necessary.
2. The working paper adjustment to correct the error described in item no. 3 should include a
debit to
A. Accounts receivable of P43, 000
B. Sales of P43, 000
C. Inventory of P12, 900
D. Retained earnings of P30, 100
3. The company’s statement of financial position as of the end of the current year should show
inventory of
A. P130, 000 C. P93, 200
B. P100, 000 C. P117, 100
4. What is the net adjustment to purchases of the current year?

A. P27, 000 increase C. P2, 000 increase
B. P25, 000 decrease D. P2, 000 decrease
5. The cost of goods sold for the current year is

A. P1, 561, 200 C. P1, 580, 000
B. P1, 533, 200 D. P1, 565, 000
Solution 3-24
SUMMARY OF WORKING PAPER ADJUSTMENTS

Debit (Credit)
Retained Beginning Accounts Accounts Ending

No Earnings Purchases Inventory Receivable Sales Payable
Inventory
1 P25, 000 (P25, 000)

2 (P13, 200) P13, 200
3 P43, 000 (P43, 0000)
4 P15, 000 (P15, 000)
5 P18, 000
6 P12, 000 (P12, 000) 12, 000
P18, 000 P2, 0000 P13, 000 P43, 000 (P43, 000) (P27, 000)P30, 000
1. Retained earnings 25, 000

Purchases 25, 000
Answer: B
2. Accounts receivable 43,000
Sales 43,000
Answer: A
3. Inventory per client-prepared income statement P100,000

Add: Item no. 5 P18,000
Item no. 6 12,000 30,000
Adjusted inventory, December 31 P130,000
Answer: A
4. Net adjustment to purchases- increase P2,000

Answer: C
5. Inventory, Jan. 1 (P80,000 + P 13,200) P 93,200

Add: Purchases ( 1,600,000+ 2,000) 1,602,000
Cost of goods available for sale 1,695,200
Less: Inventory, Dec.31 (100,000+ 30,000) 130,000
Cost of goods sold P 1,565,200
Answer: D
Problem 3-25
CHEETAH CORPORATION is a wholesale distributor of kitchen utensils. Unadjusted balances

obtained from Cheetah’s accounting records are as follows:
Inventory (based on physical count of goods

In Cheetah’s warehouse at December 31) P432,000
Accounts payable, December 31:
Vendor Terms Amount
Zonrox, Inc Net 30 P36,000
Yeba Corp. Net 30 28,000
Xak, Inc Net 30 83,000
Wais Co. Net 30 -
Velma, Inc Net 30 147,000
Sales P2,600,000
The following additional information was also obtained:

\
1. Goods held on consignment from Zonrox, Inc., the consignor, valued at P13,000 were in
the physical count of goods in Cheetah’s warehouse at December 31, and in Accounts
Payable balance as of December 31, 2010.
2. Goods costing P26,400 that were purchased from Wais Co. and paid for in December
were sold in the last week of the current year. The sale was properly recorded at P58,000
in December because the goods were in the shipping area of Cheetah’s warehouse to be
picked up by the customer, they were included in the physical count at December 31.
3. Retailers were holding goods costing P25,000 (retail price is P35,700) shipped by
Cheetah under consignment term.
4. Goods were in transit from Velma, Inc. to Cheetah on December 31. The cost of these
goods was P23,500, and they were shipped FOB shipping point on December 28.
Based on the preceding information, compute the adjusted balances of the following:
1. Inventory
A. P417,600 C. P467,500
B. P416,100 D. P441,100
2. Accounts Payable
A. P134,000 C. P157,500
B. P136,500 D. P170,500
3. Sales
A. P 2,600,000 C. P2,564,300
B. P2,635,700 D. P2,625,000
Solution 3-25
Inventory A/p Sales
Unadjusted Balances P432,000 P147,000 P2,600,000
Item No. 1 (13,000) (13,000)
2 (26,400)
3 25,000
4 23,500 23,500 __________
Adjusted Balances P441,100 P157,500 P2,600,000
1. Inventory P441,100
Answer: D
2. Accounts Payable P157,500

Answer: C
3. Sales P2,600,000
Answer: A
Problem 3-26
You have been engaged to audit the financial statements of CAMEL CORP. for the year ended
December 31, 2010. The company is engaged in the wholesale chemical business and makes all
sales at 30% above cost.
Shown below are portions of the company’s sales and purchases ledger accounts:
SALES
______________________________________________________________________________
______
Date Reference Amount Date Reference Amount
12/31 Closing Entry P1,221,027 Balance forwarded P946,720
12/28 SI No. 835 25,680
12/28 SI No. 836 14,196
12/28 SI No. 837 11,439
12/31 SI No. 839 65,436
12/31 SI No. 840 81,122
_________ 12/31 SI No. 841 76,434
P1,221,027 P1,221,027
(SI = Sales Invoice)
PURCHASES
Date Reference Amount Date Reference Amount

Balance Forwarded P418,600 12/31 Closing Entry P509,025
12/28 RR No. 949 14,500
12/30 RR No. 951 26,700
12/31 RR No. 952 34,550
12/31 RR No. 953 14,675
_________
P509,025 P509,025
(RR = Receiving Report)
Camel Corp. conducted its annual physical inventory at December 31, 2010. You observed the
physical count and were satisfied that it was properly taken.
When performing a sales and purchases cutoff test, you found the following:
a. All receiving reports and sales invoices are prepared in strict numerical sequence.
b. The last receiving report number used in calendar year 2010 is RR No. 953.
c. The sales invoice number corresponding to the last shipment made in 2010 is SI No. 838.
You also obtained the following additional information:
1. Included in the physical count at December 31 were chemicals costing P25,000 that have
been purchased and received on RR No. 950. As of December 31, 2010, no vendor
invoice has been received for these chemicals.
2. There were goods located in the shipping area of Camel Corp. on December 31, 2010, but
were not included in the physical count. These had been sold to XYZ Co. who had
already paid for the goods. The goods were picked up by XYZ Co.’s truck on January 3,
2011. The sale was recorded on SI No. 835.
3. At the close of business on December 31, 2010, there were two boxcars standing on
Camel Corp.’s siding:
(a) Boxcar 14344AA was unloaded on January 2, 2011. The receiving report for this
merchandise is RR No. 953. The freight was paid by the vendor.
(b) Boxcar 021261JR was loaded and sealed on December 31, 2010. The car was taken
from Camel Corp.’s siding on January 2, 2011. It contained a shipment of goods to
ABC Co. and was covered by SI No. 838. The sales price for this order was P65,000,
and transportation charges were to be paid by ABC Co.
4. Temporarily stranded on a distant railroad siding at December 31, 2010, was a boxcar of
chemicals en route to DEF Company. This was covered by SI No. 836. The terms of this
shipment were FOB destination.
5. Goods in transit from a vendor at December 31, 2010, were received on RR No. 954. The
terms of this shipment were FOB destination. Freight charges of P1,500 were paid by
Camel Corp. However, this P1,500 freight charge was deducted from the purchase price
of P16,800.
Determine the net adjustment to be made at December 32, 2010, for each of the following
accounts.
1. Sales
A. P222,992 debit C. P171,752 debit
B. P237,188 debit D. P208,796 debit
2. Accounts Receivable
A. P208,796 credit C. P237,188 credit
B. P222,992 credit D. P171,752 credit
3. Cost of sales
A. P50,595 credit C. P39,675 credit
B. P75,595 credit D. P25,000 debit
4. Accounts payable
A. P39,675 credit C. P25,000 debit
B. P39,675 debit D. P25,000 credit
5. Inventory
A. P60,920 debit C. P75,595 debit
B. P50,000 debit D. P64,675 debit
Solution 3-26
Adjusting Journal Entries

December 31, 2010
1. Sales 222,992
To reverse sales entries for unshipped goods.

SI No. 839 P 65,436
SI No. 840 81,122
SI No. 841 76,434
Total P222,992
2. Cost of sales 25,000

To record purchase of chemicals per RR No. 950.
3. Inventory 14,675
Cost of sales 14,675
To include in ending inventory goods purchased per RR No. 953.
4. Inventory 50,000
To include in ending inventory goods shipped to customers on January 2, 2011.

(P65,00/130% = P50,000)
5. Sales 14,196
To reverse entry made for goods in transit to customer shipped FOB destination.
6. Inventory 10,920
To include in ending inventory cost of goods in transit to customer shipped FOB

destination. (P14,196 / 130% = P10,920)
Debit (Credit)
Sales A/R COS A/P Inventory
AJE 1 P222,992 (P222.992)
2 P25,000 (P25,000)
3 (14,675) P14,675
4 (50,000) 50,000
5 _______ ________ (10,920) ________ 10,920
Net P237,188 (P237,188) (P50,595) (P25,000) P75,595
1. Sales P237,188 debit

Answer: B
2. Accounts Receivable P237,188 credit

Answer: C
3. Cost of sales P50,595 credit

Answer: A
4. Accounts payable P25,000 credit

Answer: D
5. Inventory P75,595 debit

Answer: C
Problem 3-27
Retail Inventory Method
The following information was taken from the records of CROCODILE BOUTIQUE for the
month of December:
Sales P198,000
Sales returns 4,000
Additional markups 20,000
Markup cancellations 3,000
Markdowns 18,600
Markdown cancellations 5,600
Freight-in 4,800
Purchases at cost 96,000
Purchases at retail 176,000
Purchase returns at cost 4,000
Purchase returns at retail 6,000
Beginning inventory at cost 60,000
Beginning inventory at retail 93,000
1. What is the cost of Crocodile’s ending inventory under the retail inventory (average cost)
method?
A. P40,880 C. P51,296
B. P43,070 D. P43,500
2. The difference in the calculation of the cost to retail percentage applying the conventional
retail method and the average cost method is that the average cost method
A. Excludes beginning inventory
B. Excludes markdowns
C. Includes markups
D. Includes markdowns
Solution 3-27
Cost Retail
Beginning inventory P60,000 P93,000
Purchases 96,000 176,000
Freight in 4,800
Purchase returns (4,000) (6,000)
Additional markups 20,000
Markup cancellations (3,000)
Markdowns (18,600)
Markdown cancellations _______ 5,600
Goods available for sale P156,800 267,000
Less: Net sales (P198,000 – P4,000) 194,000
Ending Inventory at retail P73,000
Cost ratio (P156,800 / P267,000) 59%
Ending inventory at cost (P73,000 x 59%) P43,070
Answer: B
3. Includes markdowns
Answer: D
Problem 3-28
Computing Inventory Fire Loss
On September 5, 2010, a fire damaged the warehouse of TIGER COMPANY. All inventory items
and many accounting records stored in the warehouse were destroyed. However, a portion of the
inventory could be sold for scrap. The company’s backup files provide the following
information:
Inventory, January 1 P750,000
Cash sales, January 1 – September 5 445,000
Purchases, January 1 – September 5 2,770,000
Collection of accounts receivable, January 1 – September 5 4,230,000
Accounts receivable, January 1 350,000
Accounts receivable, September 5 530,000
Salvage value of inventory 15,000
Gross profit ratio 32%
1. What is the estimated inventory fire loss?

A. P208,400 C. P203,600
B. P506,200 D. P218,600
Solution 3-28
Accounts receivable, September 5 P530,000
Add: Collections, January 1 – September 5 4,230,000
Total 4,760,000
Less: Accounts receivable, January 1 350,000
Sales on account 4,410,000
Add: Cash sales 445,000
Total sales 4,855,000
Cost of sales ratio(100-32%) 68%
Estimated cost of goods sold P3,301,400

Add: Purchases 2,770,000
Less: Estimated cost of goods sold 3,301,400
Estimated inventory, September 5 218,600
Less: Salvage value of inventory 15,000
Estimated inventory loss P203,600
Answer: C
Problem 3-29
CAT CORP. began operations in 2005. On July 15,2010, a fire broke out in the company’s
warehouse destroying all inventory and many accounting records. The following information
was assembled from the microfilmed records. All sales and purchases are on account.
Jan. 1, 2010 July 15, 2010

Inventory P287,700
Accounts receivable 261,180 P257,780
Accounts payable 176,280 245,700
Collections from customers
Jan. 1, 2010 – July 15, 2010 1,507,600
Payments to suppliers,
Jan.1, 2010 – July 15, 2010 975,000
Goods on consignment on
July 15, 2010, at cost 97,500
Goods in transit at July 15, 2010, purchased
FOB shipping point (included in the July 15 A/P bal) 34,750
The following is a summary of prior years’ sales and gross profit on sales:
2007 2008 2009
Sales P1,252,000 1,410,000 1,360,000
Gross profit 375,600 366,600 462,400
1. What is the company’s average gross profit ratio based on its prior years’ sales?
A. 26% C. 30%
B. 34% D. 29%
2. What is the company’s total sale for the period January 1 through July 15 of the current
year?
A. P1,504,200 C. P1,765,380
B. P1,511,000 D. P1,768,780
3. What is the company’s total purchase for the period January 1 through July 15 of the
current year?
A. P905,580 C. P1,044,420
B. P912,170 D. P1,009,670
4. What is the company’s estimated inventory on July 15, 2010, before the fire?
A. P186,605 C. P146,930
B. P244,430 D. P279,180
5. What is the inventory fire loss?

A. P146,930 C. P132,250
B. P186,605 D. P112,180
Solution 3 – 29
1. Average Gross Profit Ratio Based on Sales
2007 2008 2009

Gross profit P375,600 P366,600 P462,400
Divide by sales 1,252,000 1,410,000 1,360,000
Gross profit ratio 30% 26% 34%
Average gross profit ratio: (30%+26%+34%) = 30%
Answer: C
2. Estimated sales
Accounts receivable, July 15 P257,780

Add: Collections from customers 1,507,600
Total 1,765,380
Less: Accounts receivable, Jan 1 261,180
Estimated sales, January 1 – July 15 1,504,200
Answer: A
3. Estimated Purchases
Accounts payable, July 15 P245,700

Add: Payments to suppliers 975,000
Total: 1,22,700
LesS: Accounts payable, January 1 176,280
Estimated purchases, January 1 – July 15 1,044,420
Answer: C
4. Estimated Inventory, July 15 ( Before the Fire)

Add: Estimated purchases 1,044,420
Less: Estimated cost of goods sold
(P1,504,200 x 70%) 1,052,940
Estimated inventory, July 15 279,180
Answer: D
5. Inventory Fire Loss
Estimated Inventory, July 15 (see no. 4) P279,180

Less: Goods out on consignment P97,500
Goods in transit 34,750
Inventory fire loss P146,930
Answer: A
Problem 3-30
On April 15, 2010, fire damaged the office and warehouse of PEACOCK COMPANY. The trial balance
below was prepared from the general ledger which was the only accounting record saved.
Peacock Company
TRIAL BALANCE
March 31,2010
DEBIT CREDIT
Cash P 35,000
Held-for-trading securities 350,000
Inventory, December 31, 2009 225,000
Land 950,000
Building 800,000
Accumulated depreciation- Bldg. P 260,000
Machinery and equipment 130,500
Accumulated depreciation- mach. & Equip. 69,400
Other noncurrent assets 98,000
Other expense accruals 15,400
Ordinary share capital 1,220,600
Retained earnings 849,000
Sales 405,000
Purchases 156,000
Other operating expenses 26,000 -
P 2,890,500 P 2,890,500
The following additional information has been obtained:
1. The company’s year-end is December 31.
2. An examination of the April bank statement and cancelled checks revealed the following:
 Checks written, April 1-15 P 39,000

(P 17,000 paid to accounts payable as of March 31,
P10,200 for April merchandise shipments, and P 11,700
Paid for other operating expenses)
 Deposits, April 1-15 P 38,850
(consisted of collections from customers with the
exception of a P 2,850 refund from a supplier
for goods returned in April)
3. Communication with the suppliers disclosed unrecorded payables at April 15 of P 31,800 for
April merchandise shipments, including P 6,900 for goods in transit (FOB shipping point) on that
date.
4. Customers acknowledged indebtedness of P 108,000 (including P 1,800 that will probably be

uncollectible). It was also estimated that the customers owed another P 24,000 that will never
be acknowledged or recovered.
5. The insurance company agreed that the fire-loss claim should be based on the assumption that
the overall gross profit ratio for the past two years was in effect during the current year. The
company’s audited financial statements disclosed the following information:
Dec. 31, 2009 Dec. 31, 2008

Net sales P 1,590,000 P 1,170,000
Net purchases 840,000 705,000
Beginning inventory 150,000 225,600
Ending inventory 225,000 150,000
6. Inventory costing P 21,000 was salvaged and sold for P 10,500. The balance of the inventory was
a total loss.
Based on the preceding information, determine the following:
1. Gross profit ratio

a. 52% c. 44%
b. 33% d. 47%
2. Sales, January 1, 2010- April 15,2010

a. P429,000 c. P 405,000
b. P 381,000 d. P 453,000
3. Net purchases, January 1, 2010- April 15, 2010

a. P 195,150 c. P 188,250
b. P 198,000 d. P 204,900
4. Cost of inventory not destroyed by fire
a. P 27,900 c. P 10,500
b. P17,400 d. P 21,000
5. Inventory fire loss

a. P 175,950 c. P 138,570
b. P 165,450 d. P 149,070
Solution 3-30
1. Gross Profit Ratio
Net sales ( P 1,590,000 + P 1,170,000) P 2,760,000

Cost of goods sold:
Inventory, Jan. 1,2008 P 225,600
Add: Net purchases
( P 840,000 + P 705,000) 1,545,000
Less: Inventory, Dec.31, 2009 225,000 1,545,000
Gross profit P 1,214,400
Gross profit ratio ( P 1,214,400 / P 2,760,000) = 44%
Answer : C
2. Sales, January 1, 2010- April 15, 2010
Accounts Receivable
balance, March 31 120,00 36,000 Collections
Sales ( SQUEEZE) 48,000 ( P 38,850- P 2,850)
Balance, April 15 132,000*
*P 108,000 + P 24,000= 132,000
Sales, January 1- Match 31 (per trial balance) P 405,000

Sales, April 1- April 15 48,000
Total sales, January 1- April 15 P 453,000
Answer : D
3. Net purchases, Janauary 1,2010- April 15, 2010
Purchases, Jan. 1 – March 31, 2010 ( per trial balance) P 156,000

April merchandise shipments paid 10,200
Unrecorded purchases on account 31,800
Purchase returns ( 2,850)
Net purchases, Jan. 1 – April 15,2010 P 195,150
Answer : A
4. Cost of inventory not destroyed by fire
Salvaged inventory P 21,000

Goods in transit, purchased FOB shipping point 6,900
Total P 27,900

Inventory, Jan. 1, 2010 P 225,000
Add: Net purchases (see no. 3) 195,150
Goods available for sale 420,150
Less: estimated cost of goods sold
(P 453,000 x 56%) 253,680
Estimated inventory 166,470
Less: Salvaged inventory P 10, 500
Merchandise in transit 6,900 17,400
Inventory fire loss P 149,070
Answer: D
Problem 3-31
SHARK, INC. was organized on January 1, 2009. On December 31, 2010, the company lost most of its
inventory in a warehouse fire just before the year-end count of inventory was to take place. The
company’s records disclosed the following data:
2009 2010
Inventory, January 1 P 0 P 204,000
Purchases 860,000 692,000
Purchase returns and allowances 46,120 64,600
Sales 788,000 836,000
Sales returns and allowances 16,000 20,000
On January 1, 2010, Shark’s pricing policy was changed so that the gross profit rate would be three
percentage higher than the one earned in 2009.
Salvaged undamaged merchandise was marked to sell at P 24,000 while damaged merchandise marked
to sell at P 16,000 had an estimated realizable value of P 3,600.
1. What is the company’s gross profit rate beginning January 1, 2010?

a. 24% c. 17%
b. 21% d. 20%
2. How much is the inventory fire loss?

a. P 189,400 c. P 164,920
b. P 183, 640 d. P 254,000
Solution 3-31
1. Gross profit rate in 2010
Net sales ( P 788,000- P 16,000) P 772,000

Cost of goods sold:
Net purchases ( P 860,000- P 46,120) P 813,880
Less: Inventory, Dec. 31, 2009 204,000 609,880
Gross profit P 162,120
Gross profit rate – 2009 ( P 162,120/ P 772,000) 21%

Add: Increase in gross profit rate in 2010 3%
Gross profit rate- 2010 24%
Answer : A
Inventory, Jan. 1, 2010 P 204,000

Add: Net purchases ( P 692,000- P 64,000) 627,400
Goods available for sale P 831,400
Less: cost of goods sold
Net sales (P 836,000-P 20,000) P 816,000
Cost of sales ratio (100-24%) x 76% 620,160
Estimated ending inventory 211,240
Less: salvaged undamaged merchandise
(P 24,000 x 76%) P18,240
Net realizable value of damaged
Merchandise 3,600 21,840
Inventory fire loss P 189,400
Answer : A
Problem 3-32
Estimating Year-end Inventory
DINOSAUR, INC. Is an importer and wholesaler of car accessories. Its merchandise is purchased from a
number of suppliers and is warehoused until sold to customers.
In conducting his audit of Dinosaur’s financial statements for the year ended December 31,2010, the
company’s external auditory has determined that the internal control system is functioning effectively.
Accordingly , he observed the physical count of inventory at an interim date, November 30, 2010.
The following information was obtained from Dinosaur’s accounting records:
Inventory, January 1 P 175,000

Inventory, November 30 (per physical count) 190,000
Sales for 11 months ended November 30 1,680,000
Sales for year ended December 31 1,920,000
Purchases for 11 months ended November 30 1,350,000
Purchases for year ended December 31 1,600,000
The CPA’s audit disclosed the following information:
1. Shipments received in November and included in the

physical count at November 30 but recorded as
December purchases. P 15,000
2. Shipments received in unsalable condition and

excluded from physical inventory. The returns were
not recorded because no credit memos were received
from vendor.
Total at November 2,000

Total at December ( including the
November 30 unrecorded returns) 3,000
3. Deposit made with vendor and charged to purchases

In October. The goods were shipped in January 2011. 4,000
4. Deposit made with vendor and charged to purchases

In November. The goods were shipped FOB Destination
On November 29 and were included in the physical
Inventory as goods in transit. 11,000
5. Through the carelessness of the receiving department,

A December shipment was damaged by rain. These goods
Were later sold at cost in December. 20,000
Based on the preceding information, determine the following:
1. Adjusted net purchases up to

November 30 December 31
a. P 1,333,000 P 1,595,000
b. 1,350,000 1,582,000
c. 1,348,000 1,593,000
d. 1,352,000 1,592,000
2. Gross profit for 11 months ended November 30, 2010
a. P 347,000 c. P 332,000
b. P 336,000 d. P 351,000
3. Gross profit ratio for 11 months ended November 30, 2010

a. 19.8% c. 20.6%
b. 20.9% d. 20%
4. Cost of goods sold for the month of December 2010
a. P 192,000 c. P 194,680
b. P 196,000 d. P 196,440
5. Estimated inventory at December 31, 2010
a. P 228,000 c. P 245,000
b. P 232,000 d. P 227,560
Solution 3-32
1 Adjusted net purchases
Net Purchase as of
November 30 December 31
Unadjusted balances P 1,350,000 P 1,600,000
Shipments received in November
But recorded in December 15,000
Unrecorded purchase returns (2000) (3000)
Deposit in October recorded as purchase (4000) (4000)
December purchase recorded in November (11,000) -
Adjusted balances P 1,348,000 P1,593,000
Answer: C
2. Gross profit for 11 months ended November 30
Sales P 1,680,000
Cost of goods sold:
Inventory , January 1 P 175,000
Add: Net purchases ( see no. 1) 1,348,000
Less: Inventory, November 30
(P 190,000-P 11,000) 179,000 1,344,000
Gross profit P 336,000
Answer : B
3. Gross profit ratio for 11 months ended November 30
Gross profit ratio ( P 336,000/ P 1,680,000) 20%
Answer: D
4. Cost of goods sold in December
Sales for December ( P 1,920,000 – P 1,680,000) P 240,000
Regular sales ( P 220,000 x 80%) P 176,000

December sale at cost ( P 20,000 x 100%) 20,000
Total cost of goods sold in December P 196,000
Answer : B
5. Estimated Inventory at December 31
Inventory, Nov. 30 ( P 190,000- P11,000) P 179,000

Add: net purchases in December
(P,593,000- P 1,348,000) 245,000
Goods available for sale 424,000
Less: Cost of goods sold in December (see no. 4) 196,000
Estimated inventory at December 31 P 228,000
Answer: A
Problem 3-33
Effect of Inventory Errors on Current Ration and Net Income
At December 31, 2010, SHEEP CORP. Reported current assets of P 2,400,000 and current liabilities
of P1, 200,000. The following items may have been recorded incorrectly.
1. Goods purchased costing P 132,000 were shipped FOB Shipping point by a supplier on December
28. Sheep received and recorded the invoice on December 29, but the goods were not included
in Sheep’s physical inventory count of inventory because they were not received until January 4.
2. Goods purchased costing P 90,000 was shipped FOB Destination by a supplier on December 26.
Sheep received and recorded the invoice on December 31, but the goods were not included in
Sheep’s physical count of inventory because they were not received until January 2.
3. Goods held on consignment from Black Corporation were included in Sheep’s physical count of
inventory at P 78,000.
1. What is Sheep’s current ratio after corrections are made?

a. 2.21 to 1. c. 2.09 to 1.
b. 2.0 to 1. d. 2.04 to 1.
2. By what amount will income before taxes be adjusted up or down as a result of the corrections?
a. P 120,000 increase c. P 36,000 decrease
b. P 78,000 decrease d. P 144,000 increase
Solution 3-33
1. Current Asset Current Liabilities

Balance per books P 2,400,000 P 1,200,000
1. Goods in transit, purchased FOB
Shipping point, not included in
Physical count 132,000
2. Goods in transit, purchased FOB
Destination, recorded as purchase (90,000)
3. Goods held on consignment, included
In physical count (78,000)
P 2,454,000 P 1,110,000
Current ratio = current assets/current liabilities

= P 2,454,000/P 1,110,000
= 2.21
Answer: A
2. Net Income Adjustment

Increase
(decrease)
1. understatement of ending inventory P 132,000

2. overstatement of purchases 90,000
3. overstatement of ending inventory (78,000)
net increase in income before taxes P 144,000
answer: A
Problem 3-34
Adjustments to Correct Inventory & Related Accounts
A general ledger account is maintained by LIZARD COMPANY for each class of inventory. Such inventory
accounts are debited for increases during the period and credited for decreases. The following
transactions relate to Lizard’s Raw Materials Inventory account, which is debited for purchases of raw
materials and credited when they are requisitioned for use.
1. An invoice for P 48,600, terms FOB destination, was received and entered January 2, 2011. The
receiving report shows that the materials were received December 29, 2010.
2. Materials costing P 168,000, shipped FOB destination, were not entered by December 31, 2010,
“because they were in railroad car on the company’s siding on that date and had not been
unloaded.”
3. Materials costing P 43,800 were returned on December 29, 2010, to the creditor, and were
shipped FOB Shipping point. The return was entered on that date, even though the materials are
not expected to reach the creditor’s place of business until January 7, 2011.
4. An invoice for P 45,000, terms FOB shipping point, was received and entered December 31,
2010. The receiving report shows that the materials were received January 4, 2011, and the bill
of lading shows that they were shipped January 2, 2011.
5. Materials costing P 118,800 were received December 31, 2010, but no entry was made for them
because “they were ordered with a specified delivery of no earlier than January 9, 2011.”
Prepare correcting entries requires at December 31, 2010, assuming that the books have not
been closed. Ignore income taxes.
Solution 3-34
Adjusting Journal Entries

December 31, 2010
1. Raw materials inventory 48, 600

2. Raw materials inventory 168,000

3. No adjusting entry is necessary
4. Accounts payable 45,000

Raw materials inventory 45,000
5. Raw materials inventory 118,800

Problem 3-35
Adjustment to Correct Inventory & related Accounts
The following transactions occurred a few days before and after LEOPARD COMPANY’s fiscal year which
ends October 31. The company uses a periodic inventory system.
a. An invoice for P 75,000, terms FOB shipping point, was received and entered November
2. the invoice shows that the material was shipped October 31, but the receiving report indicates
receipt of goods on November 3.
b. An invoice for P 162,000, terms FOB destination, was received and entered October 25. The
receiving report indicates that the goods were received October 30.
c. An invoice for P 147,000, terms FOB shipping point, was received October 14 but never entered.
Attached to it is a receiving report indicating that the goods were received October 19. Across
the face of the receiving report is the following notation; “Merchandise not of same quality as
ordered- returned for credit October 20”.
d. An invoice for P 42,600, terms FOB shipping point, was received and entered October 28. The
receiving report attached to the invoice indicates that the shipment was received October 28 in
satisfactory condition.
e. An invoice for P 42, 600, terms FOB shipping point, was received and recorded November 3. The
receiving report indicates that the merchandise was received October 31.
You are instructed to review these transactions and to determine whether any correcting entries are to
be prepared and whether the inventory per physical count on October 31 should be adjusted.
1. Prepare any adjusting journal entries at October 31. Assume that the books have not been closed.
2. What is the net adjustment to Leopard’s inventory as determined by per physical count on
October31?
a. P 75,000 increase c. P 33,000 decrease
b. P 90,000 increase d. P 72,000 decrease
Solution 3-35
1. Adjusting Journal Entries

October 31
a. Purchases 75,000
b. No adjusting entry is necessary
c. Purchases 147,000

Purchase returns and allowance 147,000
d. No adjusting entry is necessary
e. Purchases 42,600
2. Increase in Inventory
Materials purchased under FOB shipping point term, shipped October 31, but received on
November 3. (see item a) P 75,000
Answer: A
Problem 3-36
Computation of Year-end Inventory
The physical inventory of BULL, INC. as of December 26, 2010, totalled P 945,000. You agreed on the
December 26 count as the company has a good internal control system. In trying to establish the
December 31 inventory, you noted the following transactions from December 27 to December 31, 2010.
Sales (30% marks up on cost) P 390,000
Credit memos issued:

For goods returned on:
December 15 10,800
December 20 18,000
December 29 15,600
For goods delivered to customers
Not in accordance with specifications 3,600
Credit memos received:
For good returned on:
December 10 5,400
December 26 4,200
December 28 6,000
Purchases:
Placed in stock 90,000
In transit, FOB shipping point 124,500
In transit, FOB destination 39,000
What is the inventory balance on December 31, 2010?

a. P 690,000 c. P 693,000
b. P 780,000 d. P 865,500
Solution 3-36
Inventory per count, December 26, 2010 P 945,000

Add (deduct)transactions, December 27-31, 2010:
Cost of goods sold ( 390,000/130%) (300,000)
Goods returned by customers on December 29
(P 15,600/ 130%) 12,000
Goods returned to suppliers on December 28 (6,000)
Purchases :
Placed in stock 90,000
In transit, purchased FOB shipping point 124,500
Inventory balance, December 31,2010 P 865,500
Answer: D
Problem 3-37
Computing Inventory Based on Incomplete Records
A recent fire severely damaged PENGUIN COMPANY’s administration building and destroyed many of its
financial records. You have been contracted by Penguin’s management to reconstruct as much financial
information as possible for the month of July. You learn that Penguin makes a physical inventory count at
the end of each month to determine monthly ending inventory values. You also find out that the
company applies the average method.
You are able to gather the following information by examining various documents:
Inventory, July 31 150,000 units

Total cost of goods available for sale in July P 356,400
Cost of goods sold during July P 297,000
Gross profit on sales for July P 303,000
Cost of inventory, July 1 P 0.35 per unit
The following are Penguin’s July purchases of merchandise:
Date Quantity Unit Cost

Ju ly 6 180,000 P 0.40
12 150,000 0.41
16 120,000 0.42
17 150,000 0.45
Penguin’s management has asked you to provide the following information:
1. Number of units on hand, July 1

a. 450,000 c. 169,714
b. 848,571 d. 300,000
2. Units sold during July

a. 600,000 c. 750,000
b. 300,000 d. 450,000
3. Unit cost of inventory at July 31

a. P 0.35 c. 0.419
b. P 0.396 d. 0.279
4. Values of inventory at July 31

a. P 59,400 c. P 62,850
b. P 52,500 d. P 41,850
Solution 3-37
1. Cost of goods available for sale P 356,400

Less: Purchases
Units Unit Cost Total Cost
180,000 P0.41 P 72,000
150,000 0.41 61,500
120,000 0.42 50,400
150,000 0.45 67,500 251,400
Cost of inventory, July 1 P 105,000
Divide by unit cost P 0.35
Inventory quantity, July 1 300,000
Answer : D
2. Inventory quantity, July 1 (see no. 1) 300,000

Add: Units purchased 600,000
Less: Inventory quantity, July 31 150,000
Units sold during July 750,000
Answer: C
3. Cost of goods available for sale P 356,400
Divide by units available for sale (see no.2) 900,000
Unit cost of inventory, July 31 P 0.396
Answer: B
Alternative computation
Cost of goods available for sale P 356,400

Less: Cost of goods sold 297,000
Cost of inventory, July 31 59,400
Divide by inventory quantity, July 31 150,000
Unit cost of inventory, July 31 P 0.396
4. Inventory value, July 31 (P 0.396 x 150,000 units) P 59,400
Answer: A

Chapter 3 Inventories

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Chapter 3 Inventories

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CHAPTER 3

Audit Program for Inventories

1. Inventories included in the statement of financial position physically exist.

1. Observe physical inventory counts

2. Obtain confirmation of inventories at locations outside the entity.

The properties should be classified as

As defined in PAS 2, inventories are assets:

Invoice FOB Terms Date Date Sales Cost

Invoice No. 256 P 6, 309

b. Purchases 70, 503

Invoice No. 262 P 11, 391

12/05/1 01/02/1 3,600 12/17/1 12/22/1 FOB

12/06/1 01/03/1 7,900 01/05/1 01/07/1 FOB

1. Good purchases during December totaled

2. How many units were sold during December?

Inventory Quantity 145, 730

2. Goods sold in December 113,830

3. Inventory quantity, December 31 43,500

4. Purchased and received before year-end was recorded

5. Sale in the current period.

The following audited balances pertains to OWL COMPANY

How much was paid by Owl Company to its suppliers in 2010?

Cost of goods sold – 2010 P1,859,082

Cost of goods sold P1,859,082

The following information was provided by the bookkeeper of COW, INC.:

1. Sales for the month of June totaled 286,000 units.

1. How many units were on hand on June 30?

2. What is the FIFO cost of the company’s inventory on June 30?

4. The 286,000 units sold in June had a unit selling price of

5. An essential procedural control to ensure the accuracy of the recorded inventory

1. Inventory quantity, June 1 108,500

2. FIFO cost of June 30 inventory:

From Quantity Unit Cost Amount

3. Composition of June of Cost of Goods Sold:

From Quantity Unit Cost Amount

4. Gross Profit P2,058,750

1. Chicken’s December 31, 2010, inventory should be increased by

3. What is Chicken’s adjusted net income for the year 2010?

Inventory 2010 Net

3. Adjusted Net Income for 2010 P1,615,800

4. Holds legal title to the goods.

Trumpet 125,0 129,00 11,61

194,0 205,00 20,50

502,0 518,50 45,95

Guitars 89,000 87,000 87,000

*NRV (net realizable value) = estimated price –estimated cost of completion

Required allowance for inventory write down on December 31, 2010

Inventories are usually written down to net realizable value on an item by

2. Allowance for Inventory Write down 7,000

9 Purchased 55 stoves at P910 each.

1 Returned one damaged stove to the supplier.

1. What is the FIFO cost of Gavial’s inventory on December 31, 2010?

3 Sales return (5) 820 (4,100) 55 820 45,100

31 850 26,350 55 910 50,050

48 910 43,680 76 960 72,960

1. Inventory, December 31, 2010 P148980

5. Cost of inventory on December 31, 2010 P148,980

December 31, 2010 December 31, 2009

1. Number of units sold

3. Accounts payable balance at December 31, 2010

Sales during 2010 P1, 840,000

Month Unit Cost Quantity Total cost