QUESTIONS IN INVENTORIES

PROBLEM NO. 1 - Computation of adjusted inventory

Ovation Company asks you to review its December 31, 2015, inventory values and
prepare the necessary adjustments to the hooks. The following information is given to
you.
a. Ovation uses the periodic method of recording inventory. A physical count reveals
P2,348,900 inventory on hand at December 31, 2015.
b. Not included in the physical count of inventory is P134,200 of merchandise
purchased on December 15 from Standing. This merchandise was shipped f.o.b.
shipping point on December 29 and arrived in January. The invoice arrived and
was recorded on December 31.
c. Included in inventory is merchandise sold to Oval on December 30, f.o.b.
destination. This merchandise was shipped after it was counted. The invoice was
prepared and recorded as a sale on account for P128,000 on December 31. The
merchandise cost P73,500, and Oval received it on January 3.
d. Included in inventory was merchandise received from Owl on December 31 with
an invoice price of I'156,300. The merchandise was shipped f.o.b destination.
The invoke, which has not yet arrived, has not been recorded.
e. Not included in inventory is P85,400 of merchandise purchased from Oxygen
Industries. The merchandise was received on December 31 after the inventory
had been counted. The invoice was received and recorded on December 30.
f. Included in inventory was P104,380 of inventory held by Ovation on consignment
from Ovoid Industries.
g. Included in inventory is merchandise sold to Kemp f.o.b. shipping point. This
merchandise was shipped after it was counted. The invoice was prepared and
recorded as a sale for P189,000 on December 31. The cost of this merchandise
was P105,200, and Kemp received the merchandise on January 5.
h. Excluded from inventory was carton labeled "Please accept for credit." This
carton contains merchandise costing P15,000 which had been sold to a customer
for P25,000. No entry had been made to the books to reflect the return, but none
of the returned merchandise seemed damaged.
REQUIRED:
Determine the adjusted balance of Inventory.

PROBLEM NO. 2 - Computation of adjusted inventory and related accounts

Bulls Company, a manufacturer of small tools, provided the following information from
its accounting records for the year ended December 31, 2015:
Inventory at December 31, 2015
(based on physical count on Dec. 31, 2015)
Accounts payable at December 31, 2015
Net sales (sales less sales returns)

P 980,000
586,000
10,048,000

Additional information follows:

a. Goods held on consignment from Chicago to Bulls amounting to 1'9,000, were
included in the physical count of goods in Bulls' warehouse on December 31,
2015, and in accounts payable at December 31, 2015.
b. Retailers were holding P50,000, at cost, of goods on consignment from Bulls, at
their stores on December 31, 2015.
c. Included in the physical count were goods billed to a customer FOB shipping
point on December 31, 2015. These goods had a cost of 1'31,000 and were
billed at P40,000. The shipment was on Bulls' loading dock waiting to be
picked .up by the cOritill011 Carrier.
d. P15,000 worth of parts which were purchased from Deng Co. and paid for in
December 2015 were sold in the last week of 2015 and appropriately recorded
as sales of P21,000. The parts were included in the physical count on December
31, 2015, because the parts were on the loading dock waiting to be picked up by
the customer.
e. Goods were in transit from a vendor to Bulls on December 31, 2015. The invoice
cost was P71,000, and the goods were shipped FOB shipping point on
December 29, 2015.
f. Work in process inventory costing P30,000 was sent to an outside processor for
plating on December 30, 2015.
g. Goods returned by customers and held pending inspection in the returned goods
area on December 31, 2015, were not included in the physical count. On January
8, 2016, the tools costing P32,000 were inspected and returned to inventory.
Credit memos totaling P47,000 were issued to the customers on the same date.
h. Goods shipped to a customer FOB destination on December 26, 2015, were in
transit at December 31, 2015, and had a cost of P21,000. Upon notification of

receipt by the customer on January 2, 2016, Bulls issued a sales invoice for
P42,000.
i. Goods, with an invoice cost of P27,000, received from a vendor at 5:00 p.m. on
December 31., 2015, were recorded on a receiving report dated January 2, 2016.
The goods Were not included in the physical count, but the invoice was included
in accounts payable at December 31, 2015.
j. Goods received from a vendor on December 26, 2015,. were included in the
physical count. However, the related P56,000 vendor invoice was not included in
accounts payable at December 31, 2015, because the accounts payable copy of
the receiving report was lost.
k. On January 3, 2016, a monthly freight bill in the amount of P6,000 was received.
The bill specifically related to merchandise purchased in December 2015, onehalf of which was still in the inventory at December 31, 2015. The freight charges
were not included in either the inventory or accounts payable at December 31,
2015.
REQUIRED:
1. Determine the following as of and for the year ended December 31, 2015:
a. Inventory
b. Net sales
c. Accounts payable
2. Adjusting entries as of December 31, 2015
PROBLEM NO. 3 - Computation of adjusted inventory and related accounts
You were engaged by Quezon Corporation for the audit of the company's financial
statements for the year ended December 31; 2015. The company is engaged in the
wholesale business and makes all sales at 25% over cost.
The following were gathered from the clients accounting records:
SALES
Date
Ref.
Amount
Balance forwarded
P 5,200,000
Dec. 27
SI No. 965
40,000
Dec. 28
SI No. 966
150,000
Dec. 28
SI No. 967
10,000
Dec. 31
SI No. 969
46,000
Dec. 31
SI No. 970
68,000
Dec. 31
SI No. 971
16,000
Dec. 31
Closing entry ( 5,530,000)
P
-

PURCHASES
Date
Ref.
Balance forwarded
Dec. 27 RR No. 1057
Dec. 28 RR No. 1058
Dec. 29 RR No. 1059
Dec. 30 RR No. 1061
Dec. 31 RR No. 1062
Dec. 31 RR No. 1063
Dec. 31 Closing entry

Amount
P2,700,000
35,000
65,000
24,000
70,000
42,000
64,000
( 3,000,000)
P
-

Note: SI= Sales Invoice

RR = Receiving Report
Inventory
Accounts receivable
Accounts payable

P600,000
500,000
400,000

You observed the physical inventory of goods in the warehouse on December 31 and
were satisfied that it was properly taken. When performing sales and purchases cut-off
tests, you found that at December 31, the last Receiving Report which had been used
was No. 1063 and that no shipments had been made on any Sales Invoices whose
number is larger than No. 968. You also obtained the following additional information:
a) Included in the warehouse physical inventory at December 31 were goods which
had been purchased and received on Receiving Report No. 1060 but for which
the invoice was not received until the following year. Cost was P18,000.
b) On the evening of December 31, there were two trucks in the company siding:
Truck No. CPA 123 was unloaded on January 2 of the following year and
receiving on Receiving Report No. 1063. The freight was paid by the
vendor.
Truck No. ILU 143 was loaded and sealed on December 31 but leave the
company premises on January 2. This order was sold for P100,000 per
Sales Invoice No. 968.
c) Temporarily stranded at December 31 at the railroad siding were two delivery
trucks enroute to Brooks Trading Corporation. Brooks received the goods, which
were sold on Sales Invoice No. 966 terms FOB Destination, the next day.
d) Enroute to the client on December 31 was a truckload of goods, which was
received on Receiving Report No. 1064. The goods were shipped FOB
Destination, and freight of P2,000 was paid by the client. However, the freight
was deducted from the purchase price of P800,000.
REQUIRED:
1. Determine the following as of and for the year ended December 31., 2015:
a. Sales
b. Accounts receivable
c. Inventory
d. Accounts payable
e. Purchases
2. Adjusting entries as of December 31, 2015

PROBLEM NO. 4 - Effect of men tory errors

During your audit of the Makati Corporation for the year ended December 31, 2015, you
found the following information relating to certain inventory transactions from your
observation of the client's physical count and review of sales and purchases cutoff:
a. Goods costing P180,000 were received from a vendor on January 3, 2016. The
goods were not included in the physical count. The related invoice was received
and recorded on December 30, 2015. The goods were shipped on December 31,
2015, terms FOB shipping point.
b. Goods costing P200,000, sold for P300,000, were shipped on December 31,
2015, and were received by the customer on January 2, 2016. The terms of the
invoice were FOB shipping point. The goods were included in the ending
inventory for 2015 and the sale was recorded in 2016.
c. The invoice for goods costing 1,150,000 was received and recorded as a
purchase on December 31, 2015. The related goods, shipped. FOB destination
were received on January 2, 2016, but were included in the physical inventory as
goods in transit.
d. A P600,000 shipment of goods to a customer on December 30, 2015, terms FOB
destination, was recorded as a sale upon shipment. The goods, costing
P400,000 and delivered to the customer on January 6, 2016, were not included
in the 2015 ending inventory.
e. Goods valued at P250,000 are on consignment from a vendor. These goods are
included in the physical inventory.
f. Goods valued at P160,000 are on consignment with a customer. These goods
are not included in the physical inventory.
REQUIRED:
1. Determine the effect of the foregoing errors on the following as of and for the
year ended December 31, 2015 (Indicate whether overstated or understated):
a. Inventory
b. Cost of sales
c. Profit
d. Working capital
2. Adjusting entries as of December 31, 2015

PROBLEM NO. 5 - Effect of inventory errors

You were engaged to perform an audit of the accounts of the Oh! Darling, Corporation
for the year ended December 31, 2015, and you observed the taking of the physical
inventory of the company on December 30, 2015. Only merchandise shipped by the
company to customers up to and including December 30, 2015 has been eliminated
from inventory. The inventory as determined by physical inventory count has been
recorded on the books by the company's controller. No perpetual inventory records are
maintained. All sales are made on an FOB shipping point basis. You are to assume that
all purchase invoices have been correctly recorded. The inventory was recorded
through the cost of sales method.
The following lists of sales invoices are entered in the sales books for the month of
December 2015 and January 2016, respectively.

a.)
b.)
c.)
d.)
e.)

f.)
g.)
h.)

Sales
Invoice
Amount
P 150,000
100,000
50,000
200,000
500,000

P 300,000
200,000
600,000

DECEMBER 2015
Sales invoice
date
Cost
Dec. 21
Dec. 31
Dec. 29
Dec. 31
Dec. 30

P100,000
40,000
30,000
120,000
280,000

JANUARY 2016
Dec. 31
P200,000
Jan. 02
115,000
Jan. 03
475,000

Date shipped
Dec. 31, 2015
Nov. 03, 2015
Dec. 30, 2015
Jan. 03, 2016
Dec. 29, 2015
(shipped to
consignee)
Dec. 30, 2015
Jan. 02, 2016
Dec. 31, 2015

REQUIRED:
1. Determine the effect of the foregoing errors on the following as of and for the
year ended December 31, 2015 (Indicate whether overstated or understated):
a. Inventory
b. Sales
c. Profit
d. Working capital
2. Adjusting entries as of December 31, 2015

PROBLEM NO. 6 - Cost flow assumptions

Orang Dampuan Co. wholesales bicycles. It uses the perpetual inventory system. The
company's reporting date is 31 December. At 1 December 2015, inventory on hand
consisted of 350 bicycles at P820 each and 43 bicycles at P850 each. During the month
ended 31 December 2015, the following inventory transactions took place (all purchase
and sales transactions are on credit):
Dec. 02

Sold 300 bicycles for P1,200 each.

03

Five bicycles were returned by a customer. They had originally cost P820
each and were sold for P1,200 each.

09

Purchased 55 bicycles at P910 each.

13

Purchased 76 bicycles at P960 each.

15

Sold 86 bicycles for P1,350 each.

16

Returned one damaged bicycles to the supplier. This bicycle had been
purchased on 9 December.

22

Sold 60 bicycles for P1,250 each.

26

Purchased 72 bicycles at P980 each.

29

Two bicycles, sold on 22 December, were returned by a customer. The

bicycles were badly damaged so it was decided to write them off. They had
originally cost P910 each.

REQUIRED:
Determine the cost of inventory as of December 31, 2015 and the cost of sale for the
month of December 2015 using:
1. First-in, first-out (FIFO) method
2. Moving average method

PROBLEM NO. 7 - Measurement of inventory and inventory shortage

Jay Roy. Retailing Ltd is a food wholesaler that supplies independent grocery stores.
The company operates a perpetual inventory system, with the first-in, first-out method
used to assign costs to inventory items. Transactions and other related information
regarding two of the items (baked beans and plain flour) carried by Jay Roy Ltd are
given below for June 2015 the last month of the company's reporting period.

Unit of packaging

Baked beans
Case containing 25 x 410g cans

Inventory @ 1 June 35,000 cases @ P19.60

2015

Plain flour
Box containing 12 x 4kg bags
62,500 boxes @ P38.40

Purchases

1. 10 June: 20, 000 case @ P19.50 1. 3 June: 15,000 boxes @

per case
P38.45
2. 19 June: 47,000 cases @ P19.70 2. 15 June: 20,000 boxes @
per case
P38.45
3. 29 June: 24,000 boxes @
P39.00

Purchase terms

2/10, n/30, FOB destination

n/30. FOB destination

June sales

73,000 cases @ P28.50

95,000 boxes @ P40.00

Return and
allowances

A customer returned 5,000 cases As June 15 purchase was

that had been shipped in error. The included, 1,000 boxes were
customers account was credited for discovered damaged. A credit
P142,500.
of P38,450 was received by
Jay Roy Retailing Ltd.

Physical count at
30 June 2015

32,600 cases on hand

1,500 boxes on hand

Explanation of
variance

No explanation found assumed

stolen

Based purchased on 2 June

still in transit on 30 June

Net realizable
value at 30 June

P29.00 per case

P38.50 per box

REQUIRED:
Determine the following:
1. Inventory shortage
2. Inventory to be reported at June 30, 2015 balance sheet

PROBLEM NO. 8 - Write down of inventory to net realizable value

Bangar Sales Company uses the first-in, first-out method in calculating cost of goods
sold for the three products that the company sells. At July 1, the balance of inventory
account was P658,500, and the allowance for inventory write down was P3,000.
Inventory and purchase information concerning the three products are given for the
month of July.
Date
July 1

Particulars
Inventory

C
50,000 units at
P6.00

P
30,000 units at
P10.00

A
65,000 units at
P0.90

July 1 15

Purchases

70,000 units at
P6.50

45,000 units at
P10.50

30,000 units at
P1.25

July 16 31 Purchases

30,000 units at
P8.00
50,000 units

45,000 units

July 1 31

Sales

July 31

Sales price
per unit

105,000 units
P8.00

P11.00

P2.00

On July 31, the company's suppliers reduced their prices from the most recent purchase
prices by the following percentages: product C, 20%; product P, 10%; product A, 8%.
Accordingly, Bangar decided to reduce its sales prices on all items by 10%, effective
August 1. Bangar's selling cost is 10% of sales price. Products C and P have a normal
profit (after selling costs) of 30% on sales prices, while the normal profit on product A
(after selling cost) is 15% of sales price.
REQUIRED:
Determine the following:
1. Inventory to be reported at July 31, 2015 statement of financial position.
2. Loss on inventory writes down for the month of July 2015 3. Cost of sales
including loss on inventory write down for the month of July 2015.

PROBLEM NO. 9 - Inventory estimation

Your client, Mandaluyong Company, is an importer and wholesaler. Its merchandise is
purchased from several suppliers and is warehoused until sold to customers.
In conducting your audit for the year ended December 31, 2015, you were satisfied that
the system of internal control was good. Accordingly, you observed the physical
inventory at an interim date, November 30, 2015 instead of at year end. You obtained
the following information from your client's general ledger:
Inventory, January 1, 2015
P
Physical inventory, November 30, 2015
Sales for 11 months ended Nov. 30, 2015
Sales for the year ended Dec. 31, 2015
Purchases for 11 months ended Nov. 30, 2015
(before audit adjustments)
Purchases for the year ended Dec. 31, 2015
(before audit adjustments)

1,312,500
1,425,000
12,600,000
14,400,000
10,125,000
12,000,000

Your audit disclosed the following information:

a.) Shipments received in November and included in the
physical inventory but recorded as December purchases
b.) Shipments received in unsalable condition and excluded
from physical inventory. Credit memos had not been
received nor charge backs to vendors been recorded:
Total at November 30, 2015
Total at December 31, 2015 (including the November
unrecorded charge backs)

112,500

15,000
22,500

c.) Deposit made with vendor and charged to purchases in

October 2015. Product was shipped in January, 2016

30,000

d.) Deposit made with vendor and charged to purchases in

November, 2015. Product was shipped FOB destination,
on November 30, 2015 and was included in November 30,
2015 physical inventory as goods in transit

82,500

e.) Through the carelessness of the receiving department

shipment in early December 2015 was damaged by rain.
This shipment was later sold in the last week of December
at cost.

150,000

REQUIRED:
Determine the December 31, 2015 inventory using the gross profit method.
PROBLEM NO. 10 - Inventory estimation
On April 21, 2015, a fire damaged the office and warehouse of Muntinlupa Company.
The only accounting record saved was the general ledger, from which the ianial balance
below was prepared.
Muntinlupa Company
Trial Balance
March 31, 2015
Debit
Credit
Cash
P180,000
Accounts receivable
400,000
Inventory, Dec. 31, 2014
750,000
Land
350,000
Building
1,100,000
Acc. Depreciation
P413,000
Other assets
56,000
Accounts payable
237,000
Accrued expenses
180,000
Share capital, P100 par
1,000,000
Retained earnings
520,000
Sales
1,350,000
Purchases
520,000
Operating expenses
344,000
Totals
P3,700,000 P3,700,000

The following data and information have been gathered:

a. The company's year-end is December 31.
b. An examination of the April bank statement and cancelled checks revealed that
checks written during the period April 1 to 21 totaled P130,000: P57,000 paid to
accounts payable as of March 31, P34,000 for April merchandise purchases, and
P39,000 paid for other expenses. Deposits during the same period amounted to
P129,500, which consisted of receipts on account from customers with the
exception of a P9,50() refund from a vendor for merchandise returned in April.
c. Correspondence with suppliers revealed unrecorded obligations at April 21 of
P106,000 for April merchandise purchases, including P23,000 for shipments in
transit on that date.
d. Customers acknowledged indebtedness of P360,000 at April 21, 2015. It was
also estimated that customers owed another P80,000 that will never be

acknowledged or recovered.. Of the acknowledged indebtedness, P6,000 will

probably be uncollectible.
e. 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:
2014
2013
Net sales
P5,300,000
P 3,900,000
Net purchases
2,800,000
2,350,000
Beginning inventory
500,000
660,000
Ending inventory
750,000
500,000
f. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The
balance of the inventory was a total loss.
REQUIRED:
Determine the estimated inventory fire loss.

PROBLEM NO. 11 - Roll-forward analysis

You are engaged in the regular annual examination of the accounts and records of
Valenzuela Manufacturing Co. for the year ended December 31, 2015. To reduce the
workload at year end, the company, upon your recommendation, took its annual
physical inventory on November 30, 2015. You observed the taking of the inventory and
made tests of the inventory count and the inventory records.
The company's inventory account, which includes raw materials and work-in-process is
on perpetual basis. Inventories are valued at cost, first-in, first-out method. There is no
finished goods inventory.
The company's physical inventory revealed that the book inventory of P1,695,960 was
understated by P84,000. To avoid delay in completing its monthly financial statements,
the company decided not to adjust the book inventory until year-end except for obsolete
inventory items.
Your examination disclosed the following information regarding the November 30
inventory:
1. Pricing tests showed that the physical inventory was overstated by P61,600.
2. An understatement of the physical inventory by P4,200 due to errors in footings
and extensions.

3. Direct labor included in the inventory amounted to P280,000. Overhead was

included at the rate of 200% of direct labor. You have ascertained that the
amount of direct labor was correct and that the overhead rate was proper.
4. The physical inventory included obsolete materials with a total cost of P7,000.
During December, the obsolete materials were written off by a charge to cost of
sales.
Your audit also disclosed the following information about the December 31 inventory:
a. Total debits to the following accounts during December were:
Cost of sales
P 1,920,800
Direct labor
338,800
Purchases
691,600
b. The cost of sales of P1,920,800 included direct labor of P386,400.
REQUIRED:
Compute for the following:
1. Adjusted amount of physical inventory at November 30, 2015
2. Adjusted amount of inventory at December 31, 2015 3. Breakdown of inventory
at December 31, 2015 as to:
a. Cost of materials on hand, and materials included in work in process
b. Direct labor included in work in process
c. Factory overhead included in work in process

PROBLEM NO. 12 Theory

Select the best answer for each of the following:
1. Which of the following is not one of the independent auditors objectives regarding
the audit of inventories?
a. Verifying that inventory counted is owned by the client.
b. Verifying that the client has used proper inventory pricing.
c. Ascertaining the physical quantities of inventory on hand.
d. Verifying that all inventory owned by the client is on hand at the time of the count.
2. The auditor should perform all of the following procedures related to the physical
inventory count except
a. Make counts of all items and record the counts for the subsequent tracing into
the clients inventory compilation.
b. Document the first and last tag numbers used.
c. Observe whether there is any physical movement of goods during the counting of
the inventory.
d. Take notations of all items that appear to be obsolete or are in questionable
condition.

3. An auditor is most likely to inspect loan agreements under which an entitys

inventories are pledged to support managements financial statement assertion of
a. Existence or occurrence.
b. Presentation and disclosure.
c. Completeness.
d. Valuation or allocation.
4. An auditor selected items for test counts while observing a clients physical
inventory. The auditor then traced the test counts to the clients inventory listing. This
procedure most likely obtained evidence concerning
a. Existence.
b. Completeness.
c. Rights.
d. Valuation.

5. A client maintains perpetual inventory records in both quantities and pesos. If the
assessed level of control risk is high an auditor will probably
a. Apply gross profit tests to ascertain the reasonableness of the physical counts.
b. Increase the extent of tests of controls relevant to the inventory cycle.
c. Request the client to schedule the physical inventory count at the end of the year.
d. Insist that the client perform physical counts of inventory items several times
during the year.

6. If the perpetual inventory records show lower quantities of inventory that the physical
count an explanation of the difference might be unrecorded.
a. Sales
b. Purchase returns
c. Purchases
d. Purchase discounts

7. 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 item has 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 retailers 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.
8. 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.
9. 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.

10. The audit of year-end inventories should include steps to verify that the clients
purchases and sales cutoffs were adequate. These audit steps should be designed
to detect whether merchandise included in the physical count at year-end was not
recorded as a
a. Sale in the subsequent period
b. Purchase in the current period
c. Sale in the current period
d. Purchase in the subsequent period

11. An auditors observation of physical inventories at the main plant at year-end

provides direct evidence to support which of the following objectives?
a. Accuracy of the priced-out inventory.
b. Evaluation of lower of cost or market test.
c. Identification of obsolete or damaged merchandise to evaluate allowance
(reserve) for obsolescence.
d. Determination of goods on consignment at another location.

12. What form of analytical review might uncover the existence of obsolete
merchandise?
a. Inventory turnover rates.
b. Decrease in ratio of gross profit to sales.
c. Ratio of inventory to accounts payable.
d. Comparison of inventory values to purchase invoices.