5 Questions Inventory

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 client’s 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 customer’s 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)

P

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 auditor’s objectives regarding the audit of inventories? a. Verifying that inventory counted is owned by the client. b. Verifying that the client has used proper inventory pricing. c. Ascertaining the physical quantities of inventory on hand. d. Verifying that all inventory owned by the client is on hand at the time of the count. 2. 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 client’s 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 entity’s inventories are pledged to support management’s 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 client’s physical inventory. The auditor then traced the test counts to the client’s 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 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. 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 client’s 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 auditor’s 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.