Audit of Inventories - Part 2

 

  PROBLEM NO. 5  5  –  – Inventory Estimation  – Gross Profit Rate method; Theft of Inventory  Inventory   DFC Inc., owner of a trading company, engaged your services as auditor. There is a discrepancy between the company`s income and the sales volume. The owner suspects that the staff is committing theft. You are to determine whether or o r not this is true. Your investigations revealed the following. 1.  Physical inventory, taken December 31, 2020 under your observation showed that cost was P265,000. The inventory on January 1, 2020 showed cost of P390,000. 2.  The average gross profit rate was 40% of net sales. 3.  The accounts receivable as of January 1, 2020 were P135,000. During 2020, accounts receivable written off during the year amounted to P10,000. Accounts receivable as of December 31, 2020 were P375,000. 4.  Outstanding purchase invoices amounted amounted to P300,000 at the end of 2020. At the beginning of 2020 they were P375,000. 5.  Receipts from customers during 2020 amounted to P3,000,000. 6.  Disbursements to merchandise creditors amounted to P2,000,000. Questions: Based on the above and the result of your adult, determined the following 1.  The total sales in 2020 is a.  P3,240,000 c. P3,250,000 b.  P3,230,000 d. P 2,770,000 2.  The total purchased in 2020 is a.  P 2,000,000 b.  P 2,075,000

c. P1,950,000 d. P 1,925,000

3.  The amount of inventory shortage as of December 31, 2020 is a.  P106,000 c. P100,000 b.  P175,000 d. P 0

 

PROBLEM NO. 6 - Gross Profit Rate Method In conducting your audit of RJE Corporation, a company engaged e ngaged in import and wholesale business, for the fiscal year ended June 30, 30 , 2020, you determined that its internal control system was good. Accordingly, you observed the physical inventory at an interim date, May 31, 2020 instead of at June 30,2020. You obtained the following information from the company`s general ledger. Sales for eleven months ended May 31, 2020 Sales for the fiscal year ended June 30, 2020 Purchased for eleven months ended May 31, 2020 20 20 (before audit adjustments) Purchases for the fiscal year ended June 30,2020 Inventory, July 1, 2019 Physical inventory, May 31, 2020

P1,344,000 1,536,000 1,080,000 1, 280,000 140,000 220,000

Your audit disclosed the following additional information. (1). Shipments costing P12,000 were received in May and included in the physical inventory but recorded as June purchases. (2). Deposit of P4,000 made with vendor and charged to purchase in April 2020. Product Pr oduct was shipped in July 2020. (3). A shipment in June was damaged through the carelessness c arelessness of the receiving department. This shipment was later sold in June at its cost of P16,000. Questions: In audit engagement in which interim physical inventories are observed, a frequently used auditing procedure is to test the t he reasonableness of the year-end inventory by the application of gross profit pr ofit ratio. Based on the above and the result of your audit, you are to provide the answers to the following. 1.  The gross profit ratio for eleven months ended May 31, 2020 is a.  20% c. 30% b.  35% d. 25% 2.  The cost of goods sold during the month of June, 2020 using the gross profit rratio atio method is a.  P132,000 c. P148,000 b.  P144,000 d. P160,000 3.  The June 30, 2020 inventories using the gross profit method is a.  P264,000 c. P148,000 b.  P340,000 d. P260,000 Answers: 1. D, 2. C, 3. D

 

PROBLEM NO. 7  7 Inventory Estimation – Retail Inventory Method RJE is using the average retail inventory method. The following information is av available ailable for the current year.

Beginning inventory Purchases Freight in Purchase returns Purchase allowances Departmental transfer in Net markups Net markdowns Sales Sales returns Sales discounts Employee discounts Loss from breakage

Cost P1,100,000

Retail P2,200,000

15,800,000 400,000 600,000 300,000 400,000

26,300,000 1,000,000 800,000 600,000 900,000 24,700,000 350,000 200,000 600,000 50,000

Questions: 1.  The cost ratio using the average retail inventory method is a.  58. 13% c. 62.00% b.  61.07% d. 60.00% 2.  The estimated ending inventory at retail is a.  P3,000,000 c. P2,800,000 b.  P3,600,000 d. P3,650,000 3.  The estimated ending inventory at cost is a.  P1,743,945 c. P1,832,143 b.  P2,198,571 d. P1,800,000 4.  The estimated cost of goods sold is a.  P15,267,857 c. P15,000,000 b. P14,901,429 d. P15,056,055 5.  If  the inventory at retail based on physical count on December 31, 2020 is P1,700,000, the estimated inventory shortage is a.  P780,00 c. P755,709 b.  P793,000 d. P 0 Answers: 1.)  D 2.) A 3.) D 4.) C 5.) A

 

PROBLEM NO. 8 On March 31, 2020 San Fabian Company had a fire which completely destroyed the factory building and inventory of goods in process, some of the equipment was saved. After the fire, a physical inventory was taken. The material was valued at P750,000 and tthe he finished goods at P620,000. The inventories on January 1, 2020 consisted of: Materials Goods in process Finished goods Total

P310,000 1,215,000 1,700,000 P3,225,000

A review of the accounting records disclosed that the sales and gross profit on sales for the last three years were:

2017 2018

Sales P8,000,000 7,600,000

2019

5,000,000

Gross profits P2,400,000 2,215,000 1,776,000

The sales for the first three months of 2020 were P3,000,000. Material purchases were P1,250,000, transportation on purchases was P100,000 and direct labor cost for the three months was P1,000,000. For the past two years, factory overhead cost has been 80% of direct labor cost. Questions: Based on the above and the result of your audit, compute the following: 1.  The most likely gross profit rate to be used in estimating the inventory of goods in process destroyed by fire. a.  31. 55% c. 35.52% b.  32.76% 2.  Total cost of goods placed in process a.  P2,710,000 b.  P973,500 3.  Total cost of goods manufactured a.  P3,133,500 b.  P 973,000 4.  Inventory of goods in process lost a.  P 791,500 b.  P1,360,600 Answers: 1.)  A 2.) C 3.) B

4.) D

d. 36.00% c. P3.925,000 d. 4,375,000 c. P 854,000 d. P3,014,400 c. P 119,100 d. P2,951,500