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III – AUDIT OF INVENTORIES PROBLEM NO. 1
1. In connec connectio tion n with your your audit audit of the Banaria Banaria Manufac Manufacturi turing ng Compan Company, y, you reviewed its year-end year-end inventory and found the following following items: (a ! pac pac"in "ing case ase cont ontaini ainin ng a produ roduc ct cos costin ting #1$ #1$$,$$ $,$$$ $ was was standing in the shipping room when the physical inventory was ta"en. It was not included included in the the inventory %ecause it was mar"ed &'old for shipping shipping instruct instructions ions. . )he customer*s customer*s order order was dated +ecem%er 1, %ut the case was shipped and the costumer %illed on anuary 1$, $$/. (% Merchandi Merchandise se costing costing #/$$,$$$ #/$$,$$$ was receive received d on +ecem%er +ecem%er , $$0, and the invoice invoice was recorded. )he invoice invoice was in the the hands of the the purchasing agent it was mar"ed &2n consignment. consignment. (c (c Mercha Merchandi ndise se receive received d on anuary anuary /, $$/, costin costing g #3$$,$ #3$$,$$$ $$ was entere entered d in purchas purchase e register register on anuary anuary 3. )he invoi invoice ce showed showed shipment was made 42B shipping point on +ecem%er 51, $$0. Because it was not on hand during the inventory count, it was not included. (d (d ! spec specia iall ma mach chin ine e cost costin ing g #$$ #$$,$ ,$$$ $$,, fa%r fa%ric icat ated ed to orde orderr for for a part partic icul ular ar cust custom omer er,, was was fini finish shed ed in the the ship shippi ping ng room room on +ecem%er +ecem%er 5$. )he customer customer was %illed %illed for #5$$,$$$ #5$$,$$$ on that that date and the machi machine ne was e6clud e6cluded ed from invent inventory ory althoug although h it was shipped anuary 7, $$/. (e (e Mercha Merchandi ndise se costin costing g #$$, #$$,$$$ $$$ was recei received ved on anuary anuary /, $$/, $$/, and the relate related d purchase purchase invoic invoice e was record recorded ed anuary anuary 0. )he )he invoice showed the shipment was made on +ecem%er 8,$$0, 42B destination. (f Mercha Merchandi ndise se costin costing g #10$,$$ #10$,$$$ $ was sold sold on an install installmen mentt %asis %asis on +ecem%er +ecem%er 10. )he customer customer too" too" possession possession of the goods goods on that date. )he merchandise merchandise was included included in in inventory %ecause Banaria Banaria still still holds legal legal title. title. 'istor 'istorica icall e6peri e6perienc ence e sugge suggests sts that full payment on installment sale is received appro6imately 889 of the time. (g (g oods oods costing costing #0$$,$ #0$$,$$$ $$ were sold sold and deliver delivered ed on +ecem% +ecem%er er $. )he goods were included in the inventory %ecause the sale was accompanied %y a purchase agreement re;uiring Banaria to %uy %ac" the inventory in 4e%ruary $$/.
5
Question: Based on the a%ove and the result of your audit, how much of these items should %e included in the inventory %alance at +ecem%er 51, $$0< a. #1,5$$,$$$ c. #1,/0$,$$$ %. # $$,$$$ d. #1,$0$,$$$ Suggested Solution: =nshipped goods #urchased merchandise shipped 42B shipping point oods used as collateral for a loan )otal
#
1$$,$$$
3$$,$$$ 0$$,$$$ #1,5$$,$$$
Reasons for including and excluding the items: a) b) c) d) e) f)
g)
Included - Merchandise should be included in the inventory until shipped. n exception !ould be special orders. "xcluded - #anaria Manufacturing has the merchandise on a consignment basis and therefore does not possess legal title. Included - $he merchandise !as shipped %&# shipping point and therefore !ould be included in the inventory on the shipping date. "xcluded - $itle may pass on special orders !hen segregated for shipment. "xcluded - $he merchandise !as shipped %&# destination and !as not received until 'anuary ( *++,. "xcluded - istorical experience suggests that #anaria !ill collect the full purchase price so the sale is recognied even though legal title has not passed. Included - $his is not a sale of inventory but instead is a loan !ith the inventory as collateral.
PROBLEM NO. 2
)he #o%re Company is on a calendar year %asis. )he following data were found during your audit: a.
oods in transit shipped 42B destination %y a supplier, in the amount of #1$$,$$$, had %een e6cluded from the inventory, and further testing revealed that the purchase had %een recorded.
%. oods costing #0$,$$$ had %een received, included in inventory, and recorded as a purchase. 'owever, upon your inspection the goods were found to %e defective and would %e immediately returned. c.
Materials costing #0$,$$$ and %illed on +ecem%er 5$ at a selling price of #5$,$$$, had %een segregated in the warehouse for shipment to a customer. )he materials had %een e6cluded from inventory as a signed purchase order had %een received from the customer. )erms, 42B destination. 58
d. oods costing #3$,$$$ was out on consignment with 'ermie Company. >ince the monthly statement from 'ermie Company listed those materials as on hand, the items had %een e6cluded from the final inventory and invoiced on +ecem%er 51 at #$,$$$. e.
)he sale of #10$,$$$ worth of materials and costing #1$,$$$ had %een shipped 42B point of shipment on +ecem%er 51. 'owever, this inventory was found to %e included in the final inventory. )he sale was properly recorded in $$0.
f.
oods costing #1$$,$$$ and selling for #17$,$$$ had %een segregated, %ut not shipped at +ecem%er 51, and were not included in the inventory. ! review of the customer*s purchase order set forth terms as 42B destination. )he sale had not %een recorded.
g.
?our client has an invoice from a supplier, terms 42B shipping point %ut the goods had not arrived as yet. 'owever, these materials costing #13$,$$$ had %een included in the inventory count, %ut no entry had %een made for their purchase.
h. Merchandise costing #$$,$$$ had %een recorded as a purchase %ut not included as inventory. )erms of sale are 42B shipping point according to the supplier*s invoice which had arrived at +ecem%er 51. 4urther inspection of the client*s records revealed the following +ecem%er 51, $$0 %alances: Inventory, #1,1$$,$$$ !ccounts receiva%le, #0$,$$$ !ccounts paya%le, #/8$,$$$ @et sales, #0,$0$,$$$ @et purchases, #,5$$,$$$ @et income, #01$,$$$. Q/"S$I&0S: Based on the a%ove and the result of your audit, determine the adAusted %alances of following as of +ecem%er 51, $$0: 1. . 5. 7. 0.
Inventory a. #1,5$,$$$
%.
#1,00$,$$$
c.
#1,/0$,$$$
d.
#1,7$,$$$
!ccounts paya%le a. #31$,$$$ %.
#1$,$$$
c.
#07$,$$$
d.
#3/$,$$$
@et sales a. #7,00$,$$$
%.
#7,35$$,$$$
c.
#7,/0$,$$$
d.
#7,83$,$$$
@et purchases a. #,53$,$$$
%.
#,10$,$$$
c.
#,7$,$$$
d.
#,5$,$$$
@et income a. #$,$$$
%.
#07$,$$$
c.
#8$,$$$
d.
#00$,$$$
7$
Suggested Solution: Questions 0o. 1 to 2 Inventory =nadAusted %alances (a (% (c (d (e (f (g (h !dAusted %alances
ns!ers: 1
!ccounts #aya%le
@et >ales
@et #urchases
@et Income
#1,1$$,$$$ (0$,$$$ 0$,$$$ 3$,$$$ (1$,$$$ 1$$,$$$ $$,$$$
#/8$,$$$ (1$$,$$$ (0$,$$$ 13$,$$$ -
#0,$0$,$$$ (5$,$$$ ($,$$$ -
#,5$$,$$$ (1$$,$$$ (0$,$$$ 13$,$$$ -
#01$,$$$ 1$$,$$$ (3$,$$$ (1$,$$$ (1$,$$$ 1$$,$$$ (13$,$$$ $$,$$$
#1,00$,$$$
#31$,$$$
#7,/0$,$$$
#,5$,$$$
#07$,$$$
B
A
5
C
7
D,
0
B
PROBLEM NO. 3
?ou were engaged %y +e uia Corporation for the audit of the company*s financial statements for the year ended +ecem%er 51, $$0. )he company is engaged in the wholesale %usiness and ma"es all sales at 09 over cost. )he following were gathered from the client*s accounting records: PURCHASES +ate Deference !mount Balance forwarded #7,$$,$$$ 1E DD F1$08 5/,$$$ 1E5$ DD F1$/1 1$0,$$$ 1E51 DD F1$/ /5,$$$ 1E51 DD F1$/5 8/,$$$ 1E51 Closing entry (7,0$$,$$$ # -
>!> +ate Deference !mount Balance forwarded #3,$$,$$$ 1E3 >I @o. 8/0 /$,$$$ 1E >I @o. 8// 0,$$$ 1E >I @o. 8/3 10,$$$ 1E51 >I @o. 8/8 /8,$$$ 1E51 >I @o. 83$ 1$,$$$ 1E51 1E51
>I @o. 831 Closing entry
7,$$$
(,80,$$$ # 0ote: >I G >ales InvoiceDD G Deceiving Deport
!ccounts receiva%le Inventory
71
#30$,$$$ 8$$,$$$
!ccounts paya%le /$$,$$$ ?ou o%served the physical inventory of goods in the warehouse on +ecem%er 51 and were satisfied that it was properly ta"en. Hhen performing sales and purchases cut-off tests, you found that at +ecem%er 51, the last Deceiving Deport which had %een used was @o. 1$/5 and that no shipments had %een made on any >ales Invoices whose num%er is larger than @o. 8/. ?ou also o%tained the following additional information: a
Included in the warehouse physical inventory at +ecem%er 51 were goods which had %een purchased and received on Deceiving Deport @o. 1$/$ %ut for which the invoice was not received until the following year. Cost was #3,$$$.
% 2n the evening of +ecem%er 51, there were two truc"s in the company siding: )ruc" @o. was unloaded on anuary of the following year and received on Deceiving Deport @o. 1$/5. )he freight was paid %y the vendor. )ruc" @o. MM 503 was loaded and sealed on +ecem%er 51 %ut leave the company premises on anuary . )his order was sold for #10$,$$$ per >ales Invoice @o. 8/.
c
)emporarily stranded at +ecem%er 51 at the railroad siding were two delivery truc"s enroute to !BC )rading Corporation. !BC received the goods, which were sold on >ales Invoice @o. 8// terms 42B +estination, the ne6t day.
d nroute to the client on +ecem%er 51 was a truc"load of goods, which was received on Deceiving Deport @o. 1$/7. )he goods were shipped 42B +estination, and freight of #,$$$ was paid %y the client. 'owever, the freight was deducted from the purchase price of #$$,$$$. Q/"S$I&0S: Based on the a%ove and the result of your audit, determine the following: 1. >ales for the year ended +ecem%er 51, $$0 a. #,1$$,$$$ %. #3,30,$$$ c. #3,30,$$$
d.
#,$0,$$$
. #urchases for the year ended +ecem%er 51, $$0 a. #7,0$$,$$$ %. #0,/51,$$$ c. #0,33,$$$
d.
#7,03,$$$
5. !ccounts receiva%le as of +ecem%er 51, $$0 a. #55$,$$$ %. #00,$$$ c. #000,$$$ 7. Inventory as of +ecem%er 51, $$0 7
d.
#1$,$$$
a.
#1,70,$$$
%.
#1,$$,$$$
c.
#1,1,$$$
0. !ccounts paya%le as of +ecem%er 51, $$0 a. #/$$,$$$ %. #051,$$$ c. #/3,$$$
d.
#1,8/,$$$
d.
#1,3,$$$
Suggested Solution: Questions 0o. 1 to 2
=nadAusted %alances ! @o. 1 ! @o. ! @o. 5 ! @o. 7 ! @o. 0 ! @o. / !dAusted %alances
>ales
#urchases
!D
Inventory
!#
#,80,$$$ (180,$$$ (0,$$$ -
#7,0$$,$$$ 3,$$$ -
#30$,$$$ (180,$$$ (0,$$$ -
#8$$,$$$ 8/,$$$ 1$,$$$ 1$,$$$
#/$$,$$$ 3,$$$ -
#3,30,$$$
#7,03,$$$
#55$,$$$
#1,8/,$$$
#/3,$$$
d3usting entries:
1 >ales (#/8,$$$J#1$,$$$J#7,$$$ #180,$$$ !ccounts receiva%le #180,$$$ $o ad3ust unshipped goods recorded as sales 4SI 0o. 5,5 56+ and 561) #urchases #3,$$$ !ccounts paya%le $o ta7e up unrecorded purchases 4RR 0o. 1+,+)
#3,$$$
5 Inventory Cost of sales $o ta7e up goods under RR 0o. 1+,(
#8/,$$$
#8/,$$$
7 Inventory (#10$,$$$E1.0 #1$,$$$ Cost of sales $o ta7e up unshipped goods under SI 0o. 5,8
#1$,$$$
0 >ales #0,$$$ !ccounts receiva%le $o reverse entry made to record SI 0o. 5,,
#0,$$$
/ Inventory (#0,$$$E1.0 Cost of sales $o ta7e up goods under SI 0o. 5,,
#1$,$$$
ns!ers: 1
B
D
5
A
7
D,
0
C
75
#1$,$$$
PROBLEM NO. 4
vangelista Company engaged you to e6amine its %oo"s and records for the fiscal year ended une 5$, $$0. )he company*s accountant has furnished you not only the copy of trial %alance as of une 5$, $$0 %ut also the copy of company*s %alance sheet and income statement as at said date. )he following data appears in the cost of goods sold section of the income statement: Inventory, uly 1, $$7 !dd #urchases )otal goods availa%le for sale ess Inventory, une 5$, $$0 Cost of goods sold
# 0$$,$$$ 5,/$$,$$$ 7,1$$,$$$ 3$$,$$$ #5,7$$,$$$
)he %eginning and ending inventories of the year were ascertained thru physical count e6cept that no reconciling items were considered. ven though the %oo"s have %een closed, your wor"ing paper trial %alance show all account with activity during the year. !ll purchases are 42B shipping point. )he company is on a periodic inventory %asis. In your e6amination of inventory cut-offs at the %eginning and end of the year, you too" note of the following: uly 1, $$7 a.
une invoices totaling to #15$,$$$ were entered in the voucher register in une. )he corresponding goods not received until uly. %. Invoices totaling #07,$$$ were entered in the voucher register in uly %ut the goods received during une. une 5$, $$0 c.
Invoices with an aggregate value of #1/,$$$ were entered in the voucher register in uly, and the goods were received in uly. )he invoices, however, were date une. d. une invoices totaling #37,$$$ were entered in the voucher register in une %ut the goods were not received until uly. e. Invoices totaling #1$,$$$ (the corresponding goods for which were received in une were entered the voucher register, uly. f. >ales on account in the total amount of #13/,$$$ were made on une 5$ and the goods delivered at that time. Boo" entries relating to the sales were made in une.
77
Q/"S$I&0S: Based on the a%ove and the result of your cut-off tests, answer the following: 1. 'ow much is the adAusted Inventory as of uly 1, $$7< a. #0$$,$$$ %. #03/,$$$ c. #/5$,$$$ d.
#53$,$$$
. 'ow much is the adAusted #urchases for the fiscal year ended une 5$, $$0< a. #5,7$,$$$ %. #5,87,$$$ c. #5,/$$,$$$ d. #5,817,$$$ 5. 'ow much is the adAusted Inventory as of une 5$, $$0< a. #37,$$$ %. #8,$$$ c. #0$$,$$$ d.
#8/$,$$$
7. 'ow much is the adAusted Cost of oods >old for the fiscal year ended une 5$, $$0< a. #5,51/,$$$ %. #5,01$,$$$c. #5,83$,$$$ d. #5,0/7,$$$ 0. )he necessary compound adAusting Aournal entry as of une 5$, $$0 would include a net adAustment to Detained arnings of a. #15$,$$$ %. #3/,$$$ c. #17,$$$ d. #07,$$$ Suggested Solution: Questions 0o. 1 to (
=nadAusted %alances !dd (deduct adA.: Item a Item % Item c Item d Item e Item f @et adAustments !dAusted %alances
Inventory 3E1E$7 #0$$,$$$
#urchases #5,/$$,$$$ (07,$$$ 1/,$$$ -
Inventory /E5$E$0 #3$$,$$$
15$,$$$ 15$,$$$
1$,$$$ 7$,$$$
1/,$$$ 37,$$$ /$,$$$
#/5$,$$$
#5,7$,$$$
#8/$,$$$
Question 0o. 9 Inventory, uly 1, $$7 !dd #urchases )otal goods availa%le for sale ess Inventory, une 5$, $$0 Cost of goods sold
#
/5$,$$$ 5,7$,$$$ 7,73$,$$$ 8/$,$$$ #5,01$,$$$
70
Question 0o. 2 ompound ad3usting entry:
Inventory, 3E1E$7 #15$,$$$ #urchases 7$,$$$ Inventory, /E5$E$0 /$,$$$ Detained earnings (#15$,$$$ - #07,$$$ Kouchers paya%le (#1/,$$$ J #1$,$$$ Cost of sales ns!ers: 1
C
A
5
D
7
B,
0
#3/,$$$ 87,$$$ /$,$$$
B
PROBLEM NO. 5
)he following accounts were included in the unadAusted trial %alance of +amondon Company as of +ecem%er 51, $$0: Cash !ccounts receiva%le Inventory !ccounts paya%le !ccrued e6penses
# 71,/$$ 1,13,$$$ 5,$0,$$$ ,1$$,0$$ 10,0$$
+uring your audit, you noted that +amondon held its cash %oo"s open after year-end. In addition, your audit revealed the following: 1.
Deceipts for anuary $$/ of #53,5$$ were recorded in the +ecem%er $$0 cash receipts %oo". )he receipts of #1$,$0$ represent cash sales and #173,0$ represent collections from customers, net of 09 cash discounts.
2.
!ccounts paya%le of #1/,$$ was paid in anuary $$/. )he payments, on which discounts of #/,$$ were ta"en, were included in the +ecem%er $$0 chec" register.
3.
Merchandise inventory is valued at #5,$0,$$$ prior to any adAustments. )he following information has %een found relating to certain inventory transactions. a.
oods valued at #153,0$$ are on consignment with a customer. )hese goods are not included in the inventory figure.
%. oods costing #1$,30$ were received from a vendor on anuary 7, $$/. )he related invoice was received and recorded on anuary /, $$/. )he goods were shipped on +ecem%er 51, $$0, terms 42B shipping point. 7/
c.
oods costing #51,30$ were shipped on +ecem%er 51, $$0, and were delivered to the customer on anuary 5, $$/. )he terms of the invoice were 42B shipping point. )he goods were included in the $$0 ending inventory even though the sale was recorded in $$0.
d. ! #81,$$$ shipment of goods to a customer on +ecem%er 5$, terms 42B destination are not included in the year-end inventory. )he goods cost #/0,$$$ and were delivered to the customer on anuary 5, $$/. )he sale was properly recorded in $$/. e.
)he invoice for goods costing #3,0$$ was received and recorded as a purchase on +ecem%er 51, $$0. )he related goods, shipped 42B destination were received on anuary 7, $$/, and thus were not included in the physical inventory.
f.
oods valued at #5$/,7$$ are on consignment from a vendor. )hese goods are not included in the physical inventory.
Q/"S$I&0S: Based on the a%ove and the result of your audit, determine the adAusted %alances of the following as of +ecem%er 51, $$0: 1.
Cash a. #71,/$$
%.
#557,5$$
c.
#57$,0$$
d.
#57/,3$$
#1,13,$$$
c.
#1,,$$$
d.
#1,37,0$
%.
#,85$,$$$
c.
#5,$7$,$$$
d.
#,0$0,$$$
!ccounts paya%le a. #,580,70$ %.
#,/,0$$
c.
#,5$3,80$
d.
#,5$1,30$
Current ratio a. #.$$
#1.7
c.
#1.5
d.
#.$1
. !ccounts receiva%le a. #1,707,5$$ %. 5.
7.
0.
Inventory a. #5,$13,0$$
%.
73
Suggested Solution: Questions 0o. 1 to 9
=nadAusted %alances !dd (deduct: ! @o. 1 ! @o. ! @o. 5.a ! @o. 5.% ! @o. 5.c ! @o. 5.d ! @o. 5.e !dAusted %alances
Cash #71,/$$
!ccounts Deceiva%le #1,13,$$$
Inventory #5,$0,$$$
!ccounts #aya%le #,1$$,0$$
(53,5$$ 1$,$$$ #557,5$$
100,$$$ #1,,$$$
153,0$$ 1$,30$ (51,30$ /0,$$$ #5,$13,0$$
1/,$$ 1$,30$ (3,0$$ #,5$3,80$
d3usting entries:
1
!ccounts receiva%le (#173,0$E.80 #100,$$$ >ales 1$,$0$ Cash >ales discount (#173,0$E.80 6 .$0
#53,5$$ 3,30$
Cash #urchase discount !ccounts paya%le
#1/,$$
#1$,$$$ /,$$
5.a Inventory Cost of sales
#153,0$$
5.% Inventory !ccounts paya%le
#1$,30$
5.c Cost of sales Inventory
#51,30$
5.d Inventory Cost of sales
# /0,$$$
5.e !ccounts paya%le Cost of sales
# 3,0$$
#153,0$$ #1$,30$ #51,30$ # /0,$$$ # 3,0$$
5.f @o adAusting entry
7
Question 0o. 2 Current assets Cash !ccounts receiva%le Inventory +ivide %y current lia%ilities !ccounts paya%le !ccrued e6penses Current ratio ns!ers: 1
B
C
5
A
7
C,
# 557,5$$ 1,,$$$ 5,$13,0$$ ,5$3,80$ 10,0$$
0
#7,/55,$$
,05,70$ 1.7
B
PROBLEM NO. 6
In conducting your audit of Mana%at Corporation, a company engaged in import and wholesale %usiness, for the fiscal year ended une 5$, $$0, you determined that its internal control system was good. !ccordingly, you o%served the physical inventory at an interim date, May 51, $$0 instead of at une 5$, $$0. ?ou o%tained the following information from the company*s general ledger. >ales for eleven months ended May 51, $$0 >ales for the fiscal year ended une 5$, $$0 #urchases for eleven months ended May 51, $$0 (%efore audit adAustments #urchases for the fiscal year ended une 5$, $$0 Inventory, uly 1, $$7 #hysical inventory, May 51, $$0
#1,577,$$$ 1,05/,$$$ 1,$$,$$$ 1,$,$$$ 17$,$$$ $,$$$
?our audit disclosed the following additional information. (1 >hipments costing #1,$$$ were received in May and included in the physical inventory %ut recorded as une purchases. ( +eposit of #7,$$$ made with vendor and charged to purchases in !pril $$0. #roduct was shipped in uly $$0. (5 ! shipment in une was damaged through the carelessness of the receiving department. )his shipment was later sold in une at its cost of #1/,$$$. Q/"S$I&0S:
78
In audit engagements in which interim physical inventories are o%served, a fre;uently used auditing procedure is to test the reasona%leness of the year-end inventory %y the application of gross profit ratio. Based on the a%ove and the result of your audit, you are to provide the answers to the following: 1. )he gross profit ratio for eleven months ended May 51, $$0 is a. $9 %. 5$9 c. 509 d. 09 . )he cost of goods sold during the month of une, $$0 using the gross profit ratio method is a. #15,$$$ %. #17,$$$ c. #177,$$$ d. #1/$,$$$ 5. )he une 5$, $$0 inventory using the gross profit method is a. #/7,$$$ %. #/,$$$ c. #57$,$$$ d. #/$,$$$ Suggested Solution: Question 0o. 1 >ales for 11 months ended 0E51E$0 ess cost of sales for 11 months ended 0E51E$0: Inventory, uly 1, $$7 !dd adAusted purchases: =nadAusted Item no. 1 Item no. oods availa%le for sale ess inventory, 0E51E$0 ross profit +ivide %y sales for 11 months ended 0E51E$0 ross profit rate for 11 months ended 0E51E$0
#1,577,$$$
# 17$,$$$ #1,$$,$$$ 1,$$$ (7,$$$
1,$,$$$ 1,,$$$ $,$$$
1,$$,$$$ 55/,$$$ 1,577,$$$ 09
Question 0o. * >ales for the fiscal year ended une 5$, $$0 ess sales for 11 months ended May 51, $$0 >ales for une, $$0 ess sales without profit >ales with profit Multiply %y cost ratio (1$$9 - 09 Cost of sales with profit !dd cost of sales without profit 0$
#1,05/,$$$ 1,577,$$$ 18,$$$ 1/,$$$ 13/,$$$ 309 15,$$$$ 1/,$$$
)otal cost of sales for une, $$0
#
17,$$$
Question 0o. ( Inventory, 3E1E$7 !dd adAusted purchases: =nadAusted Item no. )otal goods availa%le for sale ess cost of sales: >ales without profit >ales with profit L(#1,05/,$$$ - #1/,$$$ 6 309 Inventory, /E5$E$0 ns!ers: 1
D
B
5
# 17$,$$$ #1,$,$$$ (7,$$$
1,3/,$$$ 1,71/,$$$
1/,$$$ 1,17$,$$$
1,10/,$$$ # /$,$$$
D
PROBLEM NO. 7
2n March 51, $$0 I%e Company had a fire which completely destroyed the factory %uilding and inventory of goods in process some of the e;uipment was saved. !fter the fire, a physical inventory was ta"en. )he material was valued at #30$,$$$ and the finished goods at #/$,$$$. )he inventories on anuary 1, $$0 consisted of: Materials oods in process 4inished goods )otal
# 51$,$$$ 1,10,$$$ 1,3$$,$$$ #5,0,$$$
! review of the accounting records disclosed that the sales and gross profit on sales for the last three years were: $$ $$5 $$7
>ales #,$$$,$$$ 3,/$$,$$$ 0,$$$,$$$
ross profit #,7$$,$$$ ,10,$$$ 1,33/,$$$
)he sales for the first three months of $$0 were #5,$$$,$$$. Material purchases were #1,0$,$$$, transportation on purchases was #1$$,$$$ and direct la%or cost for the three months was #1,$$$,$$$. 4or the past two years, factory overhead cost has %een $9 of direct la%or cost. 01
Q/"S$I&0S: Based on the a%ove and the result of your audit, compute the following: 1. )he most li"ely gross profit rate to %e used in estimating the inventory of goods in process destroyed %y fire a. 51.009 %. 50.09 c. 5.3/9 d. 5/.$$9 . )otal cost of goods placed in process a. #,31$,$$$ %. #5,80,$$$
c.
#835,0$$
d.
#7,530,$$$
5. )otal cost of goods manufactured a. #5,155,0$$ %. #07,7$$
c.
#835,0$$
d.
#5,$17,7$$
7. Inventory of goods in process lost a. #381,0$$ %. #118,1$$
c.
#1,5/$,/$$
d.
#,801,0$$
Suggested Solution: Question 0o. 1 ross profit +ivide %y >ales ross profit rate !verage gross profit rate
$$ #,7$$,$$$ #,$$$,$$$ 5$.$$9
$$5 #,10,$$$ #3,/$$,$$$ 8.179
$$7 #1,33/,$$$ #0,$$$,$$$ 50.09
51.009
Questions 0o. * to 9 Daw materials, 1E1E$0 #urchases 4reight-in Daw materials availa%le for use Daw materials, 5E51E$0 Daw materials used +irect la%or 4actory overhead (#1,$$$,$$$ 6 $9 )otal manufacturing cost Hor"-in-process, 1E1E$0 )otal cost placed in process ess wor"-in-process, 5E51E$0 (s;ueeNe Cost of goods manufactured 4inished goods, 1E1E$0 )otal goods availa%le for sale ess finished goods, 5E51E$0 Cost of goods sold (#5,$$$,$$$ 6 /.709 0
# 51$,$$$ 1,0$,$$$ 1$$,$$$ 1,//$,$$$ (30$,$$$ 81$,$$$ 1,$$$,$$$ $$,$$$ ,31$,$$$ 1,10,$$$ 5,80,$$$ (,801,0$$ 835,0$$ 1,3$$,$$$ ,/35,0$$ (/$,$$$ #,$05,0$$
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ns!ers: 1
A
B
5
C
7
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PROBLEM NO. 8
>elect the %est answer for each of the following: 1.
2tso Manufacturing Corporation mass produces eight different products. )he controller, who is interested in strengthening internal controls over the accounting for materials used in production, would %e most li"ely to implement a. ! separation of duties among production personnel. %. ! perpetual inventory system. c. !n economic order ;uantity (2O system. d. ! Ao% order cost accounting system.
. Hhich of the following control procedures would most li"ely %e used to maintain accurate perpetual inventory records< a. Independent matching of purchase orders, receiving reports, and vendorsP invoices. %. Independent storeroom count of goods received. c. #eriodic independent reconciliation of control and su%sidiary records. d. #eriodic independent comparison of records with goods on hand. 5. )he accuracy of perpetual inventory records may %e esta%lished in part %y comparing perpetual inventory records with a. #urchase re;uisitions. c. Deceiving reports. %. #urchase orders. d. Kendor payments. 7. )he auditor tests the ;uantity of materials charged to wor" in process %y tracing these ;uantities to a. Deceiving reports. c. Materials re;uisition forms. %. #erpetual inventory records. d. Cost ledgers. 0. !n auditor would analyNe inventory turnover rates to o%tain evidence concerning management*s assertion a%out a. Kaluation or allocation. c. #resentation and disclosure. %. Dights and o%ligations. d. Completeness /. In auditing inventories, a maAor o%Aective relates to the e6istence assertion. 2f the following audit procedures relating to inventories, which does not support the e6istence assertion< a. )he auditor reviews the clientPs inventory-ta"ing instructions for such matters as proper arrangement of goods, separation of 05
consigned goods, and limits on movements of goods during inventory. %. )he auditor o%serves the clientPs inventory and performs test counts as appropriate. c. )he auditor confirms inventories not on the premises. d. )he auditor performs a lower of cost or mar"et test for maAor categories of inventory. 3.
In a manufacturing company, which one of the following audit procedures would give the least assurance of the valuation of inventory at the audit date< a. 2%taining confirmation of inventories pledged under loan agreements. %. )esting the computation of standard overhead rates. c. 6amining paid vendorsP invoices. d. Deviewing direct la%or rates.
.
Hhen auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to o%tain evidence that a. @o goods held on consignment for customers are included in the inventory %alance. %. @o goods o%served during the physical count are pledged or sold. c. !ll goods owned at year end are included in the inventory %alance d. !ll goods purchased %efore year end are received %efore the physical inventory count.
8. Hhich of the following items should not %e included in a physical inventory< a. Materials in transit from vendors. %. oods in a private warehouse. c. oods received for repairs under warranty. d. Consignment to an agent. 1$. ?ou were engaged to conduct an annual e6amination for the fiscal year ended 2cto%er 51, $$0. Because of the e6pected holiday, you were a%le to convince your client to ta"e a complete physical inventory, in which you were present on 2cto%er 10. #erpetual inventory records are "ept and the client considers a sale to %e made in the period in which goods are shipped. ?ou had a sales cut-off test wor"sheet prepared. Hhich item among those listed %elow will not re;uire an adAusting entry to reconcile the clientPs detailed inventory record with the physical inventory< a. %. c. d. 07
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