Excel Professional Services, Inc.

Management Firm of Professional Review and Training Center (PRTC)

(Luzon) Manila 7339344/7347903 * Calamba, Laquna (049) 5453807
(Visayas) Bacolod City (034) 4346214 * Cebu City (032) 2537900 loc. 218
(Mindanao) Cagayan De Oro City (088) 3093073 Davao City (082) 2250049
Since 1977

AUDITING PROBLEMS CPA REVIEW. OCAMPO/CABARLES

AY 2014
AP .1601-Audit of Inventories

The Use of Assertions in Ol>taining Audit Evidence

Assertions about classes of transactions and events for the

period under audit: (COCA C) Completeness - all assets, liabilities and equity interests
that should have been recorded have been recorded.
Completeness - all transactions and events that should
have been recorded have been recorded.
V<'lluation and allocation - assets, liabilities, and equity
interests are included in the financial statements at
Occurrence - transactions and events that have been
appropriate amounts and any resulting valuation or
recorded have occurred and pertain to the entity.
allocation adjustments are appropriately recorded.

.Cl assifiJ&ltion - transactions and events have been

recorded in the proper accounts.
Assertions about presentation and disclosure: (COCA)

Accuracy - amounts and other data relating to recorded Completeness - all disclosures that should have been
transactions and events have been recorded appropriately. included in the financial statements have been included.

Cutoff- transactions and events have been recorded in the Occurrence ...9DP rights and obligations - disclosed events1
correct accounting period. transactions1 and other matters have occurred and pertain
to the entity.

Assertions about account balances at the period end: Classification and uoderstandability - financial information
(RECV) is appropriately presented and described, and disclosures
are clearly expressed.
Rights and obligations - the entity holds or controls the
rights to assets, and liabilities are the obligattons of the
Accuracy and valuation - financial and other information
entity.
are disclosed fa>rly and at appropriate amounts.

2\istence - assets, liabilities, and equity interests extst.

INTERNAL CONTROL MEASURES

1. Authority and responsibility for controlling the 6. Deliveries of materials, finished stock and merchandise
inventories should be centralized management and in should be made only upon specific authorizations
one person. emanating at authorized levels.

2. There should be careful selection of inventory 7. Slow-movmg, obsolete and damaged stock should be
personnel and intensive training of such personnel in identified and reported following periodic reviews of
policies, objectives and system of inventory control. physical and book reco rds by qualified employees.
Valuation on the basis of approved cost-mark-down
3. Adequate physical facilities for handling and storage of
methods should be reviewed.
inventory shold be provided.
8. Safegu,ards against that action of the element and
4. Adequate system of procedures, forms and reports
inaccuracies in recording receipts and issues should be
related to the management of inventories should be
adopted. Example - Maintaining adequate insur<,mce
developed and implemented.
coverage.
5. Quantitative controls through perpetual mventory
records; book quantities verified with physical counts
at least once a year and differences being investigated,
promptly adjusted and reported to higher authority
should be implemented.

Page 1 of 8 www.prtc.com.ph AP.1601

EXCEL PROFESSIONAL SERVICES, INC.

SUBSTANTIVE AUDIT OF INVENTORIES

Inventory Balances Purchases

Existence: Recorded inventory exist Completeness: Purchases that occurred are recorded

1. Before the client takes the phys1cal inventory, review Trace a sequence of receiving reports to entries in the
and approve the client's written plan for taking it. voucher reg,ster. Test cutoff. Account for a sequence of
2. Observe the client personnel physically counting entries in the voucher register.

inventory.
Occurrence: Recorded purchases are for items that were
3. Confirm inventories on consignment and held in public
acquired
warehouses.
Examine underlying documents for authenticity and
reasonableness. Scan voucher register for large or
Completeness: All inventory of the entity recorded unusual items. Trace inventory purchased to perpetual
records. Scan voucher register for duplicate payments.
4. Obtain a copy of prenumbered inventory tags used by
the client in taking inventory and reconcile the tags to
Classification: Purchase transactions have been recorded in
the listing.
the proper accounts
5. For selected items, trace from tags to listing.
For a sample of entries in the purchases journal, verify the
6. Perform cutoff procedures. Obtain the receiving report accuracy of account coding.
number for the last shipment received prior to year
end and determine that the item is included in
inventory. Also, identify the last shipping document Accuracy (Valuation): Purchases are recorded at proper
and determine, based on shipping terms, whether the amounts
item was properly recorded in sales or inventory.
Recompute invoices and compare invoice price to purchase
7. Perform analytical procedures.
order.

Rights and obligations: Inventory is owned by the entity

Production
8. Determine that consigned inventory has been excluded
from inventory and that inventory pledged has been Completeness: All production transactions that occurred
properly disclosed. Examine confirmations from are recorded
financial institutions and read minutes of the board of
Account for a sequence for production reports.
directors' meetings.

Occurrence: Recorded producUon transactions occurred

Valuation and allocation: Recorded inventory is valued in
accordance with GAAP For selected transactions, examine signed materials
requisitions, approved labor tickets, and allocation of
9. Considering the method the client uses for inventory
overhead.
valuation, examine invoices for Inventory on hand or
Classification: Production transactions have be en recorded
trace prior year's inventory listing to verify cost.
in the proper accounts
10. For selected items, determine net realizable value
For a sample of entries, verify the accuracy of account
(NRV) of the inventory and apply the lower of cost or
coding.
NRV.

11. Verify computations in the inventory listing. Accuracy (Valuation): Production transactions are
12. Review the obsolescence of the inventory by: recorded at proper amounts
a. being alert while observing Inventory being taken
Test cost records by tracing to underlying documents, such
for damaged, slow-moving, or scrap inventory.
as bill of materials, labor tickets, authorized labor rates,
b. Scanning perpetual records for slow-moving items
and standard overhead rates. Review variances.
and discussing their valuation with client.

Presentation and disclosure: Inventory is classified and

disclosed in accordance with GAAP
- en d -

13. Determine whether accounts are classified and

disclosed in the financial statements in accordance
with GAAP.

Page 2 of 8 www.prtc.com.ph AP.l60l

 l<vv-. te"""-'n;;l. (,.,vi'OMl\""'
9'""1/).., S'f f>T1W;Jov """,or
- 11<'1!. l>Y fSJ. 9' I

EXCEL PROFESSIONAL SERVICES, INC. - f"-r' ._- to " ea'--e'PC fl Li>t4hnAl o:;- trl\lf"Y,

. PROBLEM NO. 1
\..+1.1 i<rf<'M4Vi. QUESTIONS.
lll'lky ')..l>l'l. Cf e*"")
You were engaged by Quezon Corporation
fo r the audit Based on the above and the result of your audit, determine
of the company's financ ial statements for the year ended the following:
December 31, 2014. The co mpany IS en gage d in the ' r
who I esaI e bus1ness anct makes a II sa1 es at 25a,
m over cost . A . s a I es for the year ended D ecem ber 31 , 2014
a. PS,2SO,OOO c. PS,400,000

The following were gathered from the client's ac count i ng11

b. PS,1SD,OOO _cl.c P5,350,000

records: v 2. P u rc h a ses for the year ended December 31, 2014

a. P3,000,000 c. P3,018,000

Date
SALES
ReL Date
PURCHASES
Ref. Amount b. P3, 754,000 _cj,. P3,818,000

Balance
forwarded P5,200,000
Bala nce
forwa rded P2,700,000 A 3. Inventory as of Dece mb e r 31, 20i4
a. P864,000 c. P968,000
Dec. 51 No. Dec. RR No.
b. PSOO,OOO d. P814,000
27 965 40,000 27 1057 35,000 .
Dec.
28
51 No.
966 150,000
Dec.
28
RR No.
1058 65,000
4 AccoJnts receivable as of December 31, 2014
a. P350,000 c. P370,000
Dec. 51 No. Dec. RR No .. b. P220,000 d. P120,000
28 967 10,000 . 29 1059 24,000 l
Dec . 51 No. Dec. RR No. f\ 5. Accounts payable as of December 31, 2014
31 969 46,000 30 1061 70,000 a. P41S,OOO c. P 400,000
Dec. 51 No. Dec. RR No. b. P354,000 d. P1,218,000
31 970 68,000 31 1062 42,000
Dec
31
Sl No.
971 16,000
Dec.
31
RR No.
1063 64,000
/vBLEM NO. 2
Dec. Closing Dec. Closing
31 entry (5,530,000) 31 entry (1,000.000) Dunng your audit of the Makati Corporation for the year
ended December 31, 2014, you found the following
L !'__ ---=
Note: 51 = Sale s Invoice RR = Receiving Report information relating to certain inventory transactions from
your observation of the client's physical count and review
of sales and p u rchases c utoff :
Inventory P600,000
Accounts receivable 500,000 a. Goods costing P180,000 were received from a vendor
Accoun\S payable 400,000 on January 3, 2015. The goods were not included in
the physical count. The related invoice was r ece ived
You observed the physical in v entory of goods 1n the and recorde d on De cember 30, 2014. The goods were
warehouse on December 31 and were satisfied that it was shipped on De cember 31, 2014, terms FOB shipping
properly taken. point.

b. Goods costing P200,000, sold for P300,000, were

When performing sales and purchases cut-off tests, you
shipped on December 31, 2014, and were received by
found that at D ecember 31, t he last Receiving Report
the customer on January 2, 2015. The terms of the
which had been used was No. 1063 and that no shipments
invotce were FOB shipping point. The goods were
had been made on any Sales Invoices whose numbet is
included in the endmg inventory for 2014 and the sale
larger than No. 968. You al so obtained the following
was recorded in 2015.
additional informat ion :
c. The in voi ce for goods costing P150,000 was received
a) Included in the warehouse physical inventory at
and recorded as a purchase on December 31, 2014.
December 31 were goods which had been purcha sed
The related goods, shi pped FOB destination were
and received on Receiving Report No. 1060 but for received on January 2, 2015, but were included in the
which the invoice was not received until the following physical inventory as goods in transit. : :... ",) :'l
yea r. Cost was P18,000.
d. A P600,000 shipment of goods to a custo mer on
b) On the evening of December 31, there were two trucks
December 30, 2014, terms FOB destination, was
in the co m pany siding:
recorded as a sale upon shipment. The goods, costing
T ruck No. CPA 123 was unloaded on January 2 of P400,000 and delivered to the customer on January 6,
the following year and received on Receiving
2015, we re not included in the 2014 ending inventory.
Report No. 1063. The freight was paid by the
vendor. e. Goods valued at P250,000 are on cons i gn ment from a
+' Truck No. ILU 143 was loaded and sealed on vendor. These go od s are incLuded in the physical
December 31 but leave the company premises on I nventory .
January 2. This order was sold for P100,000 per
f. Goods valued at P160,000 are on con st gn men t with a
Sales Invoice No. 968. l .i- o- - ,,r_':, ')"" .::.. . :
cust omer. These goods are not
/--

-, - ' ' r".:<-?c;l;'

Included in the
c) Temporarily stranded at D ecembe r 31 at the railroad physical inventory.
siding were two delivery trucks enroute to Brooks
Trading Cor porat ton . Brooks rece1ved .the goods, QUESTIONS:
which were sold on Sales Invo1ce No. 966 terms FOB
Based on the above and the result of your audit, answer
Destination, the next day.
the following:
d) Enroute to the client on December 31 was a truckload
(' 1 The inventory as of December 31, 2014 IS understated
of goods., which was received on Receiving Report No. v
by
1064. The goods were shipped FOB Destination, and
a. P230,000 c. P140,000
freight of P2,000 was paid by the client. However, the
b. P190,000 d. P290,000
freight was deducted from the purchase price of
PBOO,OOO.

Page 3 of 8 www.prtc.com.ph AP.1601

 EXCEL PROFESSIONAL SERVICES, INC.

The cost of sales for the year ended December 31, e) Through the carelessness of the
2014 is overstated by receiving department shipment in
a. P290,000 c. P440,000 early December 2014. was damaged
b. PllO,OOO d. P380,000 by rain. This shipment was later sold
in the last week of December at cost. 150,000
The profit for the year ended December 31, 2014 is
misstated by
REQUIRED:
a. P190,000 over c. P140,000 under
b. P 10,000 over d. P290,000 under 1. Gross profit rate for 11 months ended November 30,
The working capital as of December 31, 2014 IS 2014. 2-c-;.
misstated by 2. Cost of goods sold during the month of December
a. P190,000 over c. P140,000 under 2014 using the gross profit method. l1"ff0,1160
b. P 10,000 over d. P290,000 under
3. December 31, 2014 inventory using the gross profit
SOLUTION GUIDE method. /1 7' )11 b

Over Under)
SOLUTION GUIDE:

Requirement No. 1

Sales, up to 11/30 P12,600,000

Less COS, up to 11/30:
Inventory, 1/1 p 1,1;11,500
Net purchases, 11/30 JJLD"
TGAS 1:. L{,7'2, -pi)
Inventory, 11/30 , ) 7,!..r <,.Vo"
\_ ____::__:
_ _ ___;
Gross profit
PROBLEM NO. 3
OV\ $0)-; MH '),01'1,/ oc; I),,o(,
/ Computation of adjusted amounts:
Your client, Mandaluyong Company, is an importer and --
-----,
wholesaler. Its merchandise is purchased from several Inventory, I.P.,ll/30 : N.P.,12/31 i
'
suppliers and is warehoused until sold to customers. 11/30 Ll.Lmos.) (12 mos.) ;

In conducting your audit for the year ended December 31, Unadjusted 1,425,000 10,125,000 12,000,000

2014, you were satisfied that the system of internal control - -
a ji'2,_0D
was good. . Accordingly, you observed the physical
inventory at an interim date, November 30, 2014 instead b - / "\ ! (r-.-- :l>i:o'

t . .,::I
of at year end. You obtained the following information
-
from your client's general ledger: c

'' ' .
Inventory, January 1, 2014 p1,312,500 d t:;.. cue: '& -- .
Physical inventory, November 30, 2014 1,425,000 i e -
Sales for 11 months ended Nov. 30, 2014 12,600,000 --i---- - _____j
Sales for the year ended Dec. 31, 2014 14,400,000
Purchases for 11 months ended Nov. 30, .
Adjusted i, -_,_.r,, s:-"J) i 1_ '1 0 :t<io i: . :.:.. :J
2014 (before audit adjustments) 10,125,000
Purchases for the year ended Dec. 31, Requirement No. 2
2014 (before audit adjustments) 12,000,000 Sales, up to 12/31 P14,400,000
Less sales, up to 11/30 _1600,000
Your audit disclosed the following information; Sales- December 1,800,000
a) Shipments received in November and Sales without profit 150,000)
included in the physical inventory but Sales with profit 1,650,000
"'
x Cost ratio
'

recorded as December purchases. p 112,500 ,-Pi,,

b) Shipments received in Ltnsalable COS with profit i I 3J72 'i)':.

condition and excluded from physical COS without profit ,.iu; iC. 0
inventory. Credit memos had not Total C - f.\" '}-, ;_.1 2t->t'/r
I IL'=lv, 0;;:-
been received nor chargebacks to
vendors been recorded: Requirement No. 3
Total at November 30, 2014 15,000 Inventory, 1/1 p 1,312,500
Total at December 31, 2014 Net purchases, 12/31 ,,_ ;::;::; '"::YJ

(including the November

TGAS
unrecorded chargebacks) 22,500 Less cost of sales:
c) Deposit made with vendor and charged With profit
to purchases in October, 2014.
[(14.4M -.15M)x.8]
Product was shipped in January, Without profit
2015. 30,000 Estimated inventory, 12/31
* d) Deposit. made with vendor and charged
to purchases in November, 2014.
Product was shipped FOB destination,
r
on November 29, 2014 and was ;-.:- r'\.> '!,p,<:::0 -,if,')'-r">,-s:--!O,,'[b"-
included in November 30, 2014
-': (! . ..f.':'i:J)
physical inventory as goods in.
transit. 82,500

Page 4 of 8 www.prtc.com.ph AP.1601

 EXCEL PROFESSIONAL SERVICES, INC.
-tll\,.>J< !(A,!.
J - : M NO.4 :\
QUESTIONS.

On
n April
warehouse
21, 2014, 2
of Muntinlupa
J:ged
Com pany.
the office and
The only
Based on the above and the result of your audit, answer
the following:
accounting record saved was the general ledger, from { 1 /"'H ow much is the adjusted balance of Accounts Payable
which the trial balance below was prepared. fl/ as of April 21, 2014?
a. P286,000 c. P237,000
Muntinlupa Company
b. P106,000 d. P343,000
Trial Balance .
March 31, 2014 0 ow much is the net purchases for the period January
1 to April 21, 2014?
DEB!'( CREDIT
a. P650,500 c. P660,000
Cash p 180,000
b. P673,500 d. P683,000
Accounts receivable 400,000
Inventory, Dec. 31, 2013 750,000
(,;-.-1i ow much is the adjusted balance of Accounts
Receivable as of April 21, 2014?
Land 350,000 a. P400,000 c. P360,000
Building 1,100,000 b. P440,000 d. P354,000

Ace. depreciation P 413,000 u-/How much is the sales for the period January 1 to April
Other assets 56,000 21, 2014?
a. P1,430,000 c. P1,510,000
Accounts payable 237,000
b. P1,519,500 d. P1,506,000
Accrued expenses 180,000
Share capital, PlOD par 1,000,000 L,_ 5/'}i ow much is the cost of sales for the period January 1
Retained earnings 520 ' 000
/ to April 21, 20147
a. P786,500 c. P830,500
Sales 1,350,000 b. P835,725 d. P828,300
Purc h ases 520,000
6 . /How much is the estimated inventory on April 21,
Operating expenses 344 000
f"'/ 2014?
Totals P3 700.00Q a. P570,000 c. P623,500
b. P587,775 d. P579,500
The following data and information have been gathered:
\:>0ow much is the estimated inventory Fire l oss?
a. The company's y is December 31. a. P579,500 c. P535,000
b. P477,000 d. P512,000
b. An examination of th'e April o statement and
cancelled checks revealed that checks written during
the period April 1 to 21 totaled P130,000: P57,000 ftLEM NO. 5 (00( Jl) c,.,.
4, paid to accounts payable as of March 31, P34,000 for ,
April merchandise purchases, and P39,000 paid for
.
You are engaged rn the regular annual exa
accounts and records of Valenzuela Manufacturing Co,
ination of the
other expenses. Deposits during the same period
't amounted to P129,500, which consisted of receipts on for the year ended December 31, 2014. l9.. reduce the
account from customers with the exception of a P9, 500 workload at year . .e_nd, the company, upon your
refund from a vendor for merchandise returned in recommendation, took rts annual physical i nventor y on
April. November 30, 2014. You observed the taking of the
inventory and made tests of the inventory count and the
c. Correspondence with suppliers revealed unpaid inventory records .
.,. obligations at April 21 of P106,000 for April
merchandise purchases, including P;2 3,000 for
' The company's inventory account, which inc!udes raw
shipments in trans1t on that date . Mv materials and work-in-process is on perpetual basis.
Inventories are valued at cost, first-in, first-out method.
d. Customers ack nowl edged indebtedness of P360,000 at
April 21. It was also estimated that customers owed There is no finished goods inventory.

* another P80,000 that will never be acknowledged or

The company's physical inventory revealed that the book
recovered. Of the acknowledged indebtedness, P6,000
inventory of P1,695,960 was understated by P84,000. To
will probably be unco llect i b l e. !/ avoid delay in-completing its monthly financial statements,
e. The insurance comp a ny agreed that t he fire loss claim the company decided not to adjust the book inventory until
should be based on the assumption that the overall year - end except for obsolete inventory items.
gross profit ratio for the past two years was rn effect
during the current year. The company's audited Your examination disclosed the following information
financial sttements disclosed the following regarding the November 30 inventory:
information: a. Pricing tests showed that the physical inventory was

2013 2012 overstated by P61,600.

Net sales P5,300,000 P3,900,000 b. An understatement of the physical inventory by P4,200
Net purchases 2,800,000 2, 350,000 due to errors in foo tings and extensions.
Beginning inventory 500,000 660,000
c. Direct .labor included in the inventory amounted to
Ending inventory 750,000 500,000
P280,000. Overhead was included at the rate of 200%
f. Inventory with a cost of P70,000 was salvaged. and of direct labor. You h ave ascertained that the amount
sold for P35,000. T he balance of the i n ven tory was a of direct labonvas co rrect and that the overhead rate
total l oss. .;
was proper.

d. The physi cal inventory included obsolete materials with

a total cost of P7,000. During December, the obsolete
{'{u' materials were written off. by a charge to cost of sales.
--"-.--!_
n! _-;, ' ("
Y

--------
'
. .

Page 5 of 8 'c - www.prtc.com.ph AP.1601

 EXCEL PROFESSIONAL SERVICES, INC.

Your audit also disclosed the following information about (/ 4. A client maintains perpetual inventory, records in both
the December 31 inventory: quantities and pesos. If the assessed level of control
a. Total debits to the following accounts during December risk is high an auditor will probably
were: a. Apply gross profit tests to ascertain the
Cost of sales P1,920,800 reasonableness of the physical counts.
Direct labor 338,800 b. Increase the extent of tests of controls. relevant to
Purchases 691,600 the inventory cycle.
c. Request the client to schedule the physical
b. The cost of sales of P1,920,800 included direct labor of
inventory count at the end of the year.
...- <

P386,400.
d. Insist that the client perform physical counts of
inventory items several times during the year.
QI)ESTIONS:
Based on the above and the result of your audit, determine 5. The physical count of inventory of a retailer was bigber
the following: than shown by the perpetual records. Which of the
following could explain the difference?
r djusted amount of physical inventory at November 30
c. P1,845,760
a. Inventory item has been counted but the tags
a. P1,715,560
placed on the items had not been taken off the
6. P1,631,560 d. P1,722,560
.items and added to the inventory accumulation

.
a.
justed amount of inventory at December 31
P1,509,760 c. P1,502,760 b.
sheets.
Credit memos for several items returned by
b. P1,516,760 d. P1,425,760 customers had not been recorded. -4< Vl""v.r..c. >"-'i'; IL:
c. No journal entry had been made on the retailer's
b,3. M st of materials on hand, and materials included in books for several items returned to its suppliers.
U/ work in process as of December 31 d. An item purchased "FOB shipping point" had not
a. P819,560 c. P728,560 arrived at the date of the inventory count and had
b. P812,560 d. P942,760 not been reflected in the perpetual recordsct
./'i'he amount of direct
ll.4 labor included in work in process r
"-" 6. Purchase cut-off procedures should be designed to test
tl/ as of December 31
a. P618,800 c. P338,800 whether all inventory
Purchas.ed and received before year-end was paid
b. P232,400 d. P386,400 <)_,
for.
Cs. ..xhe amount of factory overhead included in work in b. Ordered before year-end was received.
/ brocess as of December 31 c. Purchased and received before year-end was
a. P 772,800 c. P464,800 recorded.
b. P1,237,600 d. P777;600 d. Owned by the company,is in the possession o(the
+
company at year-end.

PROBLEM NO. 6 C 0 e audit of yearend inventories should include steps

to verify that the client's purchases and sales cutoffs
Select the best answer for each of the following:
were adequate. These audit steps should be designed
\) / l
Which of the fol owing is not one of the independent to detect whether merchand'1se included in the physical
auditor's objectives regard iilg the audit of inventories? count at yearend was not recorded as a
a. Verifying that inventory counted is owned by the a. Sale in the subsequent period
..r client. Jl. Purchase in the current period
Verifying that the client has used proper inventory
5- Sale In the current period
pricing. sJ.. Purchase in the subsequent period
c. Ascertaining the physical quantities of inventory on
,.'
d.
hand.
Verifying that all inventory owned by the client is
8. What form of analytical review might uncover the
existence of obsolete merchandise?
d at the time of the count. Inventory turnover rates.
/

)i.
;."'"""' , Pi->'-"' _9.. Decrease in the ratio of gross profit to sales.
. /An
C,"' aud1tor is most likely to inspect loan agre ments c. Ratio of inventory to accounts payable.
under which an entity's inventories are pledged to <f Comparison of inventory values to purchase
support management's financial statement assertion of _.. invoices.
a.. Existence or occurrence.
6. Completeness. An auditor is rJ1ost _jikeJy to learn of slowmoving
'C Presentation and disclosure. inventory through
'Cl. Valuation or allocation. a. Inquiry of sales personnel
:.. Inquiry of warehouse personnel
An auditor selected items for test counts while Physical observation of inventory
observing a client's physical inventory. The auditor d. Review of perpetual inventory records.
then traced the test counts to the client's inventory
listing: This procedure most likely obtained evidence \t) 10. The auditor tests the quantity of materials charged to
concerning work in process by tracmg these quant1t1es to
a. Existence. 57 Rights. a. Cost ledgers.
b. Completeness. g.r Valuation. j1 Perpetual inve:ntory records.
<"'
_:.Jt l.lmpt,( c. Receiving reports.
>- "'IIW'1 = Cl>s d. Material requisitions.

.....) - now do the DIY drill -

su"'"""" ....- ::. ""-1S1f!IJL<'
'Vi!U -
-
\..>'II...<

Page 6 of8 www.prtc.com.ph AP.1601

 EXCEL PROFESSIONAL SERVICES, INC.

DO-IT-YOURSELF (DIY) DRILL

PROBLEM NO. 1

Jay Roy Retailmg Ltd is a food wholesaler that supplies independent grocery stores. The company operates a perpetual
inventory system, with the first-in, first-out m"ethod used to assign costs to inventory items. Transactions and other
related information regarding two of the items (baked beans and plain flour) carried by lay Roy Ltd are given below for
June 2014 the last month of the company's reporting period.
Baked beans Plain flour
Unit of packaging Case containing 25 x 410g cans Box containing 12 x 4kg bags
Inventory@ 1 June 2014 35,000 cases@ P19.60 62,500 boxes @ P38.40
Purchases 1. 10 June: 20,000 cases@ P9.50 per 1. 3 June: 15,000 boxes@ P38.45
case 2. 1 5 June: 20,000 boxes@ P38.45
2. 19 June: 47,000 cases@ P19.70 per 3. 29 June: 24,000 boxes@ P39. 00
case
Purchase terms 2/10, n/30, FOB destination n/30, FOB destination
'
June sales 73,000 cases@ P28.50 95,000 boxes@ 4o.oo
Returns and allowances A customer returned 5,000 cases that had As June 15 purchase was unloaded, 1,000
been shipped in error. The customer's boxes were discovered damaged. A credit
account was credited for P142,500. of P38,450 was received byJay Roy
Retailing Ltd.
Physical count at 30 June
2014 32,600 cases on hand 1,500 boxes on hand
Explanation of variance No explanation found assumed stolen Boxes purchased on 29 June still in transit
on 30 June
Net realizable value at 30
June 2014 P29.00 per case P38.50 per box

QUESTIONS: The following are some of the transactions that affected

the inventory of the Bolinao Company during 2014.
Ba.sed on the above and the result of your audit, answer
the following: Jan. 8 Bolinao purchased raw materials with a list
pnce of P200,000 and was given a trade
The inventory of baked beans as of June 30, 2014 at
discount of 20% and 10%; terms 2/15, n/30.
cost, as adjusted is
Bolin ao values i nventory at the net invoice
a. P641,860 c. P642,360
price
!7 P642,220 d. P641,360
Feb. 1 4 Bolinao repossessed an inventory item from a
The inventory of plain flour as of June 30, 2014 at
customer who was overdue in making
cost, as adjusted is
payment. The unpaid balance on the sale is
a. P134,575 _s. P57,675
'P15,200. The repossessed merchandise is to
b. P993,675 d. P57,725
' be refinished and placed on sale. It is
The amount of inventory shortage is expected that the item can be sold for P24,000
"3. a. P27,440 c. P168,560 after estimated refinishing costs of P6,800.
"b?, P27,580 d. p 0 The normal profit for this item is considered to
be P3,200
.

The total inventory to be recognized in the balance

4.
sheet as ofJune 30, 2014 is Mar. 1 Refmishing costs of P6,400 were incurred on
c. p 699,535 the repossessed item.
-{. : d. P1,623,970
Apr. 3 The repossessed item was resold for P24,000
i 5. Which of the following is the best procedure for on account, 20% down.
f identifying shortages of specific items in an inventory of
Aug. 30 A sale on account was made of finished goods
.. raw materials?
that have a list price of P59,200 and a cost
a. Compare the results of a physiCal inventory of raw
P38,400. A reduction of PS,OOO off the list
materials with perpetual inventory records.
pnce was granted as a trade-in allowance. The
b. Compare inventory turnover rates with prevailing
trade-in item is to be priced to sell at P6,400 as
rates from previous years.
is. The nor-mal profit on this type of inventory
c. Estimates inventory quantities by using the gross
IS 25% of the sales price.
profit method.
d_ Review internal controls for the physical. protection
QUESTIONS:
of inventories.
Based on the above and the result of your audit, answer
the following: (Assume the client is using perpetual
inventory system)

PROBLEM NO. 2 .
/,
\ll!'f !/.011 <;\
The Bolinao Company values its inve'ntory at the lower of C,s. The entry on Jan. 8 will include a debit to Raw
FIFO cost or net realizable value (NRV)
. The Inventory Materials Inventory of
accounts at December 31, 2013, had the following a. P200,000 .e. P 1 4 1,120
__..
balances. b. P144,000 d. P1 96,00 0
Raw materials p 650,000 J /The repossessed inventory on Feb. 14 is most likely to
Work in process 1,200,000 II' be valued at
Finished goods 1,640,000 a. P14,000 S P17,200
b. P24,000 d. P14,400

Page 7 of 8 www.prtc.com.ph AP.1601

 EXCEL PROFESSIONAL SERVICES, INC.

lJr he journal entries on April 3 will include a 2. December invoices totaling P'13,200 were entered in
a. Debit to Cash of P24,000. the voucher register in December, but goods were not
b. Debit to Cost of Repossessed Goods Sold of received until January
P14,000.
c. Credit to Profit on Sale of Repossessed Inventory End of the Year
of P3,600.
3. Sales of P43,000 (cost of P12,900) were made on
d. Credit to Repossessed Inventory of P20,400.
account on December 31 and goods delivered at that
.'6 o/The trade-in inventory on Aug. 30 is most likely to be time, but all entries relating to the sales were made
7' valued at on January 2.
a. PS,OOO c. P6,000
+4. Invoices totaling PJ 5,000 w ere entered in the voucher
b, P4,800 d. P6,400
register in January, but the goods were received in
\;; ow much will be recorded as Sales on Aug. 30? December.
a. P51,200 c. P57 ,200
5. December invoices totaling P18,000 were entered in
"1).' P56,000 d. P57,600
the voucher register in December, but the goods were
not received until January.

PROBLEM NO. 3 6. Invoices totaling P12,000 e re entered in the voucher

(Oct Mt) I tJ(}f 1-bll\
w

register tn January, and the goods were received in

The cost goods sold seion of "-ftle '-income !tatement
January, but the invoices were dated December.
prepared by your client for the year ended December 31
appears as follows:
Based on the preceding inf"orrnatlon, det:rmine the net
Inventory, January 1 p 80,000 working paper adjustment that should be made for each of
Purchases 1.600.000 the following accounts:
Cost of goods available for sale 1,680,000
Inventory, December 31 100,000
7 11. Retained earnings
a. P13,200 credit c. P25,000 debit

Cost of goods sold f'1 58Q,_QQQ

b. Pll,SOO debit d. P38,200 debit
/
Although the books have been closed, your working paper \) 12. Purchases
trial balance is prepared showing all accounts with activity a. P27,000 debit c. P25,000 credit
during the year. This is the first time your firm has made b. P28,000 debit d. P2,000 debit
---
an examination. The January
and December 31 . 1
(_" 13. Beginning inventory
inventories appearing above were determined by physical
a. P25,000 credit c. P13,200 debit
count of the goods on hand on those dates and no
reconciling items were considered. All purchases are FOB
b. P38,200 debit Cl. P11,800 debit
I
shipping point. f\ 14. Accounts receivable
ac. P43,000 debit c. P30,000 debit
In the course of your examination of the inventory cutoff, 'b. P43,000 credit d. No adjustment
both at the beginning and end of the year, you discovered
the following facts:
15. Sales
a. P43,000 debit c. P30,000credit
b. P43,000 credit d. No adjustment
Beginning of the Year
1. Invoices totaling P25,000 were entered in the voucher
register in January, but the goods were received - end of AP.1601
during December.

f;;OC

:.t:.'
'

J Y- ':- :;-
;.--- -: --

www.prtc.com.ph AP.1601
Page 8 of 8
 Jr;
- .;.
, __ _

____ ..,.

.
{_.. !, ,'_ . '
1 ,. ' .
r
.-

''

- ,- -
/'-, , , _

.
: .

_,_,-

_ '-

u;
' '

?)-'
;. -..,_
,_;
.

___ ;,.

___ }'
s. "_) )

I '-
'
(. i

----:
- . ,
r

'--:..
- - :; . - ;---'.
',