AUDIT OF INVENTORIES

PROBLEM 1:
ABC Inc. uses a perpetual inventory system and reports inventory using the First-In-First-Out (FIFO) basis. ABC’s
inventory per records on December 31, 2018 was P450,000. A physical count conducted on that day found inventory on
hand of P440,000. An investigation of the discrepancy revealed the following information:
a. Goods worth P15,000 held on consignment from XYZ Co. had been included in the physical count.
b. Goods costing P4,000 were purchased on credit from DEF Co. on December 27. Freight term of the purchase was
FOB Shipping Point. The goods were shipped on December 28 but remained in transit as of December 31 and thus,
was not included in the physical count. The purchase invoice was received and processed on December 31, 2018.
c. Goods costing P5,000 were sold on credit to GHI Co. for P7,000 on December 28, 2018 under a FOB Destination
freight term. The goods were still in transit on December 31. The sales invoice was processed and recorded on
December 29, 2018.
d. Goods costing P6,000 were purchased on credit (FOB Destination) from JKL Co. on December 28, 2018. The goods
were received on December 29, 2018 and were included in the physical count. The purchase invoice was received on
January 2, 2019.
e. On December 31, 2018, ABC sold goods costing P15,000 on credit (FOB Shipping Point) to MNO Corporation for
P20,000. The goods were dispatched from the warehouse on December 31, 2018 but the sales invoice had not been
processed at that date.
f. Damaged inventory items valued at P6,000 were discovered during the physical count. These items were omitted from
the physical count but write-off of these items was still pending.

Required:
1. How much is the adjusted inventory balance on December 31, 2018?
2. What adjustment should be made to the reported sales amount of ABC for the year ended December 31, 2018?
3. What is the adjustment to the accounts payable as of December 31, 2018?
4. How much is the “unlocated difference” between the perpetual balance and the physical count?

PROBLEM 2:
The following information was obtained from ABC’s accounting records for the year ended December 31, 2018:

Inventory based on December 31 physical count P1,900,000

Accounts Payable, December 31 1,500,000
Sales, net of returns 9,700,000

Additional Information:
a. The physical count included merchandise billed to a customer FOB Shipping Point on December 31, 2018. These
merchandise cost P100,000 and were billed at P120,000. They were in the client’s shipping area waiting to be picked
up by the customer.
b. Goods shipped FOB Shipping Point by a vendor were still in transit on December 31, 2018 Invoice cost of the goods
amounted to P140,000.
c. Work in process inventory costing P45,000 was sent to a contractor for processing.
d. The physical count excluded goods that were returned by customers on December 31, 2018. These goods had a cost of
P75,000 were inspected and returned to inventory on January 5, 2019. Credit memos for P105,000 were issued for the
returns on January 5.
e. In transit to a customer on December 31, 2018, were merchandise costing P26,000 shipped FOB Shipping Point on
December 26, 2018. A sales invoice for P45,000 was issued on January 3, 2019 upon being notified of the customer’s
receipt of the goods.
f. Goods costing P47,000 were received from a vendor on December 31, 2018. In preparation of New Year, however,
these inventories were recorded on a receiving report dated January 2, 2019. The related invoice was recorded on
December 31, 2018. These goods were not included in the physical count.
g. Included in the physical count were goods received from a vendor on December 27, 2018. The related invoice for
P54,000 was not recorded by the accounting department.
h. A monthly freight bill for P48,000 was received on January 3, 2019. It is specifically related to merchandise bought in
December 2018, one-half of which was still in the inventory at December 31, 2018. The freight was not included in
either the inventory or in accounts payable on December 31, 2018.
Required:
1. How much is the inventory that would be reported in the 2018 statement of financial position?
2. How much is the adjusted accounts payable that would be reported in the 2018 statement of financial position?
3. How much is the amount of net sales to be reported on the 2018 income statement?
4. How much is the adjustment to inventory on December 31, 2018?
5. How much is the adjustment to accounts payable on December 31, 2018?

PROBLEM 3:
You have been engaged for the audit of Z Company forthe year ended December 31, 2018. Z Company is engaged in the
wholesale chemical business and makes all sales at 25% over cost. Unadjusted balances for accounts receivable, inventory
and accounts payable were: P250,000, P300,000 and P200,000 respectively.

Following are portions of the client’s sales and purchases accounts for the calendar year 2018.
EXHIBIT
Sales
Balance Forward
Date Reference Amount Date Reference Amount
12/31 Closing entry P699,860 P658,320
12/27 SI# 965 5,195
12/28 SI# 966 19,270
12/28 SI# 967 1,302
12/31 SI# 969 5,841
12/31 SI# 970 7,922
12/31 SI# 971 2,010
P699,860 P699,860

Purchases
Balance Forward
Date Reference Amount Date Reference Amount
P360,000 12/31 Closing entry P385,346
12/28 RR# 1059 3,100
12/30 RR# 1061 8,965
12/31 RR# 1062 4,861
12/31 RR# 1063 8,120
P385,346 P385,346

*SI = Sales Invoice; **RR = Receiving Report

You observed the physical inventory of goods in the warehouse on December 31, 2018, and were satisfied that it was
properly taken.
When performing a sales and purchases cutoff test, you found that at December 31, 2018, the last receiving report used
was no. 1063 and that no shipments have been made on any sales invoices with numbers larger than no. 968. You also
obtained the following additional information:
1. Included in the warehouse physical inventory at December 31, 2018, were chemicals that had been acquired and
received on receiving report no. 1060 but for which an invoice was not received until 2019. Cost was P2,183.
2. In the warehouse at December 31, 2018, were goods that had been sold and paid for by the customer but which were
not shipped out until the year 2019. They were all sold on sales invoice no. 965 and were not inventoried. It was
appropriately recorded as a sale.
3. On the evening of December 31, 2018, two cars were on Z Company siding:
a. Car AR38162 was unloaded on January 2, 2019, and received on receiving report no. 1063. The freight was
paid by the vendor.
b. Car BAE74123 was loaded and sealed on December 31, 2018, and was switched off the company’s siding on
January 2, 2019. The sales price was P12,700 and the freight was paid by the customer. This order was sold
on sale invoice no. 968.
4. Temporarily stranded at December 31, 2018 on a railroad siding were two cars of chemical en route to the Papyrus
Paper Company. They were sold on sales invoice no. 966, and the terms were FOB destination.
5. Included in the physical inventory were chemicals exposed to rain while in transit and deemed unsalable. Their
invoice cost was P1,250, and freight charges of P350 had been paid on the chemicals. Z Company filed a claim
against the shipper in January 2019.

Required:
1. How much is the adjusted accounts receivable account as of December 31, 2018?
2. How much is the adjusted sales account for 2018?
3. How much is the adjusted inventory account as of December 31, 2018?
4. How much is the adjusted purchases account for 2018?
5. How much is the accounts payable to be reported in the 2018statement of financial position?

PROBLEM 4:
ABC Company uses the first-in, first-out method in calculating cost of goods sold for the three products that the company
handles. Product A is being sold at P8 per unit, Product B is being sold at P11 per unit while Product C is being sold at P2
per unit. Inventories and purchases information concerning the three products are shown below:

Product A Product B Product C

Beginning Inventory 50,000 units @ 30,000 units @ 65,000 units @
P6.00 P10.00 P1.00
January – June Purchases 70,000 units @ 45,000 units @ 30,000 units at
P6.50 P10.50 P1.50
July – December Purchases 30,000 @ P8.00
January – December Sales 105,000 units 50,000 units 45,000 units

Costs to sell each product is at 10% of the selling price. Normal profit margins of A, B and C are 30%, 30% and 15% of
selling price after selling costs respectively.

On December 31, 2018, the suppliers reduced their prices from the most recent purchase prices by 20%, 10% and 5% for
Products A, B and C respectively. Accordingly, ABC decided to reduce their selling price by 10% effective January 1,
2019.

Required:
1. How much is the total cost of the ending inventory on December 31, 2018?
2. How much is the inventory to be presented in the 2018 balance sheet?
3. How much is the allowance for inventory write-down on December 31?
4. How much is the cost of sales, adjusted for the year ended December 31, 2018?