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Audit of Inventories - Part 2

The document describes several problems involving inventory auditing. Problem 5 involves determining total sales, purchases, and inventory shortage for a company by analyzing inventory counts, sales receipts, cost of purchases, and accounts receivable. Problem 6 uses gross profit ratio analysis to calculate cost of goods sold and ending inventory based on interim inventory counts. Problem 7 uses the retail inventory method to estimate ending inventory quantities and costs. Problem 8 involves estimating inventory destroyed in a fire by analyzing historical sales and cost data.

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Mark Lawrence Yusi
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969 views4 pages

Audit of Inventories - Part 2

The document describes several problems involving inventory auditing. Problem 5 involves determining total sales, purchases, and inventory shortage for a company by analyzing inventory counts, sales receipts, cost of purchases, and accounts receivable. Problem 6 uses gross profit ratio analysis to calculate cost of goods sold and ending inventory based on interim inventory counts. Problem 7 uses the retail inventory method to estimate ending inventory quantities and costs. Problem 8 involves estimating inventory destroyed in a fire by analyzing historical sales and cost data.

Uploaded by

Mark Lawrence Yusi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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PROBLEM NO.

5 – Inventory Estimation – Gross Profit Rate method; Theft of 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 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 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 c. P1,950,000
b. P 2,075,000 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 in import and wholesale business, for
the fiscal year ended June 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 P1,344,000


Sales for the fiscal year ended June 30, 2020 1,536,000
Purchased for eleven months ended May 31, 2020
(before audit adjustments) 1,080,000
Purchases for the fiscal year ended June 30,2020 1, 280,000
Inventory, July 1, 2019 140,000
Physical inventory, May 31, 2020 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 was shipped in
July 2020.
(3). A shipment in June was damaged through the carelessness 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 reasonableness of the year-end inventory by the application of gross profit 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 ratio 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 Inventory Estimation – Retail Inventory Method

RJE is using the average retail inventory method. The following information is available for the current
year.

Cost Retail
Beginning inventory P1,100,000 P2,200,000
Purchases 15,800,000 26,300,000
Freight in 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 800,000
Net markups 600,000
Net markdowns 900,000
Sales 24,700,000
Sales returns 350,000
Sales discounts 200,000
Employee discounts 600,000
Loss from breakage 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 the finished
goods at P620,000.

The inventories on January 1, 2020 consisted of:


Materials P310,000
Goods in process 1,215,000
Finished goods 1,700,000
Total P3,225,000

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

Sales Gross profits


2017 P8,000,000 P2,400,000
2018 7,600,000 2,215,000
2019 5,000,000 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% d. 36.00%
2. Total cost of goods placed in process
a. P2,710,000 c. P3.925,000
b. P973,500 d. 4,375,000
3. Total cost of goods manufactured
a. P3,133,500 c. P 854,000
b. P 973,000 d. P3,014,400
4. Inventory of goods in process lost
a. P 791,500 c. P 119,100
b. P1,360,600 d. P2,951,500

Answers:
1.) A 2.) C 3.) B 4.) D

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