MODULE – 5 AUDIT OF INVENTORIES

Inventory Cycle for Manufacturers, Retailers, and Distributors

The term inventory cycle means different things to different companies in different verticals. For
companies that source, assemble, and create inventory, it refers to a time-based process which
is basic to understanding how to maximize resources and cash flow. To businesses that buy,
store, and sell inventory, it focuses on the process of understanding, planning, and managing
inventory levels from the point of purchase through more-efficient auditing.

3 Phases of the Cycle for Manufacturers

The term inventory cycle refers to a three-phase process:
1. The ordering or administrative phase
2. The production phase
3. The finished goods and delivery phase.

The first phase, the ordering phase, is the amount of time it takes to order and receive raw
materials. The production phase is the work in progress phase. The last phase entails the
finished goods (i.e., products produced by the manufacturer) that remain in stock and includes
the delivery time for products to reach the customer. The inventory cycle is measured by
the number of days it takes from the beginning of phase one, through delivery.

For Retailers and Distributors

To a retailer or distributor, the inventory cycle is the process of understanding, planning, and
managing their inventory levels, which includes:
 Accurate ordering of required inventory based on demand and terms, by product
 Reduced time to reorder products on a periodic basis
 An accurate history of individual product sales and department sales
 Increased customer satisfaction
Inventory control can be applied to any system, whether it's manual or computerized.

Inventory's Impact
The most important part of the inventory cycle process (also called cycle inventory) is to
frequently and regularly perform inventory counts to understand the turnover rate or demand for
a particular item.

A cycle count is an auditing procedure whereby a small subset of inventory, usually in a specific
location, is counted at a specific day or time. The goal is to move through all inventory on a
regular basis. Cycle counting yields more accurate inventory results.
Retailers may also look at cycle stock inventory, or on-hand inventory, which is the sum of what
is on the shelves and what is in the warehouse or storeroom. The quantity of a cycle stock
inventory is equal to the total on-hand inventory. If the safety stock inventory is maintained, it
does not count. The goal is to prevent running out of stock, while managing cash flow, and
economize as much as possible on shipping and storage.
Internal Control
Internal controls are reviews, procedures or guidelines to protect and safeguard a company’s
business and financial information. Business owners and managers are responsible for
developing and implementing internal controls to keep costs down and minimize or avoid
problems. Inventory represents an expensive and sizable physical asset for most companies.
Internal controls are necessary for inventory, because companies can rarely survive if they
consistently lose inventory to theft, spoilage and obsolescence.

Inventory System
Inventory systems are accounting methods for managing the financial transactions relating to
a company’s physical inventory items. Two common systems are the periodic and perpetual
systems. Periodic inventory systems update the accounting ledger once a month or quarterly.
A better and more controlling method is the perpetual inventory system, which updates
inventory after each purchase, sale and adjustment. Inventory systems give owners and
managers a better idea of inventory cost and its effects on the balance sheet, which is an
important part of internal controls.

Order Process
Internal controls create specific limitations on a company’s inventory ordering process.
Owners and managers usually divide inventory ordering duties among multiple employees.
This ensures an individual does not order inventory and steal it as it comes into the company’s
warehouse. Separating out the purchase order and payment process is also important, since
an employee could “order” inventory from a fake company and send the payment to a post
office box rented by the employee.

Storage
Storage is a physical inventory control procedure. Companies must find secure warehouses
and distributors, so inventory is not stolen or damaged. Adequate warehousing also ensures
the company has enough space to properly receive and store inventory products. Companies
must have enough space for driving forklifts, moving pallets and allowing workers to walk
through the warehouse safely without damaging inventory.

Physical counts
Physical counts reconcile the company’s accounting ledger with the actual amount of
inventory on hand. Companies typically use cycle counts or an annual inventory count for this
process. Cycle counts are ongoing counts where companies require employees to count a
specific number of items each week. High value or popular items may be a constant feature of
cycle counts to ensure these items are not comprised. Annual physical counts happen once a
year, when the company counts its entire inventory at one time rather than a weekly counting
process.
Audit Assertions for Inventory
In the audit of inventory, we usually test the audit assertions included in the table below:
Audit assertions for inventory

Inventory balances reported on financial statements actually exist at the

Existence
reporting date.

Inventory reported on the balance sheet includes all inventory transactions

Completeness
that have occurred during the accounting period.

Rights and All inventory reported on financial statements as at the reporting date really
obligations belongs to the company.

Valuation Inventory balances truly reflect its economic value.

Presentation and Inventory is properly classified and sufficiently disclosed in the notes to
disclosure financial statements.

In the audit of inventory, we usually focus more on existence and valuation. This is due to we
concern more about whether the inventory does actually exist; and that it has been properly
valued in accordance with applicable accounting standards.

Audit Procedures:

Confirm existence of inventories

Inventories are the accounting balance in the balance sheet. And if auditor decided to perform
their review on the entity’s inventories, existence is one of the financial statements assertions
that auditor needs to confirm.

Physical verification is one of the procedure that auditor use to confirm this assertion. The
auditor may consider to join the observation of a client’s year-end inventories count or perform
their own sampling.

Physical verification is not only helping the auditor to confirm the existence of inventories that
report in the balance sheet, but it also helps auditors to assess the condition of inventories,
physical controls and asses the procedures that client use to perform their year-end counts.

When auditor assesses the counting procedures that perform by its client, auditors should focus
on three main areas including the procedures before the count, during the count, and the
procedure after the count.

These procedures are really important for the client to ensure that any error to the quantity of
inventories report is identified and reflected financial statements.
Review ownership
Inventories are the current assets and entity could recognize the inventories in its financial
statements only if those inventories meet the definition provided by PFRS Conceptual
Framework.

Normally, auditor review the ownership (Right and Obligation) of the entity over the inventories
by reviewing the Contracts, Quotation, Invoices, and Delivery Noted. Term and Condition in the
contract are very important for ownership verification.

Assess the value of inventories

PAS 2 is the current standard that issued by PFRS for dealing with inventories measurement,
recognition, and disclosure and so on. Measurement of inventories should be at the lowest of
cost and net realizable value.

Normally, the cost of inventories including cost of acquisition, cost of conversion, and others
related cost that bring inventories into their present location.

Inventories are:
• items held for sale, or
• goods to be used in the production of goods to be sold.

INITIAL VALUATION
Costs – includes cash acquisition price and costs directly connected with bringing the
goods to the buyer’s place of business and converting such goods to a salable condition.

Classification
Four accounts
• Raw materials
• Work in process
• Finished goods
• Mfg. supplies

ACCOUNTING FOR INVENTORIES

Perpetual System
1. Purchases of merchandise are debited to Inventory.
2. Freight-in is debited to Inventory. Purchase returns and allowances and purchase
discounts are credited to Inventory.
3. Cost of goods sold is debited and Inventory is credited for each sale.
4. Subsidiary records show quantity and cost of each type of inventory on hand.

The perpetual inventory system provides a continuous record of Inventory and

Cost of Goods Sold.
Periodic System
1. Purchases of merchandise are debited to Purchases.
2. Ending Inventory determined by physical count.
3. Calculation of Cost of Goods Sold:
Beginning inventory XX
Purchases, net XX
Goods available for sale XX
Ending inventory XX
Cost of goods sold XX

Inventory Control
All companies need periodic verification of the inventory records by actual count, weight, or
measurement, with the counts compared with the detailed inventory records.
Companies should take the physical inventory near the end of their fiscal year, to properly report
inventory quantities in their annual accounting reports.

Valuation requires determining

• The physical goods (goods on hand, goods in transit, consigned goods, special sales
agreements).
• The costs to include (product costs).
• The cost flow assumption (specific Identification, average cost, FIFO, retail, etc.).

Goods Included in Inventory

A company should record purchases when it obtains legal title to the goods.
Subsequent Valuation of Inventory

Net Realizable Value

Estimated selling price in the normal course of business less estimated costs to complete and
estimated costs to make a sale.

Use of an Allowance
Instead of crediting the Inventory account for net realizable value adjustments, companies
generally use an allowance account.

Loss due to decline to NRV xx

Allowance to reduce inventory to NRV xx

Recovery of Inventory Loss

• Amount of write-down is reversed.
• Reversal limited to amount of original write-down.

Assume the net realizable value increases. Entity makes the following entry, using the loss
method.
Allowance to reduce inventory to NRV xx
Recovery of inventory loss xx

Inventory Estimates
Gross Profit Method
(1) Provides an estimate of ending inventory.
(2) Uses past percentages in calculation.
(3) A blanket gross profit rate may not be representative.
(4) Normally unacceptable for financial reporting purposes. IFRS requires a physical
inventory as additional verification.

Retail Inventory Method

A method used by retailers, to value inventory without a physical count, by converting retail
prices to cost.

Requires retailers to keep:

(1) Total cost and retail value of goods purchased.
(2) Total cost and retail value of the goods available for sale.
(3) Sales for the period.

Special Items
• Freight costs
• Purchase returns
• Purchase discounts and allowances
• Transfers-in
• Normal spoilage
• Abnormal shortages
• Employee discounts

Purchase commitments
A firm Purchase commitment is “an agreement with an unrelated party, binding on both parties
and usually legally enforceable, that
a. Specifies all significant terms, including the price and timing of the transactions, and
b. Includes a disincentive for non-performance that is sufficiently large to make
performance highly probable.” (PFRS 5. Appendix)

A contracting party under a firm purchase commitment cannot cancel the contract without
suffering penalty. Thus, the buyer has to accept future delivery even if the goods promised to
be purchased become impaired. In such a case the buyer recognizes loss on purchase
commitment.

When prices subsequently increase, the buyer recognizes gain on purchase commitment,
however the gain should not exceed the loss previously recognized.
Illustrative Problem: Sales and purchases cutoff
The Rosalina Company is on a calendar year basis. The following data were found during your
audit:

a. Goods in transit shipped FOB destination by a supplier, in the amount of 100,000, had been
excluded from the inventory, and further testing revealed that the purchase had been
recorded.

b. Goods costing 50,000 had been received, included in inventory, and recorded as a
purchase. However, upon your inspection the goods were found to be defective and would
be immediately returned.

c. Materials costing 250,000 and billed on December 30 at a selling price of 320,000, had been
segregated in the warehouse for shipment to a customer. The materials had been excluded
from inventory as a signed purchase order had been received from the customer. Terms,
FOB destination.

d. Goods costing 70,000 was out on consignment with Hermie Company. Since the monthly
statement from Hermie Company listed those materials as on hand, the items had been
excluded from the final inventory and invoiced on December 31 at 80,000.

e. The sale of 150,000 worth of materials and costing 120,000 had been shipped FOB point of
shipment on December 31. However, this inventory was found to be included in the final
inventory. The sale was properly recorded in 2020.

f. Goods costing 100,000 and selling for 140,000 had been segregated, but not shipped at
December 31, and were not included in the inventory. A review of the customer’s purchase
order set forth terms as FOB destination. The sale had not been recorded.

g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not
arrived as yet. However, these materials costing 170,000 had been included in the
inventory count, but no entry had been made for their purchase.

h. Merchandise costing 200,000 had been recorded as a purchase but not included as
inventory. Terms of sale are FOB shipping point according to the supplier’s invoice which
had arrived at December 31.

Further inspection of the client’s records revealed the following December 31, 2020 balances:
Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable, P690,000; Net sales,
P5,050,000; Net purchases, P2,300,000; Net income, P510,000.

QUESTIONS:

Based on the above and the result of your audit, determine the adjusted balances of following
as of December 31, 2020:
1. Inventory
2. Accounts payable
3. Net sales
4. Net purchases
5. Net income
Solution:

Question Nos. 1 to 5

Accounts Net Net

Inventory Payable Net Sales Purchases Income
Unadjuste
d P1,100,000 P690,00 P5,050,000 P2,300,000 P510,000
balances 0
(a) - (100,000 - (100,000) 100,000
)
(b) (50,000) (50,000) - (50,000) -
(c) 250,000 - (320,000) - (70,000)
(d) 70,000 - (80,000) - (10,000)
(e) (120,000) - - - (120,000)
(f) 100,000 - - - 100,000
(g) - 170,000 - 170,000 (170,000)
(h) 200,000 - - - 200,000
Adjusted
balances P1,550,000 P710,00 P4,650,000 P2,320,000 P540,000
0
 MODULE # 5 Post-test
APPLIED AUDITING
AUDIT OF INVENTORY

PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. Presented below is a list of items that may or may not reported as inventory in a company’s
December 31 statement of financial position.

1. Goods out on consignment at another company’s store 800,000

2. Goods sold on installment basis 100,000
3. Goods purchased f.o.b. shipping point that are in transit
at December 31 120,000
4. Goods purchased f.o.b. destination that are in transit at
December 31 200,000
5. Goods sold to another company, for which our company
has signed an agreement to repurchase at a set price
that covers all costs related to the inventory 300,000
6. Goods sold where large returns are predictable 280,000
7. Goods sold f.o.b. shipping point that are in transit
December 31 120,000
8. Freight charges on goods purchased 80,000
9. Factory labor costs incurred on goods still unsold 50,000
10. Interest cost incurred for inventories that are routinely
manufactured 40,000
11. Costs incurred to advertise goods held for resale 20,000
12. Materials on hand not yet placed into production 350,000
13. Office supplies 10,000
14. Raw materials on which a the company has started
production, but which are not completely processed 280,000
15. Factory supplies 20,000
16. Goods held on consignment from another company 450,000
17. Costs identified with units completed but not yet sold 260,000
18. Goods sold f.o.b. destination that are in transit at
December 31 40,000
19. Temporary investment in stocks and bonds that will be
resold in the near future 500,000
 How much of these items would typically be reported as inventory in the financial statements?
a. 2,300,000 c. 2,260,000
b. 2,000,000 d. 2,220,000

2. Sales and purchases cutoff

The Rosalina Company is on a calendar year basis. The following data were found during your
audit:

a. Goods in transit shipped FOB destination by a supplier, in the amount of 100,000, had been
excluded from the inventory, and further testing revealed that the purchase had been
recorded.

b. Goods costing 50,000 had been received, included in inventory, and recorded as a
purchase. However, upon your inspection the goods were found to be defective and would
be immediately returned.

c. Materials costing 250,000 and billed on December 30 at a selling price of 320,000, had been
segregated in the warehouse for shipment to a customer. The materials had been excluded
from inventory as a signed purchase order had been received from the customer. Terms,
FOB destination.

d. Goods costing 70,000 was out on consignment with Hermie Company. Since the monthly
statement from Hermie Company listed those materials as on hand, the items had been
excluded from the final inventory and invoiced on December 31 at 80,000.

e. The sale of 150,000 worth of materials and costing 120,000 had been shipped FOB point of
shipment on December 31. However, this inventory was found to be included in the final
inventory. The sale was properly recorded in 2017.

f. Goods costing 100,000 and selling for 140,000 had been segregated, but not shipped at
December 31, and were not included in the inventory. A review of the customer’s purchase
order set forth terms as FOB destination. The sale had not been recorded.

g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not
arrived as yet. However, these materials costing 170,000 had been included in the
inventory count, but no entry had been made for their purchase.

h. Merchandise costing 200,000 had been recorded as a purchase but not included as
inventory. Terms of sale are FOB shipping point according to the supplier’s invoice which
had arrived at December 31.
 Further inspection of the client’s records revealed the following December 31, 2017 balances:
Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable, P690,000; Net sales,
P5,050,000; Net purchases, P2,300,000; Net income, P510,000.

QUESTIONS:

Based on the above and the result of your audit, determine the adjusted balances of following
as of December 31, 2017:

1. Inventory
a. 1,230,000 c. 1,550,000
b. 1,650,000 d. 1,480,000

2. Accounts payable
a. 710,000 c. 810,000
b. 540,000 d. 760,000

3. Net sales
a. 4,550,000 c. 4,730,000
b. 4,650,000 d. 4,970,000

4. Net purchases
a. 2,370,000 c. 2,150,000
b. 2,420,000 d. 2,320,000

5. Net income
a. 220,000 c. 540,000
b. 290,000 d. 550,000

3. Joseph Sales Company uses the first-in, first-out method in calculating cost of goods sold for
the three products that the company handles. Inventories and purchase information concerning
the three products are given for the month of October.

Product C Product P Product A

Oct. 1 Inventory 50,000 units at 30,000 units 65,000 units
P6.00 at P10.00 at P0.90
Oct. 1-15 Purchases 70,000 units at 45,000 units 30,000 units
P6.50 at P10.50 at P1.25
Oct. 16-31 Purchases 30,000 units at
P8.00
Oct. 1-31 Sales 105,000 units 50,000 units 45,000 units
Oct. 31 Sales P8.00/unit P11.00/unit P2.00/unit
price
 On October 31, the company’s suppliers reduced their prices from the most recent purchase
prices by the following percentages: product C, 20%; product P, 10%; product A, 8%.
Accordingly, Joseph decided to reduce its sales prices on all items by 10%, effective November
1. Joseph’s selling cost is 10% of sales price. Products C and P have a normal profit (after
selling costs) of 30% on sales prices, while the normal profit on product A (after selling cost) is
15% of sales price.

Based on the above and the result of your audit, determine the following:

1. Total cost of Inventory at October 31 is

a. 565,000 c. 557,310
b. 655,500 d. 617,500

2. The amount of Inventory to be reported on the company’s statement of financial position at

October 31 is
a. 569,850 c. 559,350
b. 543,810 d. 595,350

3. The Allowance for inventory write down at October 31 is

a. 5,650 c. 85,650
b. 13,500 d. 60,150

4. The cost of sales after loss on inventory write down for the month of October is
a. 1,298,500 c. 1,022,260
b. 1,290,650 d. 1,208,000

4. You were engaged by Alfredo Corporation for the audit of the company’s financial statements
for the year ended December 31, 2020. The company is engaged in the wholesale business
and makes all sales at 25% over cost.

The following were gathered from the client’s accounting records:

SALES PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P7,800,000 Balance forwarded P4,200,000
12/27 SI No. 60,000 12/28 RR #2059 36,000
865
12/28 SI No. 225,000 12/30 RR #2061 105,000
866
12/28 SI No. 15,000 12/31 RR #2062 63,000
867
12/31 SI No. 69,000 12/31 RR #2063 96,000
869
12/31 SI No. 102,000 12/31 Closing
870 entry (4,500,000)
12/31 SI No. 24,000 P -
871
12/31 Closing
entry (8,295,000)
P -
Note: SI = Sales Invoice RR = Receiving Report

Accounts receivable P750,000

Inventory 900,000
Accounts payable 600,000

You observed the physical inventory of goods in the warehouse on December 31 and were
satisfied that it was properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, the last
Receiving Report which had been used was No. 2063 and that no shipments had been made on
any Sales Invoices whose number is larger than No. 868. You also obtained the following
additional information:

a) Included in the warehouse physical inventory at December 31 were goods which had been
purchased and received on Receiving Report No. 2060 but for which the invoice was not
received until the following year. Cost was P27,000.

b) On the evening of December 31, there were two trucks in the company siding:
 Truck No. XXX 888 was unloaded on January 2 of the following year and received on
Receiving Report No. 2063. The freight was paid by the vendor.

 Truck No. MGM 357 was loaded and sealed on December 31 but leave the company
premises on January 2. This order was sold for P150,000 per Sales Invoice No. 868.

c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute
to ABC Trading Corporation. ABC received the goods, which were sold on Sales Invoice
No. 866 terms FOB Destination, the next day.

d) Enroute to the client on December 31 was a truckload of goods, which was received on
Receiving Report No. 2064. The goods were shipped FOB Destination, and freight of
P2,000 was paid by the client. However, the freight was deducted from the purchase price
of P800,000.

Based on the above and the result of your audit, determine the following:

1. Sales for the year ended December 31, 2020

a. 8,100,000 c. 7,875,000
b. 7,725,000 d. 8,025,000
 2. Purchases for the year ended December 31, 2020
a. 4,500,000 c. 5,631,000
b. 5,727,000 d. 4,527,000

3. Accounts receivable as of December 31, 2020

a. 330,000 c. 525,000
b. 555,000 d. 180,000

4. Inventory as of December 31, 2020

a. 1,452,000 c. 1,200,000
b. 1,221,000 d. 1,296,000

5. Accounts payable as of December 31, 2020

a. 600,000 c. 531,000
b. 627,000 d. 1,827,000

5. The following accounts were included in the unadjusted trial balance of Alfredo Company as of
December 31, 2020:

Cash P
481,600
Accounts receivable 1,127,000
Inventory 3,025,000
Accounts payable 2,100,500
Accrued expenses 215,500

During your audit, you noted that Alfredo held its cash books open after year-end. In addition,
your audit revealed the following:

1. Receipts for January 2021 of 327,300 were recorded in the December 2020 cash receipts
book. The receipts of 180,050 represent cash sales and 147,250 represent collections from
customers, net of 5% cash discounts.

2. Accounts payable of 186,200 was paid in January 2021. The payments, on which discounts
of 6,200 were taken, were included in the December 2020 check register.

3. Merchandise inventory is valued at 3,025,000 prior to any adjustments. The following

information had been found relating to certain inventory transactions.

a. Goods valued at 137,500 are on consignment with a customer. These goods are not
included in the inventory figure.

b. Goods costing 108,750 were received from a vendor on January 4, 2021. The related
invoice was received and recorded on January 6, 2021. The goods were shipped on
December 31, 2020, terms FOB shipping point.
 c. Goods costing 318,750 were shipped on December 31, 2020, and were delivered to the
customer on January 3, 2021. The terms of the invoice were FOB shipping point. The
goods were included in the 2020 ending inventory even though the sale was recorded in
2020.

d. A 91,000 shipment of goods to a customer on December 30, terms FOB destination are
not included in the year-end inventory. The goods cost 65,000 and were delivered to the
customer on January 3, 2021. The sale was properly recorded in 2021.

e. The invoice for goods costing 87,500 was received and recorded as a purchase on
December 31, 2020. The related goods, shipped FOB destination were received on
January 4, 2021, and thus were not included in the physical inventory.

f. Goods valued at 306,400 are on consignment from a vendor. These goods are not
included in the physical inventory.

Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2020:

1. Cash
a. 481,600 c. 334,300
b. 340,500 d. 346,700

2. Accounts receivable
a. 1,454,300 c. 1,127,000
b. 1,282,000 d. 1,274,250

3. Inventory
a. 3,017,500 c. 2,930,000
b. 3,040,000 d. 2,505,000

4. Accounts payable
a. 2,395,450 c. 2,286,500
b. 2,307,950 d. 2,301,750

5. Current ratio
a. 2.00 c. 1.84
b. 1.83 d. 2.01

6. Mavis, 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 and net realizable value (NRV), P244,000. The inventory on January 1, 2020
showed cost of P390,000 and net realizable value of P375,000. It is the corporation’s
practice to value inventory at “lower of cost or NRV.” Any loss between cost and NRV is
included in “Other expenses.”

2. The average gross profit rate was 40% of net sales.

3. The accounts receivable as of January 1, 2020 were 135,000. During 2020, accounts
receivable written off during the year amounted to 10,000. Accounts receivable as of
December 31, 2020 were 375,000.

4. Outstanding purchase invoices amounted to 300,000 at the end of 2020. At the beginning
of 2020 they were 375,000.

5. Receipts from customers during 2020 amounted to 3,000,000.

6. Disbursements to merchandise creditors amounted to 2,000,000.

Based on the above and the result of your audit, determine the following:

1. The total sales in 2020 is

a. 3,240,000 c. 3,250,000
b. 3,230,000 d. 2,770,000

2. The total purchases in 2020 is

a. 2,000,000 c. 1,950,000
b. 2,075,000 d. 1,925,000

3. The amount of inventory shortage as of December 31, 2020 is

a. 106,000 c. 100,000
b. 175,000 d. 0

7. A recent fire severely damaged Penguin Company’s administration building and destroyed
many of its financial records. You have been contracted by Penguin’s management to
reconstruct as much financial information as possible for the month of July. You learn that
Penguin makes a physical inventory count at the end of each month to determine monthly
ending inventory values. You also find out that the company applies the average cost method.

You are able to gather the following information by examining various documents:
Inventory, July 31 150,000 units
Total cost of goods available for
sale in July 356,400
Cost of goods sold during July 297,000
Gross profit on sales for July 303,000
 Cost of inventory, July 1 P0.35 per unit

The following are Penguin’s July purchases of merchandise:

Date Quantity Unit Cost
July 6 180,000 P0.40
12 150,000 0.41
16 120,000 0.42
17 150,000 0.45

1. Number of units on hand July 1

a. 450,000 b. 848,571
c.169,714 d. 300,000

2. Units sold during July

a. 600,000 b. 300,000
c. 750,000 d. 450,000
3. Unit cost of inventory at July 31
a. 0.35 b. 0.396
c.0.419 d. 0.279

8. Dundas Mart uses the average retail inventory method. The following information is available
for the current year:

Cost Retail
Beginning inventory P 1,100,000 P 2,200,000
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

Based on the above and the result of your audit, answer the following:

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. 3,000,000 c. 2,800,000
b. 3,600,000 d. 3,650,000

3. The estimated ending inventory at cost is

a. 1,743,945 c. 1,832,143
b. 2,198,571 d. 1,800,000

4. The estimated cost of goods sold is

a. 15,267,857 c. 15,000,000
b. 14,901,429 d. 15,056,055

5. If the inventory at retail based on physical count at December 31 is P1,700,000, the

estimated inventory shortage is
a. 780,000 c. 755,709
b. 793,929 d. 0

9. On November 17, 2020, Matet Airways entered into a non-cancelable commitment to purchase
3,000 barrels of aviation fuel for 9,000,000 on March 31, 2021. Matet entered into this purchase
commitment to protect itself against the volatility in the aviation fuel market. By December 31,
2020, the purchase price of aviation fuel had fallen to 2,200 per barrel. However, by March 31,
2021, when Matet took delivery of the 3,000 barrels, the price of aviation fuel had risen to 3,100
per barrel.

Based on the above and the result of your audit, answer the following:

1. The loss on purchase commitment on December 31, 2020 is

a. 1,500,000 c. 2,400,000
b. 900,000 d. 0

2. The gain on purchase commitment on March 31, 2021 is

a. 2,700,000 c. 2,400,000
b. 300,000 d. 0

10. Biological assets; Agricultural produce

A public limited company, Windsor Dairy Products, produces milk on its farms. As of January 1,
2021 Windsor has a stock of 1,050 cows (average age, 2 years old) and 150 heifers (average
age, 1 year old).

Additional information:

 Windsor purchased 375 heifers, average age 1 year, on July 1, 2021. No animals were
born or sold during the year.
  The Company produced milk with a fair value of 660,000 (that is determined at the time of
milking) in the year ended 31 December 2021. The Company also estimated the following
costs:

Commissions to brokers and dealers 20,000

Transport and other costs necessary to get milk
to a market 10,000

 The fair values less costs to sell were

1 - year old animal at December 31, 2021 P3,200

2 - year old animal at December 31, 2021 4,500
1.5 - year old animal at December 31, 2021 3,600
3 - year old animal at December 31, 2021 5,000
1 - year old animal at January 1, 2021 and July 1, 2021 3,000
2 - year old animal at January 1, 2021 4,000

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. The milk should be valued at

a. 660,000 c. 650,000
b. 640,000 d. 630,000

2. The increase in value of biological assets in 2021 due to price change?

a. 460,000 c. 630,000
b. 555,000 d. 1,500,000

3. The increase in value of biological assets in 2021 due to physical change?

a. 870,000 c. 590,000
b. 720,000 d. 780,000

4. The carrying amount of the biological assets as of January 1, 2021 is

a. 4,650,000 c. 5,150,000
b. 5,205,000 d. 3,150,000

5. The carrying amount of the biological assets as of December 31, 2021 is

a. 6,150,000 c. 7,325,000
b. 6,825,000 d. 7,275,000

11. Pickering Corp. produces milk on its farms. The entity produces 20% of the community's milk
that is consumed. Farmville Incorporated owns 5 farms and had a stock of 4,200 cows and
2,100 heifers.
The farms produce 1,600,000 kilograms of milk a year and the average inventory held is 30,000
kilograms of milk. However, on December 31, 2021 the entity is currently holding 100,000
kilograms of milk in powder. On December 31, 2021, the biological assets are:

Purchased before January 1, 2021. ( 3 years old ) 4,200 cows

Purchased on January 1,2021. ( 2 years old) 600 heifers
Purchased on July 1,2021. (1.5 years old) 1,500 heifers

No animals were born or sold during the current year. The unit fair value less cost of disposal is
as follows:

January 1, 2021:
1-year old. 3,000
2-year old. 4,000
July 1, 2021:
1-year old. 3,000
December 31, 2021:
1-year old. 3,200
2-year old. 4,500
1.5-year old. 7,200
3-year old. 10,000

1. What is the fair value of biological assets on January 1, 2021?

a. 18,600,000
b. 19,200,000
c. 16,800,000
d. 14,400,000

2. What is the fair value of biological assets purchased on July 1, 2021?

a. 4,500,000
b. 6,000,000
c. 7,500,000
d. 6,750,000

3. What is the fair value of biological assets on December 31,2021?

a. 29,100,000
b. 31,500,000
c. 30,450,000
d. 23,700,000

4. What is the increase in fair value of biological assets on December 31,2021?

a. 6,000,000
b. 10,500,000
c. 9,900,000
d. 12,300,000
 5. What is the increase in fair value of biological assets due to physical change?
a. 2,520,000
b. 3,480,000
c. 6,000,000
d. 2,880,000

12. The following account balances are presented by OUR Company:

2020 2021
Merchandise Inventory 150,000 90,000
Cash 180,000 ?
Accounts Receivable 240,000 180,000
Accounts payable 405,000 200,00

Assuming all sales and purchases are on account. The amount of cost of goods sold is 360,000
during the current year. The gross profit margin on sales is 20%.

1. What is the 2021 cash balance?

a. 105,000
b. 35,000
c. 55,000
d. 185,000

2. What is the amount of purchases?

a. 300,000
b. 210,000
c. 240,000
d. 310,000