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Audit of Inventories Practice Test with Solution
Accountancy (STI College)
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CEBU CPAR CENTER, INC. www.Cebu-CPAR.com
AUDIT OF INVENTORIES
PROBLEM NO. 1
Presented below is a list of items that may or may not reported as inventory in a company’s
December 31 balance sheet.
1. Goods out on consignment at another company’s store P800,000
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
Question:
How much of these items would typically be reported as inventory in the financial statements?
a. P2,300,000 c. P2,260,000
b. P2,000,000 d. P2,220,000
Suggested Solution:
PAS 2 par. 6 defines “Inventories” as assets
a. held for sale in the ordinary course of business;
b. in the process of production for such sale; or
c. in the form of materials or supplies to be consumed in the production process or in the
rendering of services.
Par. 10 further states that the cost of inventories shall comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their present location and condition.
Therefore, items 1, 3, 5, 8, 9, 12, 14, 15, 17 and 18 would be reported as inventory in the financial
statements.
The other items will be reported as follows:
Item 2 - Cost of goods sold in the income statement
Item 4 - Not reported in the financial statements
Item 6 - Cost of goods sold in the income statement
Item 7 - Cost of goods sold in the income statement
Item 10 - Interest expense in the income statement
Item 11 - Advertising expense in the income statement
Item 13 - Office supplies in the current asset section of the balance
sheet
Item 16 - Not reported in the financial statements
Item 19 - Trading securities in the current asset section of the balance
sheet
, lOMoARcPSD|18098192
CEBU CPAR CENTER, INC. www.Cebu-CPAR.com
PROBLEM NO. 2
In connection with your audit of the Alcala Manufacturing Company, you reviewed its inventory as
of December 31, 2006 and found the following items:
(a) A packing case containing a product costing P100,000 was standing in the shipping room when
the physical inventory was taken. It was not included in the inventory because it was marked
“Hold for shipping instructions.” The customer’s order was dated December 18, but the case
was shipped and the costumer billed on January 10, 2007.
(b) Merchandise costing P600,000 was received on December 28, 2006, and the invoice was
recorded. The invoice was in the hands of the purchasing agent; it was marked “On
consignment”.
(c) Merchandise received on January 6, 2007, costing P700,000 was entered in purchase register
on January 7. The invoice showed shipment was made FOB shipping point on December 31,
2006. Because it was not on hand during the inventory count, it was not included.
(d) A special machine costing P200,000, fabricated to order for a particular customer, was finished
in the shipping room on December 30. The customer was billed for P300,000 on that date and
the machine was excluded from inventory although it was shipped January 4, 2007.
(e) Merchandise costing P200,000 was received on January 6, 2007, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on December 29,
2006, FOB destination.
(f) Merchandise costing P150,000 was sold on an installment basis on December 15. The customer
took possession of the goods on that date. The merchandise was included in inventory because
Alcala still holds legal title. Historical experience suggests that full payment on installment sale
is received approximately 99% of the time.
(g) Goods costing P500,000 were sold and delivered on December 20. The goods were included in
the inventory because the sale was accompanied by a purchase agreement requiring Alcala to
buy back the inventory in February 2007.
Question:
Based on the above and the result of your audit, how much of these items should be included in the
inventory balance at December 31, 2006?
a. P1,300,000 c. P1,650,000
b. P 800,000 d. P1,050,000
Suggested Solution:
Unshipped goods P 100,000
Purchased merchandise shipped
FOB shipping point 700,000
Goods used as collateral for a loan 500,000
Total P1,300,000
Reasons for including and excluding the items:
a) Included - Merchandise should be included in the inventory until shipped. An exception would be
special orders.
b) Excluded - Alcala Manufacturing has the merchandise on a consignment basis and therefore does
not possess legal title.
c) Included - The merchandise was shipped FOB shipping point and therefore would be included in
the inventory on the shipping date.
d) Excluded - Title may pass on special orders when segregated for shipment.
e) Excluded - The merchandise was shipped FOB destination and was not received until January 3,
2006.
f) Excluded - Historical experience suggests that Alcala will collect the full purchase price, so the sale
is recognized even though legal title has not passed.
g) Included - This is not a sale of inventory but instead is a loan with the inventory as collateral.
Answer: A
PROBLEM NO. 3
The Anda 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 P100,000, had been
Audit of Inventories Practice Test with Solution
Accountancy (STI College)
Scan to open on Studocu
Studocu is not sponsored or endorsed by any college or university
Downloaded by Yna Recinto ()
, lOMoARcPSD|18098192
CEBU CPAR CENTER, INC. www.Cebu-CPAR.com
AUDIT OF INVENTORIES
PROBLEM NO. 1
Presented below is a list of items that may or may not reported as inventory in a company’s
December 31 balance sheet.
1. Goods out on consignment at another company’s store P800,000
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
Question:
How much of these items would typically be reported as inventory in the financial statements?
a. P2,300,000 c. P2,260,000
b. P2,000,000 d. P2,220,000
Suggested Solution:
PAS 2 par. 6 defines “Inventories” as assets
a. held for sale in the ordinary course of business;
b. in the process of production for such sale; or
c. in the form of materials or supplies to be consumed in the production process or in the
rendering of services.
Par. 10 further states that the cost of inventories shall comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their present location and condition.
Therefore, items 1, 3, 5, 8, 9, 12, 14, 15, 17 and 18 would be reported as inventory in the financial
statements.
The other items will be reported as follows:
Item 2 - Cost of goods sold in the income statement
Item 4 - Not reported in the financial statements
Item 6 - Cost of goods sold in the income statement
Item 7 - Cost of goods sold in the income statement
Item 10 - Interest expense in the income statement
Item 11 - Advertising expense in the income statement
Item 13 - Office supplies in the current asset section of the balance
sheet
Item 16 - Not reported in the financial statements
Item 19 - Trading securities in the current asset section of the balance
sheet
, lOMoARcPSD|18098192
CEBU CPAR CENTER, INC. www.Cebu-CPAR.com
PROBLEM NO. 2
In connection with your audit of the Alcala Manufacturing Company, you reviewed its inventory as
of December 31, 2006 and found the following items:
(a) A packing case containing a product costing P100,000 was standing in the shipping room when
the physical inventory was taken. It was not included in the inventory because it was marked
“Hold for shipping instructions.” The customer’s order was dated December 18, but the case
was shipped and the costumer billed on January 10, 2007.
(b) Merchandise costing P600,000 was received on December 28, 2006, and the invoice was
recorded. The invoice was in the hands of the purchasing agent; it was marked “On
consignment”.
(c) Merchandise received on January 6, 2007, costing P700,000 was entered in purchase register
on January 7. The invoice showed shipment was made FOB shipping point on December 31,
2006. Because it was not on hand during the inventory count, it was not included.
(d) A special machine costing P200,000, fabricated to order for a particular customer, was finished
in the shipping room on December 30. The customer was billed for P300,000 on that date and
the machine was excluded from inventory although it was shipped January 4, 2007.
(e) Merchandise costing P200,000 was received on January 6, 2007, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on December 29,
2006, FOB destination.
(f) Merchandise costing P150,000 was sold on an installment basis on December 15. The customer
took possession of the goods on that date. The merchandise was included in inventory because
Alcala still holds legal title. Historical experience suggests that full payment on installment sale
is received approximately 99% of the time.
(g) Goods costing P500,000 were sold and delivered on December 20. The goods were included in
the inventory because the sale was accompanied by a purchase agreement requiring Alcala to
buy back the inventory in February 2007.
Question:
Based on the above and the result of your audit, how much of these items should be included in the
inventory balance at December 31, 2006?
a. P1,300,000 c. P1,650,000
b. P 800,000 d. P1,050,000
Suggested Solution:
Unshipped goods P 100,000
Purchased merchandise shipped
FOB shipping point 700,000
Goods used as collateral for a loan 500,000
Total P1,300,000
Reasons for including and excluding the items:
a) Included - Merchandise should be included in the inventory until shipped. An exception would be
special orders.
b) Excluded - Alcala Manufacturing has the merchandise on a consignment basis and therefore does
not possess legal title.
c) Included - The merchandise was shipped FOB shipping point and therefore would be included in
the inventory on the shipping date.
d) Excluded - Title may pass on special orders when segregated for shipment.
e) Excluded - The merchandise was shipped FOB destination and was not received until January 3,
2006.
f) Excluded - Historical experience suggests that Alcala will collect the full purchase price, so the sale
is recognized even though legal title has not passed.
g) Included - This is not a sale of inventory but instead is a loan with the inventory as collateral.
Answer: A
PROBLEM NO. 3
The Anda 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 P100,000, had been
