9-4 Solutions Manual to Accompany Applied Auditing, 2006 EditionSubstantive Tests of Inventories and Cost of Goods Sold 9-3

9-1.Substantiation of the figure for inventories is an especially challenging task because of the variety of acceptable methods of valuation. In addition, the variety of materials found in inventories calls for considerable experience and skill to do an efficient job of identifying and test-counting goods on hand. The possibilities of obsolescence and of excessive stocks also create problems. Finally, the relatively large size of inventories and their significance in the determination of net income make purposeful misstatement by the client a possibility which the auditors must guard against.

9-2.During an audit of a manufacturing company, the auditors review the cost system for the following purposes:

(1)To determine that costs are properly allocated to current and future periods and hence that cost figures used in arriving at balance sheet and income statement amounts are supported by internal records.

(2)To obtain assurance that the cost system, as an integral part of the system of internal control, provides proper accounting control over costs incurred and related inventories.

(3)To ascertain, as a service to management, that the cost system is economical and effectively provides information for reducing or controlling costs and for determining the cost and profitability of products, and other related data necessary for informed managerial decisions.

9-3.The auditors make test counts of inventory quantities during their observation of the taking of the physical inventory to ascertain that an accurate count is being made by the individuals taking the inventory. The extent of test counting will be determined by the inventory-taking procedures; for example, the number of the auditors test counts would be reduced if there were two teams, one verifying the other, taking the inventory. On the other hand, the auditors test counts would be expended if they found errors in the inventory counts.

9-4.The statement is not true. The auditors responsibilities with respect to inventories include not only quantities and pricing, but also the quality or condition of the goods, the accuracy of extensions, footing, and summaries, and the evaluation of internal control. Weakness in internal control may cause large losses from excessive stockpiling, obsolescence, inaccurate cost data, and many other sources, even though the ending inventory is properly counted and priced.

9-5.The independent auditors utilize the clients backlog of unfilled sales orders in the determination of net realizable value of finished goods and goods-in-process, and in the determination of losses, if any, on firm sales commitments for which no production has yet been undertaken.

9-6.Beed Company

Since Beed Company obtained all of its merchandise inventory from the president of the company in a related-party transaction, the auditors must determine the cost of the merchandise to the president in his operation of a similar business as a single proprietor. In this related-party transaction, the auditors must look beyond form--a total cost of P100,000 for the original stock of merchandise--to substance. Substantively, the merchandise of Beed Company should be priced, on a specific identification basis if feasible, at its cost from the suppliers of the sole proprietorship. Any difference between cost as thus determined and amounts charged by the president to Beed Company represents unamortized discount on the notes payable. The entire transaction should be fully disclosed in a note to the financial statements of Beed Company.

9-7.Jay Company

The following procedures should be undertaken:

(a)The oral evidence that the motors are on consignment should be substantiated by a review of the clients records of consigned inventory, examination of contracts and correspondence with consignors, and confirmation of consigned stocks by direct communication with consignors.

(b)The location of the machine in the receiving department, together with the presence of the REWORK tag, suggests that the machine had been shipped to a customer but rejected and returned by the customer. The auditors should examine the receiving report for the machine, the accounts receivable confirmation from the customer, and records of the clients quality control department, to ascertain who has title to the machine. If the customer has title, the machine should not be included in inventory, and a liability for rework costs should be established. If the client has title, the customers account should be credited for the sales return and the machine should be included in the clients inventory at estimated realizable value.

(c)The Material Inspection and Receiving Report signed by the Navy Source Inspector, is evidence that title to the machine passed to the Phil. Naval Base on November 30, 2006. Accordingly, the auditors should ascertain that the sales value of the machine is included in accounts receivable, and that the cost of the machine is not in the perpetual inventory or the physical inventory.

(d)The location of the storeroom and the dusty condition of the goods suggest that the items may be obsolete, or at least slow moving. The auditors should inspect perpetual inventory records for usage of the materials, and should inquire of production personnel whether the materials are currently useful in production. The materials may have to be valued at scrap value.

9-8.Pancho Manufacturing Corporation

(a)Consignment out.

1.Obtain from the client a complete list of all consignees together with copies of the consignment contracts.

2.Evaluate the consignment contract provisions relative to the following areas:

(a)Payment of freight and other handling charges.

(b)Extension of credit.

(c)Rates and computation of commissions to consignees.

(d)Frequency and contents of reports and remittances received from consignees.

3.Discuss with the client any variations found in the contracts which do not seem justified by the circumstances.

4.Following review of the consignment contracts, communicate directly with the consignees to obtain complete information in writing on merchandise remaining unsold, receivables resulting from sales, unremitted proceeds, and accrued expenses and commissions, which should be reconciled with the clients records for the period covered by the engagement.

5.Determine that merchandise on consignment with consignees is valued on the same basis as merchandise on hand, and included as part of the inventory. Ascertain that any arbitrary mark-ons are deducted and that shipping and related charges for the transfer of merchandise to the consignees are reflected as part of the inventory.

6.Ascertain that quantities of goods in hands of consignees at the close of the period under audit appear in the balance sheet and are separately designated as Merchandise on Consignment.

(b)Finished merchandise in public warehouse pledged as collateral for outstanding debt.1.Determine that goods pledged to obtain funds are covered by warehouse receipts. (The examination of warehouse receipts alone is not a sufficient verification of goods stored in public warehouses.)

2.Request direct confirmation from the warehouses in which the merchandise is held.

3.If available, obtain independent accountants reports on a warehouses internal controls over custody of stored goods.

4.Review the clients procedures for acceptance and evaluation of the performance of warehouses, and review supporting documents.

5.Review the loan agreements collateralized by warehouse receipts. These agreements usually provide for certain payments to be made by the borrower as pledged goods are sold.

6.Consider observing a physical inventory of goods stored at the public warehouses.

9-9.a. (2)

b.(3)

c.(2)

d.(2)

e. (4)

f.(2)

9-10.a.Principal problems the auditor will face are related by:

1.Verification of existence of the inventory owned by the company as against inventory belonging to the customers.

2.Proper valuation since the perpetual inventory records reflect quantities only.

b.Steps that should be undertaken to enable the auditor to render an unqualified opinion:

1.Verify postings to the perpetual ledger at the plant office for both stock owned and stock being held for customers against original cost sheet to determine amounts debited and credited to the account.

2.Require that an annual physical inventory taking be done by the client and arrangements for the presence and observation of the auditor be done.

3.Confirm with customers unclaimed merchandise still in the possession of the client as of the balance sheet date.

9-11.1.Existence or occurrence

2.Existence or occurrence

3.Valuation or allocation

4.Completeness

5.Completeness

6.Valuation or allocation

7.Completeness

8.Completeness

9.Existence or occurrence and completeness

10.Completeness

9-12.a.When the inventory is a material item in the financial statements that the auditor is examining, observation of the taking of the physical inventory is in compliance with the auditing standard pertaining to field work that requires obtaining sufficient competent evidential matter to afford a reasonable basis for an opinion regarding the financial statements. Observation is a generally accepting auditing procedure applied in the examination of the physical inventory.

By observing the taking of the physical inventory, the CPA is seeking to satisfy himself or herself as to the effectiveness of the methods of inventory taking and the measure of reliance that can be placed on the client inventory records and their representations as to inventory quantities. The CPA must ascertain that the physical inventory actually exists, that the inventory quantities are being determined by reasonably accurate methods, and that the inventory is in a salable or usable condition.

b.The CPA makes test counts of inventory quantities during observation of the taking of the physical inventory to become satisfied that an accurate count is being made by the individuals taking the inventory. The extent of test counting will be determined by the inventory-taking procedures. For example, the number of test counts would be reduced if there were two teams taking the inventory, one checking the other. On the other hand, the CPAs test count would be expanded if errors were found in the inventory counts.

Some test counts are recorded by the CPA for the purpose of subsequent comparison with the clients compilation of the inventory. The comparison procedure goes beyond the mere determination that quantities have been accurately transcribed. In addition, the CPA seeks assurance that the description and condition of the inventory items are accurate for pricing purposes and that the quantity information, such as dozen, gross, and cartons, is proper.

c.1.The CPA does not regard the inventory certificate of an outside service company as a satisfactory substitute for his or her own audit of the inventory. The service company has merely assumed the clients function of taking the physical inventory, pricing it, and making the necessary extensions. To the extent that the service company is competent, internal control with regard to the inventory has been strengthened. Nevertheless, as under other strong systems of internal control, the CPA would investigate the system to become satisfied that it is operating in a satisfactory manner. The CPAs investigation would necessarily entail an observation of the taking of the inventory and testing the pricing and calculation of the inventory.

2.The inventory certificate of the outside specialists would have no effect on the CPAs report. The CPA must be satisfied that the inventory is fairly stated by observing the taking of the inventory and by testing the pricing and calculation of the inventory.

However, if the taking of the inventory was not observed and no audit tests were applied to the computation of the inventory, the CPA would be compelled to disclaim an opinion on the financial statements as a whole if the amount of the inventory is material.

If it has been impracticable or impossible for the CPA to observe the taking of the physical inventory but he or she has been satisfied by the application of other auditing procedures, the CPA would make no reference to the matter in the report.

3.The CPA would make no reference to the certificate of the outside specialists in the report. The outside specialists are serving as adjuncts of the companys staff of permanent employees and, as such, are in somewhat the same position as temporary employees. The outside specialists are not independent in that they are not imbued with third-party interests. The CPA is compelled, under certain circumstances, to mention in the report the reports of other independent auditors, but this compulsion does not extend to the certificate of outside specialists who are not independent auditors.

9-13.a.For a client to dispose of the chemical compound in a manner that meets legal requirements is admirable. However, ethical behavior frequently calls for individual persons and companies to exhibit behavior that exceeds the minimum standards set by law. Due to the harm to cattle and the pollution that has resulted. Remote is involved in a matter that entails ethical issues.

b.Most auditors are hesitant to serve as judge and jury for clients on ethical matters. For example, declining to serve this client probably would not cause any alteration of its behavior. Further, serving the client does not facilitate any unethical behavior. Further, serving the client does not facilitate any unethical behavior. Hence, an auditor might choose to discuss the matter with the board and encourage them to act as responsible citizens.

9-14.JC

Requirement (1)

Inventory, as given

P271,500

Deduct (adjustments to cost):

50% markup in (a) [P250,000 (P250,000 ( 1.5)]

P83,333

60% markup in (b) (P10,000 x 0.60)

6,000

Exclusion of (c)

4,000

Incorrect amount used in (e) (P2,500 P1,000)

1,500

94,833

P176,667

Add:

Freight on goods in transit in (d)

800

Corrected ending inventory

P177,467

Requirement (2)

Income Statement

a.Ending inventory overstated (P250,000 P177,467)

P72,533

b.Cost of goods sold understated

72,533

c.Gross margin overstated

72,533

d.Pretax income overstated

72,533

e.Income taxes overstated (P72,533 x 0.40)

29,013

f.Net income overstated (P72,533 P29,013)

43,520

Balance Sheet:

Current assets, inventory overstated

72,533

Current liabilities, income taxes payable overstated

29,013

Retained earnings overstated

43,520

Requirement (3)

Retained earnings (prior period adjustment)

43,520

Income taxes payable

29,013

Inventory

72,533

9-15.Beginning inventoryP 38,000

Purchases 19,000

Cost of goods available for saleP 57,000

Cost of goods sold (net sales of P51,000 ( 1.50) 34,000

Ending inventory before theftP 23,000

Ending inventory after theft 15,000

Inventory lostP 8,0009-16. LRT CompanyLRT COMPANY

Computation of Value of Inventory Lost

February 16, 2006

SalesP 40,000

Less: Gross profit (40%) 16,000

Cost of goods soldP 24,000

Finished goods, February 16 75,000

Cost of goods available for saleP 99,000

Less: Finished goods, December 31, 2005 72,000

Cost of goods manufactured and completedP 27,000

Raw materials, December 31, 2005 P 65,000

Raw materials purchases 20,000

Raw materials available for productionP 85,000

Raw materials before flood 70,000(P35,000 ( 1/2)

Raw materials usedP 15,000

Direct labor30,000

Manufacturing overhead cost15,000

Goods in process, December 31, 2005 80,000

Cost of productionP 140,000

Less: Cost of goods completed (from above) 27,000

Goods in process inventory lost in floodP 113,000

Total value of inventory =Raw materials lost + Goods in process lost

destroyed by flood

=(P70,000 - P35,000) + P113,000

=P148,0009-17.Y Companya.Necessary adjustments to clients physical inventory:

Material in Car #AR38162--received in

warehouse on January 2, 2007

P 8,120

Materials stranded en route

(Sales price P19,270/125%)

15,416

Total

23,536

Less unsalable inventory

1,250*

Total adjustment

P22,286*If freight charges have been included in the clients inventory, the amount would be P1,600 and the amount of the total adjustment would be P21,936. Journal entry 6 probably would have a credit to purchases of P1,600 in this case.

b.Auditors worksheet adjusting entries:

1.PurchasesP 2,183

Accounts Payable

P 2,183

To record goods in warehouse but not

invoiced-received on RR 1060.

2.No entry required. Title to goods had passed.

3.Accounts receivable 12,700

Sales

12,700

To record goods as sold which were

loaded on December 31 and not

inventories-SI 968.

4.Sales

19,270

Accounts receivable

19,270

To reverse out of sales material included

in both sales (SI 966) and in physical

inventory (after adjustment).

5.No adjustment required.

6.Claims receivable 1,600

Purchases

1,250

Freight In

350

To record claim against carrier for

merchandise damaged in transit.

7.Inventory 22,286

Cost of goods sold

22,286

To adjust accounts for changes in physical

inventory quantities.

8.Sales

15,773

Accounts receivable

15,773

To reverse out of sales invoices #969, #970,

#971. The sales book was held open too long.

This merchandise was in warehouse at time

of physical count and so included therein.

9-18.Engine Warehouse Supply Companya.Cutoff errors will exist for accounts payable whenever the liability for a purchase is recorded in the wrong period. The following rules should be followed for recording purchases:

1.Record as of date received when shipped FOB destination.

2.Record as of date shipped when shipped FOB origin.

On this basis, the receiving reports would be evaluated as follows:

Receiving Report No.AmountDate ShippedDate ReceivedFOB PointShould be Recorded in AugustWas Recorded

in August

679P 8608-298-31DestinationYesYes

6801,2118-279-01OriginYesYes

6811938-209-01OriginYesYes

6824,6748-279-01DestinationNoYes

6834508-309-02DestinationNoNo

6841068-309-02OriginYesNo

6852,8009-069-02OriginNoNo

6866868-309-02DestinationNoNo

The entry to adjust the records as of August 31 for cutoff errors in accounts payable is as follows:

Dr.Accounts payableP4,568

Cr. Purchases

P4,568

To adjust accounts payable for cutoff errors in recording inventory purchases:

RR No. 682P4,674

RR No. 684 ( 106)

P4,568b.Sales should be recorded as of the date shipped. The following shipping documents were dated on September 1 and recorded in August:

311P 56

312 3,194

313 635

314 193

P4,078

The adjusting entry will be:

Dr. Sales

P4,078

Cr. Accounts receivable

P4,078

To adjust sales for cutoff errors at August 31.

c. 1.Inventory received near the balance sheet date should be included in inventory if it is recorded as a purchase and excluded if it is not recorded as a purchase.

2.Inventory shipped near the balance sheet date should be excluded from inventory if it is recorded as a sale and included if it has not been recorded as a sale.

These principles lead to the following analysis.

Receipt of Goods

1.Inventory for all receiving reports up to 684 are included in inventory.

2.Using the analysis in part a, column 6, inventory for all receiving reports up to 684, except 682 and 683, should be included in accounts payable and inventory.

Report No.AmountShould be Included in Purchases and InventoryWas Included

in Inventory

679 860YesYes

6801,211YesYes

681 193YesYes

682*4,674NoYes

683* 450NoYes

684 106YesYes

6852,800NoNo

686 686NoNo

* Requires removal from inventory.

3.Inventory for receiving reports 682 and 683 should therefore be removed from the physical count:

Amount

6824,674

683 450

5,124Shipment of Goods1.Inventory for shipping documents 314 to 317 were included in inventory. All inventory for documents 313 and earlier were excluded.

2.Sales, after adjustments, were included only for shipments 310 and those preceding, as shown in the analysis in part b.

3.Inventory for shipping documents 311 to 313 should therefore be added to inventory. The amount of the cost of the inventory cannot be determined without reference to inventory costs. Presumably, cost will be less than the sales value shown in part b.

Shipping

Document No.Included in

PhysicalRecorded as Sale After Adjustments in Part b

310NoYes

311*NoNo

312* NoNo

313*NoNo

314YesNo

315YesNo

316YesNo

317YesNo

318YesNo

*Requires addition to inventory at cost.

Shipping

Document No.Selling

Price

311P 56

312 3,194

313 635

Inventory cost 3,885

(70% of selling price) 2,719

Summary

Reduction of inventory due to physical count error

resulting from receipt of goods.P5,124.00

Increase of inventory due to physical count error

resulting from shipment of goods. 2,719.50Net reduction of inventory requiredP2,404.50d.The accuracy about September 1 receipts and shipments of goods could be verified by reference to bills of lading.

9-19.Green CompanyRequirement (a)

Green Company

Inventory

12.31.06

Per Audit

ItemQuantityUnit Price *AmountPer Client

A 510720 unitsP 2.64 / doz.P 218.40P 2,592.00

A 520 48 units4.70 each225.60252.60

A 530146 units16.50 each2,409.002,706.00

A 540 86 units5.15 each442.90353.60

A 550 80 units8.50 each680.007,280.00

A 560140 units2.00 each3,360.00280.00

A 570910 gross132 gross 120,120.00 27,360.00

Total

P127,455.90P 40,824.20

Add: AJE (1)

__________ 86,631.70

P127,455.90P127,455.90

* Lower of cost or market

Requirement (b)

Inventory86,631.70

Cost of sales

86,631.70

9-20.

Requirement (a)Requirement (b)

1.ExcludeTitle to the goods passed to the client on January 3, 2007 or upon receipt because the term of shipment was FOB Destination.

2.ExcludeGoods held on consignment are not owned by the client.

3.IncludeRegular stock item even if segregated but not actually delivered as of the end of the year is still part of the clients inventory.

4.IncludeTitle to the goods passed to the client on December 31, 2006 or upon shipment because the invoice showed FOB suppliers warehouse.

5.ExcludeGoods fabricated to order for a customer are considered sold as soon as completed even if not yet delivered.

9-21.Isabela CompanyISABELA COMPANY

Worksheet to Correct Selected Accounts

12-31-06

InventoryAccounts PayableSales

Initial amounts

P1,250,000

P1,000,000

P9,000,000

Adjustments

Increase (Decrease)

1

P (155,000)

P (155,000)None

2

(22,000)NoneNone

3NoneNone

P 40,000

4

210,000NoneNone

5

25,000

25,000None

6

2,000

2,000None

7 (5,300) (5,300)

None

Total adjustments

P 54,700

P (133,300)

P 40,000

Adjustment amounts

P1,304,700

P 866,700

P9,040,000

9-22.Stockroom WStockroom W

Reconciliation of Inventory

Opening

InventoryReceiptsWithdrawalsEnding

Inventory

Balance per Accounting DepartmentP 22,600P28,000P 26,000P 24,600

Add (Deduct) Reconciling Items

1)Receipt of materials erroneously posted by the Accounting Department to Stockroom W.

480

480

2)Correction of error in the Accounting Department.( 600)

( 600)

3)Shortage not recorded in the Accounting Department._____________ 90 (90)

Balance per Factory RecordsP 22,000P28,480P 25,490P 24,990

9-23.Pinas Company

Requirement (1)

Audit Adjustments, 12.31.06

1.Retained earnings300

Purchases

300

2.Inventory, January 1, 2006700

Retained earnings

700

3.Accounts receivable500

Sales

500

4.Purchases500

Accounts payable

500

5.Inventory, Dec. 31, 2006 B/S400

Inventory, Dec. 31, 2006 I/S

400

6.a.Purchases1,200

Accounts payable

1,200

b.Inventory, Dec. 31, 2006 B/S1,200

Inventory, Dec. 31, 2006 I/S

1,200

7.Accounts payable800

Purchases

800

Requirement (2)

Pinas Company

Cost of Sales

2006

PerAdjustmentsPer

ClientDrCrAudit

Inventory, Jan. 1P 3,200

P 700(2)

P 3,900

Purchases21,100

500(4)

P 300(1)

_______

1,200(6a)

800(7) 21,700

Total available24,300

25,600

Less: Inventory, Dec. 31 4,300

400(5)

_______

______

1,200(6b) 5,900

Cost of salesP 20,000

P 2,400

P 2,700P19,700

9-24.Bers Company

UncorrectedItems for CorrectionCorrected

Amounts(a)(b)(c)(d)(e)Amounts

Income statement:

Sales revenue

P90,000

12,000

15,000

P 63,000

Cost of goods sold

50,000

+ 6,000+ 15,000 8,000

63,000

Gross margin

40,000

0

Expenses

30,000+ 7,000

37,000

Income

P10,000 7,000 12,000 6,000 15,000 7,000

P(37,000)

Balance sheet:

Accounts receivable

P42,000

12,000

15,000

P15,000

Inventory 20,000

15,000+ 8,000

13,000

Remaining assets

30,000

30,000

Accounts payable

11,000*

+ 6,000

17,000*

Remaining liabilities

6,000*+ 7,000

13,000*

Share capital, ordinary

60,000*

60,000*

Retained earnings

15,000* 7,000 12,000 6,000 15,000 7,000 (32,000)

Totals

P 0

P 0

*Credits.

Retained Earnings is negative after correction.

9-25.

1.Jap Co.

P150,000 (P150,000 X .20) = P120,000;

P120,000 (P120,000 X .10) = P108,000, cost of goods purchased

2.Fred Company

P1,100,000 + P69,000 = P1,169,000. The P69,000 of goods in transit on which title had passed on December 24 (f.o.b. shipping point) should be added to 12/31/06 inventory. The P29,000 of goods shipped (f.o.b. shipping point) on January 3, 2007, should remain part of the 12/31/06 inventory.

3.B. May Corp.

Because no date was associated with the units issued or sold, the periodic (rather than perpetual) inventory method must be assumed.

FIFO inventory cost:1,000 units at P24P 24,000

1,100 units at 23 25,300

TotalP 49,300

Average cost:1,500 at P21P 31,500

2,000 at 2244,000

3,500 at 2380,500

1,000 at 24 24,000

Totals8,000P180,000

P180,000 ( 8,000 = P22.50

Ending inventory (2,100 X P22.50) is P47,250.

4.Emmett Lopez Inc.

The inventoriable costs for 2007 are:

Merchandise purchased

P909,400

Add: Freight-in

22,000

931,400

Deduct: Purchase returnsP16,500

Purchase discounts 6,800 23,300

Inventoriable cost

P908,100

9-26.

(a)(1)8/10

Purchases9,000

Accounts Payable

9,000

8/13

Accounts Payable1,200

Purchase Returns and Allowances

1,200

8/15

Purchases12,000

Accounts Payable

12,000

8/25

Purchases15,000

Accounts Payable

15,000

8/28

Accounts Payable12,000

Cash

12,000

(2)Purchasesaddition in cost of goods sold section of income statement.

Purchase returns and allowancesdeduction from purchases in cost of goods sold section of the income statement.

Accounts payablecurrent liability in the current liabilities section of the balance sheet.

(b)(1)8/10

Purchases8,820

Accounts Payable (P9,000 X .98)

8,820

8/13

Accounts Payable1,176

Purchase Returns and Allowances

1,176

(P1,200 X .98)

8/15

Purchases11,880

Accounts Payable (P12,000 X .99)

11,880

8/25

Purchases14,700

Accounts Payable (P15,000 X .98)

14,700

8/28

Accounts Payable11,880

Purchase Discounts Lost120

Cash

12,000

(2)8/31

Purchase Discounts Lost156

Accounts Payable

(.02 X [P9,000 P1,200])

156

(3)Same as part (a) (2) except:

Purchase Discounts Losttreat as financial expense in income statement.

(c)The second method is better theoretically because it results in the inventory being carried net of purchase discounts, and purchase discounts not taken are shown as an expense. The first method is normally used, however, for practical reasons.

9-27.MAR Company(a)Purchases Total Units

Sales Total Units

April 1 (balance on hand)100

April 5300

April 4400

April 12200

April 11300

April 27800

April 18200

April 28 100

April 26500

Total units1,400

April 30 200

Total units1,700

Total units sold1,400

Total units (ending inventory) 300

Assuming costs are not computed for each withdrawal:

(1)First-in, first-out.

Date of Invoice

No. Units

Unit Cost

Total Cost

April 30

200

P5.80

P1,160

April 26

100

5.60

560

P1,720

(2)Average cost.

Cost of Part X available.

Date of Invoice

No. Units

Unit Cost

Total Cost

April 1

100

P5.00

P 500

April 4

400

5.10

2,040

April 11

300

5.30

1,590

April 18

200

5.35

1,070

April 26

500

5.60

2,800

April 30

200

5.80

1,160

Total Available

1,700

P9,160

Average cost per unit = P9,160 ( 1,700 = P5.39.

Inventory, April 30 = 300 X P5.39 = P1,617.

(b)Assuming costs are computed for each withdrawal:

(1)First-in, first out.

The inventory would be the same in amount as in part (a), P1,720.

(2)Average cost.

Purchased

Sold

Balance

Date

No. of units

Unit cost

No. of units

Unit cost

No. of units

Unit cost*

Amount

April 1

100

P5.00

100

P5.0000

P 500.00

April 4

400

5.10

500

5.0800

2,540.00

April 5

300

P5.0800

200

5.0800

1,016.00

April 11

300

5.30

500

5.2120

2,606.00

April 12

200

5.2120

300

5.2120

1,563.60

April 18

200

5.35

500

5.2672

2,633.60

April 26

500

5.60

1,000

5.4336

5,433.60

April 27

800

5.4336

200

5.4336

1,086.72

April 28

100

5.4336

100

5.4336

543.36

April 30

200

5.80

300

5.6779

1,703.36

Inventory April 30 is P1,703.

*Four decimal places are used to minimize rounding errors.

9-28.Timmy Turner

Requirement (a)

Merchandise on hand, January 1

P38,000

PurchasesP72,000

Less purchase returns and allowances 2,400

Net purchases69,600

Freight-in 3,400 73,000

Total merchandise available for sale

111,000

Cost of goods sold*

75,000

Ending inventory

36,000

Less undamaged goods

10,900

Estimated fire loss

P 25,100

*Gross profit =33 1/3%= 25% of sales.

100% + 33 1/3%

Cost of goods sold = 75% of sales of P100,000 = P75,000.

Requirement (b)

Cost of goods sold = 66 2/3% of sales of P100,000 = P66,667

Ending inventory [P111,000 (as computed above) P66,667]

P44,333

Less undamaged goods

10,900

Estimated fire loss

P33,433

9-29.Cosmo and Wanda Company

Beginning inventory

P170,000

Purchases

390,000

560,000

Purchase returns

(30,000)

Total goods available

530,000

SalesP650,000

Sales returns (24,000)

Net sales626,000

Less gross profit (40% X P626,000)(250,400) 375,600

Estimated ending inventory (unadjusted for damage)

154,400

Less goods on handundamaged (at cost) P21,000 X (1 40%)

(12,600)

Less goods on handdamaged (at net realizable value)

(5,300)

Fire loss on inventory

P136,500

CHAPTER

9

SUBSTANTIVE TESTS

OF INVENTORIES AND

COST OF GOODS SOLD