AUDIT OF INVENTORIES AND RELATED ACCOUNTS

CASE 1
Mumuso Company, a manufacturer of small tools, provided the following information from its accounting records for the
year ended December 31, 2018, Mumuso uses periodic inventory system to record inventory transactions:

Inventory at December 30, 2018 (based on physical count) P3,180,000

Accounts payable at December 31 2,620,000
Net sales (less sales return) 15,600,000

Additional information as follows:

a. Gross profit of the company is at 30% base on sales.

b. Goods held on consignment from Home to Mumuso amounting to P50,000, were included in the physical count of
goods in Mumuso warehouse, and in accounts payable at December 31, 2018.

c. Retailers were holding P150,000, at selling price, of goods on consignment from Mumuso, at their stores on
December 31, 2018.

d. Included in the physical count were goods billed to a customer FOB shipping point on December 31, 2018. These
goods had a cost of P114,800. The shipment was on Mumuso loading dock waiting to be picked up by the common
carrier.

e. Goods were in transit from a vendor to Mumuso on December 31, 2018. The invoice cost was P155,000 and the goods
were shipped FOB shipping point on December 31, 2018.

f. Work in process inventory with current sales value of P260,000 was sent to an outside processor for plating on
December 31, 2018.

g. Goods returned by customer and held pending inspection in the returned goods area on December 31, 2018, were not
included in the physical count. On January 8, 2019, the tools costing P68,600 were inspected and returned to
inventory. Credit memos totaling P98,000 were issued to the customers on the same date.

h. Goods shipped to a customer FOB destination on December 29, 2018, were in transit at December 31, 2018. Upon
notification of receipt by the customer on January 4, 2019, Mumuso issued a sales invoice for P90,000.

i. Goods, with an invoice cost of P135,000, received from a vendor on December 31, 2018, were inspected and recorded
on a receiving report dated January 2, 2019. The goods were not included in accounts payable at December 31, 2018.

j. Goods received from a vendor on December 26, 2018 with P115,000 vendor invoice was not included in the accounts
payable at December 31, 2018, because the accounts payable copy of the receiving report was lost.

Determine the following:

1. The correct amount of inventory as of December 31, 2018?
2. Net sales during the period?
3. Adjusted balance of Accounts payable?

CASE 2
TsimShaTsui Company’s inventory is purchased and uses the first-in, first-out method in calculating cost of goods sold
for the three products that the company handles. Product D is being sold at P8 per unit, Product E is being sold at P11 per
unit while Product F is being sold at P2 per unit. During the last few weeks of the year, TsimShaTsui started
manufacturing its products (none of the products were completed by year-end). Inventories and purchases information
concerning the three products are shown below:

Merchandise purchased:
Product D Product E Product F
Beginning Inventory 50,000 units @ P6.00 30,000 units @ P10.00 65,000 units @ P1.00
January – June Purchases 40,000 units @ P6.50 45,000 units @ P10.50 30,000 units at P1.50
July – December Purchases 70,000 units @ P7.10 30,000 @ P11.00
January – December Sales 105,000 units 50,000 units 40,000 units

Work in process:
Product Units Direct materials Direct labor Over head Cost to complete
Product D 5,000 P2 per unit P2.5 per unit P1 per unit P1 per unit
Product E 7,000 P3 per unit P4 per unit P1.5 per unit P3 per unit
Product F 4,000 P0.25 per unit P0.80 per unit P0.20 per unit P0.1 per unit
TsimShaTsui applied lower of cost and net realizable value by product line. On December 31, 2018, the suppliers reduced
their prices from the most recent purchase prices by 20%, 10% and 5% for Products D, E and F respectively. Accordingly,
TsimShaTsui decided to reduce their selling price by 8% effective January 1, 2019. Costs to sell each product are at 9% of
the selling price.

1. How much is the total cost of ending inventory?

2. How much is the ending allowance for inventory write-down as of December 31?
3. How much is the total inventory to be presented in the 2018 financial statement?
4. How much is the loss absorbed by cost of sales in 2018 related to goods purchased?

CASE 3
Your client, Care Co., is an importer and wholesaler. Its merchandise is purchased from several suppliers and is
warehoused until sold to customers.

In conducting your audit for the year ended December 31, 2018, you were satisfied that the system of internal control was
good. Accordingly, you observed the physical count at interim date, November 30, 2018 instead of year end. You obtained
the following information for your client’s general ledger:

Inventory, January 1, 2018 P1,266,500

Physical inventory, November 30, 2018 1,400,000
Sales for 11 months ended November 30 12,600,000
Sales for the year ended December 31 14,400,000
Purchases for 11 months ended November 30 ( before adjustments) 10,250,000
Purchases for the year ended December 31 ( before adjustments) 12,500,000

a. Shipments received in November and not included in the physical inventory but recorded as December purchases for
P120,500.

b. Shipments received in unsalable condition and excluded from physical inventory. Credit memo’s had not been
received nor chargebacks to vendors been recorded:
Total for the month of November 30 22,500
Total for the month of December 31 7,500

c. Deposit made with vendor and charge to purchases in September, 2018. Product was shipped December 2018,
P50,000 with term FOB seller.

d. Deposit made with vendor and charged as purchases in November 2018. Product was shipped FOB destination on
November 29, 2018, P90,000 and received in December.

e. Through the carelessness of the receiving department, shipment in early December 2018 was damaged by rain. This
shipment was later sold in the last week of December at cost, P200,000.

Determine the following:

1. The gross profit for the period ending November 30, 2018 is:
2. Adjusted inventory as of November 30, 2018 is:
3. Adjusted goods available for sale as of December 31, 2018 is:
4. The cost of sale for the month of December 2018 is:
5. The correct balance of inventory as of December 31, 2018 is: