ACCTNG 110
AUDIT OF INVENTORY
AUDIT PROBLEM
AUDIT OF INVENTORY
PROBLEM #1:
The following information was obtained from the statement of financial position of Lion Inc.
31-Dec-14
31-Dec-13
Cash
706,600
200,000
Notes Receivable
0
50,000
Inventory
Accounts Payable
?
?
399,750
150,000
All operating expenses are paid by Lion Inc with cash and all purchases of inventory are made on account.
Lion Inc sells only one product.
All sales are cash sales which are made on P100 per unit. Lion Inc purchases 1,500 units of inventory per
month and values its inventory using periodic FIFO. The unit cost of inventory during January 2014 was
P65.20 and increased P0.20 per month during the year. during 2014, payments to suppliers totaled P943,400
and operating expenses totaledP440,000. The ending inventory for 2013
was valued at P65.00 per unit
REQUIREMENTS
1. Number of units sold during 2014
2. The total Cost of purchase during 2014
3. accounts payable balance at December 31, 2014
4. Inventory quantity at December 31, 2014
5. FIFO cost of inventory on December 31,2014
ACCTNG 110
AUDIT OF INVENTORY
AUDIT PROBLEM
PROBLEM #2:
Monkey Co. annual net income for the period 2010- 2014 is as follows:
YEAR
NET INCOME/ LOSS
2010
2011
P150,000
340,000
2012
645,000
2013
2014
-100,000
250,000
A review of the company's records reveals the following inventory errors
2010 P3,000 overstatement end year
2011 6,000 understatement end of the year
2013 4,500 understatement end of the year
2014 11,000 understatement end of the year
REQUIREMENTS
1. What is the adjusted net income in 2010?
2. What is the adjusted net income in 2011?
3. What is the adjusted net income in 2012?
4. What is the adjusted net loss in 2013?
5. What is the adjusted net income in 2014?
ACCTNG 110
AUDIT OF INVENTORY
AUDIT PROBLEM
PROBLEM #3:
Shark Inc. was organized on January 1, 2013. On December 31, 2014, the company lost most of its inventory in a warehouse fire
just before the yearend count of inventory was to take place. The company's records disclosed the following data:
2013
2014
Inventory, January 1
204,000.00
Purchases
860,000.00
692,000.00
Purchase returns & allowances
46,120.00
64,600.00
Sales
788,000.00
836,000.00
Sales return & allowances
16,000.00
20,000.00
On January 1, 2014, Shark's policy was changed so thatthe gross profit rate would be three percent higher than the one earned in
2013.
Salvaged undamaged merchandise market to sell P24,000 while damaged merchandise marked to sell P16,000 had an estimated
realizable value of P3,600.
REQUIREMENTS
1. What is the company's gross profit rate beginning January 1, 2014?
2. How much inventory fire loss?
ACCTNG 110
AUDIT OF INVENTORY
AUDIT PROBLEM
PROBLEM #4:
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 physical inventory count at the end of each month
to determine monthly ending inventory values. You also find out that the company applies 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 July
P356,400
Cost of Goods Sold during July
P297,000
Gross profit on sales July
P303,000
Cost of inventory, July 1
P0.35 per unit the
following are Penguin's July purchases of merchandise;
DATES
Jul-06
12
16
17
QUANTITY
180,000
150,000
120,000
150,000
600,000
RQUIREMENTS
1. Number of units on Hand JULY 1
2. Units sold during July
3. Unit cost of inventory at July 31
4. Value of inventory at July 31
UNIT COST
P0.40
0.41
0.42
0.45
ACCTNG 110
AUDIT OF INVENTORY
AUDIT PROBLEM
GUIDE SOLUTIONS:
PROBLEM #1
PROBLEM #2:
1. What is the adjustment net income in 2010?
Net income is equal to 150,000
Inventory Error (overstatement) is equal to 3,000
Adjusted Net Income = 150,000 - 3,000
Adjusted Net Income = 147,000
2. What is the adjusted net income in 2011?
Net Income for 2015 :
Add : Overstatement Inventory for 2014
Add : Understatement Inventory for 2015
Adjusted Net Income for 2015
3. What is the adjusted net income in 2012?
Net income
2015 understatement
645,000
-6,000
639,000
340,000
3,000
6,000
P349,000
ACCTNG 110
AUDIT OF INVENTORY
AUDIT PROBLEM
4. What is the adjusted net loss in 2013?
Net income (Loss) - Error
= 100,000 - 4,500
= 95,500
5. What is the adjusted net income in 2018?
Annual Net Income in 2018
Add: Understatement in inventory in 2018
Less: Understatement in inventory in 2017
Adjusted Net Income in 2018
PROBLEM #3:
PROBLEM #4:
250,000
11,000
(4,500)
256,500