• Document: CEBU CPAR CENTER, INC. AUDIT OF INVENTORIES
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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 Answer: A 1 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 da

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