DLSU-DASMARIÑAS • RESA – THE REVIEW SCHOOL OF ACCOUNTANCY • AUDITING • JUNE 2022

AUDIT OF INVENTORIES
PURCHASE TO PAY PROCESSES: Purchase to Pay; Plan to Inventory; Order to Cash
PROBLEM 1: (RAP; INTERNAL CONTROLS, TEST OF CONTROLS, SUBSTANTIVE TESTING)

1. Which of the following is not a relevant process in the auditor’s perspective in his understanding
and review of a client’s production/conversion cycle?
a. Production planning.
b. Materials, labor and OH requisition.
c. Cost accounting.
d. Order processing.

2. Which of the following questions would not be appropriate for an internal control questionnaire
involving inventories?
a. Are daily production based on approved production orders?
b. Are disbursement vouchers approved before payment?
c. Are goods stored in locked storage areas and are access to the store room limited to
authorized personnel only?
d. Are there independent, periodic comparisons of inventory records with goods on hand?

3. The auditor, while understanding internal control over production/conversion cycle noted that the
client has no production planning policy in place and that you have noted that most of the time
the client tended to run over-production of its products in the past, what is the possible implication
of this information to the auditors planned substantive testing audit program?
a. The auditor should schedule inventory count procedures at year-end in validating
existence and completeness assertion on inventories.
b. The auditor should schedule inventory count at an interim date in validating existence
and completeness’ assertion on inventories.
c. The auditor should plan to perform more extensive audit procedure to validate the
valuation assertion on inventories.
d. The auditor maybe allowed to heavily rely on analytical procedures, such as the use of
inventory estimation procedures in validating the valuation assertion on inventories.

4. What is the possible implication and which financial statement assertion would be affected if there
is no appropriate internal control policy regarding the authorization/approval of requisition of
materials, labor and overhead to be placed in production?
a. May lead to unauthorized production which affect the existence assertion of
inventories.
b. May lead to wastages which in turn may affect the valuation assertion of inventories.
c. May lead to pilferage/theft which in turn may affect the completeness assertion of
inventories.
d. May lead to erroneous cost allocation which in turn may affect the valuation assertion.

5. Which of the following most likely would be an internal control procedure designed to detect errors
and irregularities concerning the custody of inventories?
a. Periodic reconciliation of work-in-process with job cost sheets.
b. Segregation of functions between general accounting and cost accounting.
c. Independent comparisons of finished goods records with counts of goods on hand.
d. Approval of inventory journal entries by bookkeeper.

6. The auditor, while reviewing cost accounting records, noted that there has been a recurring entry
to close over-applied overhead cost allocated to cost of sales, work-in process inventory and
finished goods inventories, what is the possible implication of this observation to the auditor’s
substantive testing audit program?
a. The auditor should determine, where applicable, that any over-applied overhead cost
has been closed to the appropriate accounts at year-end for all production during the
year to ensure no material misstatement in the valuation assertion for inventories.
b. The auditor should determine, where applicable, that any over-applied overhead cost
has been closed to the appropriate account at year-end for all production during the
year to ensure no material misstatement in the existence assertion for inventories.
c. Independent comparisons of finished goods records with counts of goods on hand to
ensure no material misstatement in the existence and completeness assertions for
inventories.
d. Perform purchases and sales cut-of procedures at year-end to ascertain whether goods
are appropriately included in the records at year-end to ensure no material
misstatements in the existence and completeness assertions for inventories.

7. Which of the following internal control procedures most likely would be used to maintain accurate
inventory records?

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 a. Perpetual inventory records are periodically compared with the current cost of
individual inventory items.
b. A just-in-time inventory ordering system keeps inventory levels to a desired minimum.
c. Requisitions, receiving reports and purchase orders are independently matched before
payment is approved.
d. Periodic inventory counts are used to adjust the perpetual records.

8. An essential procedural control to ensure the accuracy of the recorded inventory quantities is:
a. Performing a gross profit test.
b. Testing inventory extension.
c. Calculating unit costs and valuing obsolete or damaged inventory items in accordance
with inventory policy.
d. Establishing cut-off for goods received and shipped.

9. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level
of control risk is high, an auditor would probably
a. Increase the extent of test of controls of the inventory cycle.
b. Request the client to schedule the physical inventory at the end of the year.
c. Insist that the client perform physical counts on inventories several times during the
year.
d. Apply gross profit tests to ascertain the reasonableness of physical counts.

10. Which of the following is correct regarding an auditor’s findings while performing sales and
purchases cut-off in line with auditing a merchandising client’s inventories?
a. Goods received on or before the count date included in the physical count but is
purchased on a “sale with repurchase agreement” terms shall understate inventories
as of the balance sheet date.
b. Goods delivered on or before the count date excluded in the physical count but are still
in-transit as of the balance sheet date on an FOB-shipping point terms shall
understate inventories as of the balance sheet date.
c. Goods received after the count date included in the physical count but is purchased on
a “bill and hold agreement” terms shall overstate inventories as of the balance sheet
date.
d. Goods delivered on or before the count date excluded in the physical count but are still
in transit as of the balance sheet date on an FOB destination terms shall understate
inventories as of the balance sheet date.

11. Which of the following is incorrect regarding the physical count of inventories of the client in the
context of the independent audit of financial statements?
a. The best timing for observing physical count of inventories from the auditor’s
perspective is at year-end.
b. The primary responsibility of the independent auditor with regard inventory physical
count is to observe the conduct of the physical count of inventories done by the client
personnel.
c. The auditor may decide to perform test-count on inventories as part of his substantive
test procedure for inventories.
d. The auditor traces test-counts noted during his count observation to the client’s
inventory summary and records in support of the existence assertion on inventories.

12. While observing a client’s annual physical inventory, an auditor recorded test counts for several
items and noticed that certain test counts were higher than the recorded quantities in the client’s
perpetual records. This situation could be the result of the client’s failure to record
a. Purchase discounts.
b. Purchase returns
c. Sales
d. Sales returns.

13. To gain assurance that all inventory items in a client’s inventory listing are valid, an auditor most
likely would _____________. This procedure is necessary to audit ___________ assertion over
inventories.
a. Trace inventory tags noted during the auditor’s observation to items listed in the
inventory listing schedule; Completeness.
b. Trace Inventory tags noted during the auditor’s observation to items listed in the
receiving reports and vendor invoices; Existence.
c. Vouch items listed in the inventory listing schedule to inventory tags and the auditor’s
recorded count sheet, Existence.
d. Vouch items listed in the receiving reports and vendors’ invoices to the inventory
listing schedule; Completeness.

14. Which of the following procedures carried out at an inventory count by an auditor is a test
primarily for overstatement of inventory?
a. Agree items that have been test-counted to inventory sheets.

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 b. Ensure completeness of sequence of pre-numbered inventory sheets at the conclusion
of the count.
c. Check that inventory held a third party locations is included in the count.
d. Agree items appearing in the inventory summary prepared by the client after the
inventory count to the test counts done the by the auditor.

15. Which of the following procedures carried out at an inventory count by an auditor is a test
primarily for overstatement of inventory?
a. Agree items that have been test-counted to inventory sheets.
b. Identify slow-moving obsolete inventory items.
c. Ensure completeness of sequence of pre-numbered inventory sheets at the conclusion
of the count.
d. Check that inventory held a third party locations is included in the count.

16. To measure how effectively an entity employs it resources, an auditor calculates inventory
turnover by dividing average inventory into cost of goods sold, this analytical procedure
information is most helpful/useful in assessing which of the following financial statement assertion
on inventories?
a. Existence
b. Rights
c. Valuation
d. Completeness

17. You were assigned to audit a merchandising client’s inventory for the period ended December 31,
2020. After your complete review the internal control over inventories, you have ascertained that
they were effective thus maintained the internal control risk at below the maximum level. In
connection to this, you decided, as a substantive test procedure, to simply test the reasonableness
of the reported inventory balance by rendering inventory estimation using the gross profit method
of creating an expectation of how much the client’s inventory balance should be. Which of the
following is correct, if the auditor’s expected balance using the gross profit method is materially
different from the reported balance per books as a result of the physical count?
a. The auditor should propose to the audit client to adjust the books to equal the result
of the analytical procedure-inventory estimation.
b. The auditor should issue a qualified opinion due to the material misstatement in the
inventory and indicate in the audit report the extent of the material misstatement.
c. The auditor should extend further the audit procedure by rendering additional test of
details of account balance and transactions to ascertain the source of the material
misstatement
d. The auditor should propose to the audit client that an audit adjustment is necessary as
a result of your audit procedure and if the client is not willing to make the necessary
adjustment, communicate the possible implication of the material misstatement to the
type of audit opinion you will be issuing on the financial statements.

18. An auditor most likely would make inquiries of production and sales personnel concerning possible
obsolete or slow-moving inventory to support management’s financial assertion of:
a. Valuation
b. Rights and obligations
c. Existence
d. Occurrence

19. Which of the following auditing procedures most likely would provide assurance about a
manufacturing entities inventory valuation?
a. Testing the entity’s computation of standard overhead rates.
b. Obtaining confirmation of inventories pledged under loan agreements.
c. Reviewing shipping and receiving cut-off procedures for inventories
d. Tracing test counts to the entity’s inventory listing.

20. An auditor concluded that no excessive costs for idle plant were charged to inventory. This
conclusion most likely related to the auditors objective to obtain evidence about the financial
statement assertions regarding inventory:
a. Rights and obligation
b. Valuation
c. Existence
d. Completeness

21. PAS 2, Inventories require that inventories be valued at lower of cost or net realizable value as at
the balance sheet date. Which of the following shall be the auditor’s best source of corroborating
evidence to determine the reasonableness of the client’s estimate of the net realizable value?
a. Vouching client estimates to the last sales invoices for finished goods inventory sales
and supplier’s purchase invoices for raw materials purchases.
b. Benchmarking by comparing client estimates against industry’s current prices of
similar inventories.

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 c. Tracing test counts noted during the physical count of inventories to the client’s
inventory summary.
d. Subsequent events review.

22. When auditing inventories, an auditor would least likely verify that:
a. The financial statement presentation of inventories is appropriate
b. Damaged goods and obsolete items have been properly accounted for
c. All inventories owned by the client is on hand by the time of the count.
d. The client has used proper inventory pricing.

PROBLEM 2: (RECOGNITION/DERECOGNITION; MEASUREMENT)

Presented below is a list of items that may or may not be reported as inventory in a company’s
December 31, balance sheet:

a. Cost of goods held on consignment received from another company P900,000

b. Goods sold on installment basis at selling price 300,000
c. Invoice price of goods in transit sold FOB shipping point 360,000
d. Invoice price of goods in transit sold FOB destination 600,000
e. Selling price of goods sold to another company, for which the company has signed
an agreement to repurchase at selling price plus additional interest. 900,000
f. Selling price of goods sold to another company under a “bill and hold 360,000
agreement”. As such, goods are still on hand as the company waits for
shipping instructions from the customer.
g. Invoice price of goods in transit purchased FOB shipping point 200,000
h. Invoice price of goods in transit purchased FOB destination point 600,000
i. Import duties and non-refundable taxes on goods purchased in item g. 49,000
j. Freight charges on goods purchased in item g. 24,000
k. Freight charges on goods sold 30,000
l. Cost of insurance while in -transit on goods purchased in item g. 8,000
m. Raw materials on which the company has started production, but which are not
completely processed 840,000
n. Factory labor costs incurred on item m. 150,000
o. Factory overhead costs incurred on item m. 120,000
p. Interest cost incurred for inventories that are routinely manufactured 120,000
q. Costs identified with units completed but not yet sold 780,000
r. Cost to transfer finished goods from factory to finished goods warehouse 30,000
s. Costs incurred to advertise goods held for resale 60,000
t. Costs of goods in the display cabinets of stores (for display only) 15,000
u. Materials on hand not yet placed into production 1,050,000
v. Office and store supplies 30,000
w. Factory supplies 60,000
x. Sales price of goods out on consignment held by another company 1,000,000
y. Freight charges on goods delivered on consignment related to item x. 120,000
z. Temporary investment in stocks and bonds for resale for short-term profit 1,500,000

Audit Notes:
a. All sales were made at 40% gross profit based on Sales.

b. Confirmation with consignees (in item x) indicates that as of December 31, one-thirds of the
goods had already been sold to third-party customers.

How much of these items would typically be reported as inventory in the financial statements?

PROBLEM 3: (SALES CUT-OFF)

You are engaged to perform an audit of the accounts of Patrol Company for its first year of operations
ending December 31, 2020. You have observed the taking of the physical inventory of the company on
December 30, 2020. As a result all goods delivered on or before December 30, 2020 were excluded
from the physical count. An excerpt of the company’s trial balance revealed the following information:

Accounts receivable P527,000

Inventory, physical count 327,000
Sales 5,749,000
Purchases 2,125,000

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The following lists the sales invoices entered in the sales books for the months of several days before
and after December 31, 2020. All purchases were correctly recorded.

DECEMBER 2020 SALES JOURNAL ENTRIES

Invoice # Selling Price Cost Date of Shipment Freight term and other remarks
20122 14,500 8,200 Dec. 27, 2020 FOB Destination
20123 3,000 2,000 Dec. 28, 2020 FOB Shipping Point, in Transit
20124 25,000 15,000 Dec. 29, 2020 Shipped to consignee, 60% unsold by
consignee as per consignee report.
Commission at 10% of sales.
20125 7,000 4,600 Dec. 30, 2020 FOB Destination, in Transit
20126 12,000 8,000 Dec. 31, 2020 FOB Buyer’s Warehouse, in Transit
20127 8,000 4,000 Dec. 31, 2020 Free Alongside the Vessel, in Transit
20128 4,000 2,400 Jan. 2, 2021 FOB Shipping Point

JANUARY 2021 SALES JORNAL ENTRIES

Invoice # Selling Price Cost Date of Shipment Freight term and other remarks
20129 6,000 3,800 Dec. 30, 2020 FOB Destination, in Transit
20130 8,000 5,800 Dec. 31, 2020 FOB Shipping Point, in Transit
20131 7,600 4,800 January 2, 2021 FOB Shipping Point
20132 9,600 6,200 January 2, 2021 Under bill and hold agreement
executed in 2020

What are the adjusted balances of the following:

1. Sales

2. Accounts Receivable

3. Inventories

PROBLEM 4: (SALES AND PURCHASES CUT-OFF)

You have been engaged to audit Sputnik Company for the year ended December 31, 2020. The Company
is engaged in the wholesale business and makes all sales at 30% gross profit based on sales price.
Portions of the client’s sales and purchases accounts for the calendar year 2020 follow:

Sales
DECEMBER SALES JOURNAL
Date Reference Amount Date Reference Amount
12/31 Closing entry 5,313,000 Balance Forwarded 4,910,000
12/26 SI # 706 90,000
12/27 SI # 707 60,000
12/28 SI # 708 80,000
12/28 SI # 709 50,000
12/31 SI # 710 40,000
12/31 SI # 711 45,000
12/31 SI # 712 38,000
P 5,313,000 P 5,313,000

JANUARY SALES JOURNAL

Date Reference Amount Date Reference Amount
1/02/21 SI # 713 120,000
1/02 SI # 714 52,000
1/03 SI # 715 60,000
1/05 SI # 716 40,000

Purchases
DECEMBER PURCHASES JOURNAL
Date Reference Amount Date Reference Amount
Balance forwarded P 2,200,000 12/31 Closing entry P 2,735,000
12/28 RR # 903 100,000
12/30 RR # 905 110,000
12/31 RR # 906 150,000
12/31 RR # 907 175,000
P 2,735,000 P 2,735,000

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JANUARY PURCHASES JOURNAL
Date Reference Amount Date Reference Amount
1/02/21 RR # 908 89,000
1/02 RR # 909 100,000
1/02 RR # 910 76,000
1/03 RR # 911 95,000
1/04 RR # 912 75,000

RR is Receiving Report and SI is Sales Invoice

You observed the physical inventory count in the warehouse on December 31, 2020 and were satisfied
that it was properly taken. Per cut-off tests, the last sales invoice with actual shipment of
goods was No. 711 and the last receiving report used was No. 908 (for which goods were
physically received). The following additional information were gathered:

1. Included in the physical inventory were goods purchased and received on receiving report No.
904 but the corresponding invoice document was received on January 3, 2021. Cost is at
P76,000.

2. In the warehouse on December 31, 2020, were goods covered by the sales invoice No. 706.
Since the customer has already advanced the payment for these goods, these were no longer
included in the physical inventory count.

3. The company uses the railroad facilities of PNR for its purchases or sales shipments. On the
evening of December 31, 2020, there were cars on the Sputnik Company siding:
a. Car No. 1 was unloaded on January 2, 2021 and received per receiving report No. 906.
b. Car No. 2 was unloaded on January 3, 2021 and received per receiving report No. 910.
c. Car No. 3 was loaded and sealed on December 31, 2020 and was switched off the
company’s siding on January 2, 2021. These goods were billed per sales invoice No.
708.
d. Car No. 4 was loaded and sealed on December 31, 2020 and was switched off the
company’s siding on January 2, 2021. The sales price was P120,000. This order was
covered by sales invoice No. 713.

(Hint: Since these goods are inside the corresponding cars on the count date, none of these
were included in the physical count)

4. The tracks were damaged in Quezon Province on December 31, 2020. In the train cars were
goods in transit to a customer in Naga. The goods were billed on sales invoice No. 710 and the
terms were FOB Naga.

5. In transit to Sputnik on December 31, 2020, were goods received per receiving report No. 909.
The freight of P8,000 was properly deducted from the gross purchase price P100,000.

6. In transit to Sputnik on December 31, 2020, were goods acknowledged per receiving report no.
911. The freight of P5,000 was paid by the supplier. The supplier’s invoice shows a total price
of P95,000 which appropriately included the freight charge.

7. Included in the physical inventory count were unsalable items because they were exposed to
rain while they were in transit to Sputnik in November. The invoice cost for the goods which
were shipped FOB Seller was P40,000. These can be sold at an NRV of P5,000.

REQUIRED:
1. What is the adjusted balance of sales?

2. What is the adjusted balance of purchases?

3. What is the net adjustment to accounts receivable account?

4. What is the net adjustment to accounts payable?

5. What is the net adjustment to inventory?

6. What is the net adjustment to the net income?

PROBLEM 5: (ANAYTICAL PROCEDURE: INVENTORY ESTIMATION – GP METHOD)

ABC Corp. lost considerable part of its inventory on a fire on October 31. As the auditor, you were
requested to make an estimate as to the total damages in inventories caused by the fire. Upon
inquiry and inspection of records you ascertained the following:

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 Merchandise inventory, January 1 P120,000
Cash Payments to suppliers from January 1 to October 31 900,000
Purchases returns and allowances (all on account) 46,000
Transportation in 20,000
Customer collections from January 1 to October 31 946,000
Sales returns (all on account) 40,000
Sales allowance (all on account) 20,000
Sales discount (customer cash discounts) 50,000
Special discounts (employee discounts) 24,000
Merchandise not damaged by fire on October 31 48,000
Net realizable value of inventories damaged by fire 4,000
Accounts payable, January 1 130,000
Accounts payable, October 31 60,000
Accounts receivable, January 1 150,000
Accounts receivable, October 31 190,000

Requirements:
1. Using the gross profit test, what was the estimated loss in inventory due to the fire
assuming that the gross profit rate is 30% based on sales?

2. Using the gross profit test, what was the estimated loss in inventory due to the fire
assuming that the gross profit rate is 25% based on cost?

PROBLEM 6: (ANALYTICAL PROCEDURE: INVENTORY ESTIMATION – GP METHOD)

The Davao Corporation is an importer and wholesaler. In conducting his audit for the year ended
December 31, 2020, the company’s CPA determined that the system of internal control was good.
Accordingly, he observed the physical inventory at an interim date November 30, 2020, instead of at
year end.

The following information was obtained from the general ledger:

Inventory, January 1, 2020 P 90,000

Inventory, November 30, 2020, per count 225,000
Sales for eleven months ended November 30, 2020 800,000
Sales for year ended December 31, 2020 950,000
Purchases for eleven months ended November 30,
2020 (before audit adjustments) 720,000
Purchases for year ended December 31, 2020
(before audit adjustments) 810,000

Additional information:
1- Goods received on November 28 but recorded
as purchases in December 10,000
2- Deposits made in October 2020 for purchases
to be made in 2021 but charged as 2020 purchases. 14,000
3- Defective merchandise to be returned to suppliers:
Total at November 30, 2020 5,000
Total at December 31, 2020, excluding
November items 7,000
The returns have not been recorded pending
receipt of credit memos from the suppliers.
The defective goods were not included in the
inventory
4- Goods shipped in November under FOB destination and
received in December were recorded as purchases in November 18,500
5- Goods shipped in November under FOB shipping point and
received in December were recorded as purchases in November 20,500
6- Through the carelessness of the client’s warehouseman,
certain goods were damaged in December and sold in
December at its cost 20,000
7- Audit of the November inventory summary revealed the following:
Items duplicated 3,000
Errors in extension that overvalued the items 4,000

REQUIRED: Compute for the following:

1. Adjusted net purchases up to November 30

2. Adjusted net purchases up to December 31

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3. Gross profit for the eleven months ended November 30

4. Gross profit ratio for eleven months ended November 30

5. Cost of goods sold during December (for the month of December) under the gross profit
method:

6. December 31, inventory under the gross profit method

PROBLEM 7: (ANALYTICAL PROCEDURE: INVENTORY ESTIMATION – RETAIL METHOD)

You were assigned to audit the inventories of Titanuim Corp. in relation to your audit firm’s audit of
the company’s financial statements as of and for the period ended December 31, 2020. Since internal
control over inventories were good, you audit manager simply asked you to render analytical
procedure to test the reasonableness of the inventory balance. The following information were made
available by Titanuim Corp.’s accountant:

Cost Retail
Beginning inventory 1,020,000 1,920,000
Purchases 13,072,500 22,155,000
Freight in 300,000
Purchase return 450,000 750,000
Purchase allowance 270,000
Departmental transfer debit 300,000 425,000
Departmental transfer credit 600,000 1,200,000
Net markup 450,000
Net markdown 1,425,000
Sales 19,800,000
Sales returns and allowance 450,000
Sales discounts 500,000
Employee discount 300,000
Normal Spoilage and breakages 600,000
Abnormal Spoilages and breakages 120,000 200,000

The company reported inventories at P600,000 as a result of its physical count on December 31,
2020, what is the amount of estimated ending inventory shortage/overage as a result of your audit
procedures? (round off cost% to nearest whole number, eg: xx%)

Required:
1. Lower of cost or average/Conservative/Conventional Approach:

2. Average Approach:

3. FIFO Retail Approach:

PROBLEM 8: (BS MEASUREMENT – LOWER OF COST OR NRV)

You were assigned to audit the inventories of Techno Industries Inc. for the period ended December
31, 2020. Techno Industries, a distributor of specialized equipment in the textile industry has the
following inventory transactions based on its records:

Date Particulars Units Cost Sales

Price
Jan. 1 Beginning Balance 2,000 P550
Feb. 3 Purchase 1,700 600
Mar. 5 Sale 1,000 P800
Mar. 20 Sale 900 800
Apr. 15 Purchase 1,000 660
May 20 Purchase 1,800 720
Jun. 5 Sale 1,400 900
Jul. 10 Sale 900 900
Aug. 30 Purchase 800 780
Oct. 11 Sale 1,400 1,000
Nov. 12 Sale 600 1,000
Dec. 15 Purchase 1,000 800

Based on your review of subsequent events, the latest sales transaction selling price inventories was
at P850. Cost to sell is estimated at 10% of the estimated selling price.

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What is the correct carrying value of inventories to be reported in the 2020 Statement of Financial
Position and the corresponding loss on inventory write-down in the 2020 Statement of Comprehensive
Income, assuming no allowance for write-down account was recognized in the previous year under the
following assumptions:

1. The company maintains periodic records and uses FIFO cost formula.

2. The company maintains perpetual records and uses FIFO cost formula.

3. The company maintains periodic records and uses Average cost formula.

4. The company maintains perpetual records and uses Average cost formula.

PROBLEM 9: (BS MEASUREMENT – LOWER OF COST OR NRV)

October Inc., a manufacturing company, had the following information about its inventories as of
December 31, 2020:

Finished Goods Inventory:

Item Cost Selling Price Cost to Sell
A P500,000 P1,000,000 20% of Sales Price
B 1,200,000 1,500,000 30% of Sales Price
C 800,000 1,200,000 10% of Sales Price

Work-in-process Inventory:
Item Direct Direct Labor Overhead Cost to Selling
Materials Complete Price upon
Completion
A P30,000 P50,000 P25,000 P50,000 P200,000
B 45,000 65,000 40,000 60,000 250,000
C 75,000 25,000 80,000 40,000 240,000

Raw Materials Inventory: Finished Goods A:

Item Cost Replacement
cost
RM A-01 P120,000 P125,000
RM A-02 95,000 90,000

Raw Materials Inventory: Finished Goods B:

Item Cost Replacement
cost
RM B-01 P80,000 P100,000
RM B-02 105,000 98,000
RM B-03 110,000 100,000

Raw Materials Inventory: Finished Goods C:

Item Cost Replacement
cost
RM C-01 P175,000 P170,000
RM C-02 40,000 45,000

Required:
1. What is the correct carrying value of finished goods inventory?

2. What is the correct carrying value of work-in process inventories?

3. What is the correct carrying value of raw-materials inventories?

4. Assuming direct write-off method is used to account for inventory write-down, how much should
be recognized in the profit/loss as a result of the lower of cost or net realizable value valuation
of inventories?

5. Assuming allowance method and the following allowance for inventory write-down existed at the
beginning of the year (FG – P60,000; WIP – P70,000; RM – 0), how much should be recognized
in the profit/loss as a result of the lower of cost or net realizable value valuation of inventories?

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