Gross Profit
Shelly Corporation is an importer and wholesaler. Its merchandise is purchased from several suppliers and is warehoused by Shelly until sold to consumers. In conducting her audit for the year ended June 30, 2019, the corporation’s CPA determined that the system of internal control was good. Accordingly, she observed the physical inventory at an interim date, May 31, 2019, instead of at year-end.
The CPA obtained the following information from the general ledger:
The CPA’s audit disclosed the following information:
Required:
In audit engagements in which interim physical inventories are observed, a frequently used
- 1. Computation of the gross profit ratio for 11 months ended May 31, 2019
- 2. Computation by the gross profit ratio method of cost of goods sold during June 2019
- 3. Computation by the gross profit ratio method of June 30, 2019 inventory
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Chapter 8 Solutions
Intermediate Accounting: Reporting And Analysis
- Assume that in an annual audit of Pharoah Inc. at December 31, 2020, you find the following transactions near the closing date.Assuming that each of the amounts is material, state whether the merchandise should be included in the client’s inventory. Transactions 1. A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shipping room on December 31, 2020. The customer was billed on that date and the machine excluded from inventory although it was shipped on January 4, 2021. select an option IncludeDo not include 2. Merchandise costing $5,180 was received on January 3, 2021, and the related purchase invoice recorded January 5. The invoice showed the shipment was made on December 29, 2020, f.o.b. destination. select an option IncludeDo not include 3. A packing case containing a…arrow_forwardIn conducting your audit of Blue Lagoon Corporation, a company engaged in import and wholesale business, for the fiscal year ended June 30, 2021, you determined that its internal control system was good. Accordingly, you observed the physical inventory at an interim date, May 30, 2021 instead of at June 30, 2021. You obtained the following information from the company's general ledger. Sales for eleven months ended May 31, 20121 (before audit adjustments) Sales for the fiscal year ended June 30, 2021 (before audit adjustments) Purchases for eleven months ended May 31, 2021 (before audit adjustments) Purchases for the fiscal year ended June 30, 2021 (before audit adjustments) Inventory, July 1, 2020 Physical inventory, May 30, 2021 P1,615,000 1,843,000 1,296,000 1,536,000 170,200 264,000 Your audit disclosed the following additional information. a. Shipments costing P12,000 were received in May and included in the physical inventory but recorded as June purchases. b. Deposit of P4,000…arrow_forwardYou are engaged to perform an audit of the Nadir Corporation for the year ended December 31, 2021. You have decided to perform the following cutoff test for payables and accruals. Select all items greater than P25,000 for two business days before and after year-end from the purchases journal and ensure that all transactions are recorded in the proper period. During your firm's observation of Nadir's physical inventory you obtained the following cutoff information: the last receiving report number in 2021 was 49745. Your audit work identified the following items for further investigation: Selections from the December 2021 Purchase Journal Vendor Name Date RR# 49472 Amount Explanation P 29,875 Chemicals purchased for manufacturing process. P 45,000 Payment for consulting services for the three-month period beginning December 1, 2021. The P45,000 was charged to consulting expenses. P205,000 Raw materials used in the manufacturing process. 12/30 12/31 Jeff Chemicals None Abed Consulting…arrow_forward
- Your audit client presented the following information on December 31, 2018: Net purchases (all on account) — P2,400,000; Inventory, December 31, 2018 — P350,000. The audited balance of inventory on December 31, 2017 is P260,000. Additional information:A. The December 31, 2018 inventory balance is based on the inventory count conducted on the entity's warehouse. All inventories in the warehouse at that date were included, while inventories not in the warehouse were not included in the count. B. A purchase of inventory for P6,000 was recorded on December 28, 2018 and the goods are still in transit as of December 31. The related freight term is FOB Shipping Point. C. Goods (costing P20,000) consigned by your client to another entity are not yet sold as of December 31, 2018. No journal entry was prepared by your client upon the transfer of goods to the consignee. D. Goods costing P8,000 were sold for P15,000 on December 28, 2018. The freight term is FOB Shipping Point.E. A purchase of…arrow_forwardA client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probablya. Apply gross profit tests to ascertain the reasonableness of the physical counts.b. Increase the extent of tests of controls relevant to the inventory cycle.c. Request the client to schedule the physical inventory count at the end of the year.d. Insist that the client perform physical counts of inventory items several times during the year.arrow_forwardReggie Company has just completed a physical inventory count at year-end, December 31, 2020. Only the items on the shelves, in storage, and in the receiving area were counted and costed on a FIFO basis. The inventory amounted to $65,000. During the audit, the auditor developed the following additional information: a. Goods costing $750 were being used by a customer on a trial basis and were excluded from the inventory count at December 31, 2020. b. Goods costing $900 were in transit to Reggie on December 31, 2020, with terms F.O.B. destination (explained below). Because these goods had not arrived, they were excluded from the physical inventory count. c. On December 31, 2020, goods in transit to customers, with terms F.O.B. shipping point, amounted to $1,300 (the expected delivery date was January 10, 2021), Because the goods had been shipped, they were excluded from the physical inventory count. d. On December 28, 2020, a customer purchased goods for $2,650 cash and left them "for…arrow_forward
- In your audit of Joseph Moore Company, you find that a physical inventory on December 31, 2020, showed merchandise with a cost of $411,580 was on hand at that date. You also discover the following items were all excluded from the $411,580. 1. Merchandise of $60,710 which is held by Moore on consignment. The consignor is the Max Suzuki Company. 2. Merchandise costing $38,360 which was shipped by Moore f.o.b. destination to a customer on December 31, 2020. The customer was expected to receive the merchandise on January 6, 2021. 3. Merchandise costing $46,920 which was shipped by Moore f.o.b. shipping point to a customer on December 29, 2020. The customer was scheduled to receive the merchandise on January 2, 2021. 4. Merchandise costing $82,010 shipped by a vendor f.o.b. destination on December 30, 2020, and received by Moore on January 4, 2021. 5. Merchandise costing $55,300 shipped by a vendor f.o.b. shipping point on December 31, 2020, and received by Moore on…arrow_forwardThe perpetual and periodic systems are different methods of recording the purchase and sale of inventory during the year in the accountingrecords.You are required to answer the following questions on the two methods:a. Explain TWO differences between the perpetual and the periodic systems. b. How do we record a sales return by a client under the perpetual method if the client purchased the item on credit and has not yet settled theiraccount.arrow_forwardAssume that in an annual audit of Harlowe Inc. at December 31, 2020, you find the following transactions near the closing date. 1. A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shipping room on December 31, 2020. The customer was billed on that date and the machine excluded from inventory although it was shipped on January 4, 2021. 2. Merchandise costing $2,800 was received on January 3, 2021, and the related purchase invoice recorded January 5. The invoice showed the shipment was made on December 29, 2020, f.o.b. destination. 3. A packing case containing a product costing $3,400 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.” Your investigation revealed that the customer's order was dated December 18, 2020, but that the case was shipped and the customer billed on January 10, 2021. The…arrow_forward
- In your audit of James Smith Company, you find that a physical inventory on December 31, 2020, showed merchandise with a cost of $449,390 was on hand at that date. You also discover the following items were all excluded from the $449,390. 1. Merchandise of $61,150 which is held by Smith on consignment. The consignor is the Max Suzuki Company. 2. Merchandise costing $36,420 which was shipped by Smith f.o.b. destination to a customer on December 31, 2020. The customer was expected to receive the merchandise on January 6, 2021. 3. Merchandise costing $47,720 which was shipped by Smith f.o.b. shipping point to a customer on December 29, 2020. The customer was scheduled to receive the merchandise on January 2, 2021. 4. Merchandise costing $83,030 shipped by a vendor f.o.b. destination on December 30, 2020, and received by Smith on January 4, 2021. 5. Merchandise costing $49,200 shipped by a vendor f.o.b. shipping point on December 31, 2020, and received by Smith on…arrow_forwardMichael Corporation is on a calendar year basis. The following data were found during your audit:1) An excerpt from the client’s trial balance revealed the following account balances:Accounts receivable P 80,000Inventory, per count 1,200,000Accounts payable 790,000Net sales 6,050,000Net purchases 3,300,000Net income 610,0002) The client conducted an inventory count on December 31, 2021. Michael Corporation normally sells at 30% gross profit based on selling price.3) Goods were in transit FOB destination from a supplier in the amount of P120,000. Further testing revealed that the suppliers invoice pertaining to the delivery was received and recorded on December 28, 2021.4) Good costing P70,000 had been received on December 31, and recorded as a purchase. However, upon your inspection, the goods were found to be defective and would be immediately returned.5) Materials costing P224,000, sold and billed on December 30 under a “bill and hold” agreement, had been segregated in the warehouse…arrow_forwardWhen auditing merchandise inventory at year-end, the auditor performs audit procedures to obtain evidence that no goods held on consignment are included in the client’s ending inventory balance. This audit procedure provides assurance about which management assertion Select one: a. Existence b. Valuation and allocation c. Completeness d. Occurrence e. Rights and obligationsarrow_forward
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