Name ACCT 6335 Class Case 3 Droog Co. is a retailer dealing in a single product.

Question

Name ACCT 6335 Class Case 3 Droog Co. is a retailer dealing in a single product. Beginning inventory at January 1 of this year is zero, operating expenses for this same year are $5,000, and there are 2,000 common shares outstanding. The following purchases are made this year: Cost $1,000 3,300 7,200 4,200 7.500 $23,200 Per Unit $10 Units 100 300 600 300 December.. ..500 January.... June October. 12 14 15 Ending inventory at December 31 is 800 units. End-of-year assets, excluding inventories, amount to $75,000, of which $50,000 of the $75,000 are current. Current liabilitios amount to $25,000, and long-term liabilities equal $10,000. Required: a. Determine net income for this year under each of the following inventory methods Assume a sales price of $25 per unit and ignore income taxes. (1) FIFO (2) LIFO (3) Average cost b. Compute the following ratios under each of the inventory methods of FIFO, LIFO and average cost. (1) Current ratio (2) Debt-to-equity ratio (3) Inventory turnover (4) Return on total assets (5) Gross margin as a percent of sales (6) Net profit as a percent of sales c. Discuss the effects of inventory accounting methods for financial statement analysis given the results from parts a and b.

Explanation / Answer

a. Net Income: FIFO LIFO Average Sale 1000*25 25000 25000 25000 Cost of Sales: -Beginning                  -                    -                                -   Add: Purchase        23,200        23,200                    23,200 Less: Ending        11,700           9,100                    10,311 Cost of Sales        11,500        14,100                    12,889 Gross Profit        13,500        10,900                    12,111 Operating Expense 5000 5000 5000 Net Income           8,500           5,900                       7,111 Net Income per share Net Income/2000             4.25             2.95                         3.56 Working FIFO LIFO Average Ending Inventory 500*15 100*10 23200/1800*800 300*14 300*11 400*12 11700 9100 10311 b. Ratios: Working: FIFO LIFO Average Current Asset (Excluding Inventory) 50000 50000 50000 Inventory 11700 9100 10311.11111 Other Asset (75000-25000) 25000 25000 25000 Total Assets 86700 84100 85311.11111 Common Share (Balancing) 43200 43200 43200 Retained Earning 8500 5900 7111.111111 Current Liabilities 25000 25000 25000 Other Liabilities 10000 10000 10000 Total Equity and Liabilities 86700 84100 85311.11111 Ratios: Formula FIFO LIFO AVG Current Ratio Current Asset/Current Liabi             2.47             2.36                         2.41 Debt to Equity Ratios Total Liability/Equity             0.68             0.71                         0.70 Inventory Turnover COGS/Avg Inv             0.98             1.55                         1.25 Return on Total Asset EBIT/Total Assets             9.80             7.02                         8.34 Gross Margin Ratio Gross Margin/Sale                 54                 44                             48 Net Profit as percentage of Sale Net Profit/Sale                 34                 24                             28 c. Effect LIFO: This has lowest Gorss Marging and Net profit ratio and Return on total asset and current ratio. FIFO: This has Highest Gorss Marging and Net profit ratio and Return on total asset and current ratio. Average: This has Gorss Marging and Net profit ratio and Return on total asset and current ratio in between FIFO and LIFO

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