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Droog Co is a retailer dealing in a single product

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:

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 liabilities 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 andb.

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 liabilities 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 andb.

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