Question

Calculate Inventory Turnover Ratio in each of the following alternative cases:
Case 1: Cash Sales 25% of Credit Sales; Credit Sales ₹3,00,000; Gross Profit 20% on Revenue from Operations, i.e., Net Sales; Closing Inventory ₹1,60,000; Opening Inventory ₹40,000.
Case 2: Cash Sales 20% of Total Sales; Credit Sales ₹4,50,000; Gross Profit 25% on Cost; Opening Inventory ₹37,500; Closing Inventory ₹1,12,500.

Answer 1

Case 1

Credit Sales = 3,00,000

Cash sales = 25% of Credit Sales

∴ Cash Sales = `300000 xx 25/100 = 75000`

Total Sales = Cash Sales + Credit Sales

= 3,00,000 + 75,000 = 3,75,000

Gross Profit = 20% on Sales

∴ Gross Profit = `375000 xx 20/100 = 75000`

Cost of Goods Sold = Total Sales − Gross Profit

= 3,75,000 − 75,000 = 3,00,000

Average Stock = `("Opening Stock + Closing Stock")/2`

`=(40000 + 160000)/2 = 100000`

Inventory Turnover Ratio=`"Cost of goods Sold"/"Average Stock"`

`= 300000/100000` = 3 times

Case 2

Let Total Sales = x

Cash sales = `"Total Sales" xx 20/100`

Cash Sales = `x xx 20/100 = (20x)/100`

Total Sales = Cash Sales + Credit Sales

`x = (20x)/100 + 450000`

or, `x - (20x)/100 = 450000`

or, `(80x)/100 = 450000`

or,x = 562500

Let cost of goods sold = a

Gross Profit = `a xx 25/100 = (25a)/100`

Gross Profit = Sales − Cost of Goods Sold

`(25a)/100 = 562500 - a`

or, `a + (25a)/100 = 562500`

or, `(125a)/100` = 562500

or, a=450000

Cost of goods sold = a = 450000

Average Stock

= `("Opening Stock + Closing Stock")/2`

`= (37500 + 112500)/2` = 75000

Stock turnover Ratio =`"Cost of goods Sold"/"Average Stock"`

= `450000/75000 = 6   "times"`