Question

Calculate Inventory Turnover Ratio from the data given below:

Inventory in the beginning of the year	Rs 20,000
Inventory at the end of the year	Rs 10,000
Purchases	Rs 50,000
Carriage Inwards	Rs 5,000
Revenue from Operations, i.e., Sales	Rs 1,00,000

State the significance of this ratio.

Answer 1

Inventory Turnover Ratio = `("Cost of goods Sold (COGS)")/("Average Inventory")`

Cost of Goods Sold = Opening Stock + Purchases + Carriage Inwards − Closing Stock

= 20,000 + 50,000 + 5,000 − 10,000

= 65,000

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

`= (20,000 + 10,000)/2`

= `(30,000)/2`

= 15,000

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

= `65000/15000 = 4.33` times

Significance:
It shows how many times inventory is sold and replaced in a year. A higher ratio means efficient inventory management and strong sales.