Question

From the following information, calculate Inventory Turnover Ratio; Operating Ratio and Working Capital Turnover Ratio:
Opening Inventory ₹ 28,000; Closing Inventory ₹ 22,000; Purchases ₹ 46,000; Revenue from Operations,  i.e., Net Sales ₹ 80,000; Return ₹10,000; Carriage Inwards ₹ 4,000; Office Expenses ₹ 4,000; Selling and Distribution Expenses ₹ 2,000; Working Capital ₹ 40,000. 

Answer 1

(i)

Opening Inventory = 28,000

Closing Inventory = 22,000

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

`= (28000 + 22000)/2` = Rs 25000

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

= 28,000 + 46,000 + 4,000 − 22,000 = 56,000

Inventory Turnover Ratio = `"Cost of Goods Sold"/"Average Inventory" = 56000/25000` = 2.24 Times

(ii) 

Operating Expenses = Office Expenses + Selling and Distribution Expenses

= 4,000 + 2,000 = 6,000

Operating Cost = Cost of Goods Sold + Operating Expenses

= 56000 + 6000 = 62000

Net Sales = Rs 80,000*

Operating Ratio = `"Operating Cost"/"Net Sales" xx 100`

`= 62000/80000 xx 100 = 77.5 %`

(iii)

Working Capital = 40,000

Working Capital Turnover Ratio = `"Net Sales"/"Working Capital" = 80000/40000` = 2 Times

*Note: Sales return will not be considered as amount of net sales is provided in the question.