Question

From the following information, calculate Inventory Turnover Ratio:

Purchases ₹ 10,00,000; Revenue from Operations (Sales) ₹ 12,00,000; Direct Expenses ₹ 48,000; Gross Profit Ratio 15% on Revenue from Operations; Closing Inventory ₹ 1,64,000.

Answer 1

Inventory Turnover Ratio = `"Cost of Revenue from Operations"/"Average Inventory"`

Cost of Revenue from Operations = Revenue from Operations − Gross Profit

= ₹ 12,00,000 − 15% of ₹ 12,00,000

= ₹ 12,00,000 − ₹ 1,80,000

= ₹ 10,20,000

Cost of Revenue from Operations = Opening Inventory + Purchases + Direct Expenses − Closing Inventory

₹ 10,20,000 = Opening Inventory + ₹ 10,00,000 + ₹ 48,000 − ₹ 1,64,000

₹ 10,20,000 = Opening Inventory + ₹ 8,84,000

Opening Inventory = ₹ 10,20,000 − ₹ 8,84,000

= ₹ 1,36,000

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

= `(₹ 1,36,000 + ₹ 1,64,000)/2`

= ₹ 1,50,000

Inventory Turnover Ratio = `(₹ 10,20,000)/(₹ 1,50,000)`

= 6.8 times