Question

A company earns Gross Profit of 25% on cost. For the year ended 31st March, 2017 its Gross Profit was ₹ 5,00,000; Equity Share Capital of the company was ₹ 10,00,000; Reserves and Surplus ₹ 2,00,000; Long-term Loan ₹ 3,00,000 and Non-current Assets were ₹ 10,00,000.
Compute the 'Working Capital Turnover Ratio' of the company.

Answer 1

Working Capital Turnover Ratio= Revenue from Operation/Working Capital
Gross Profit = 25% on Cost
Let Cost of Goods sold be ₹ 100.
Gross Profit = ₹ 25
Revenue from Operations = ₹ (100 + 25) = ₹ 125
When Gross profit is ₹ 25, revenue from operations is= ₹ 125
And, if Gross profit is ₹ 5,00,000 then revenue from operations will be= ₹ (5,00,000 × 125/25) = ₹ 25,00,000
Capital Employed = Shareholder’s Funds + Non-Current Liabilities
                          = ₹ (10,00,000 + 2,00,000 + 3,00,000) = ₹ 15,00,000
Also, Capital Employed = Non Current Assets + Working Capital
Alternatively, Working Capital = Capital Employed – Non-current Assets = ₹ (15,00,000 – 10,00,000)= ₹ 5,00,000
Hence, Working Capital Turnover Ratio= 25,00,000/5,00,000= 5 times