Question

From the given information, calculate the following ratios:

1. Operating Ratio and
2. Inventory Turnover Ratio

Information:

Cash Revenue from Operations	:	₹ 10,00,000
Credit Revenue from Operations	:	120% of Cash Revenue from Operations
Operating Expenses	:	10% of Total Revenue from Operations
Rate of Gross Profit	:	40%
Opening Inventory	:	₹ 1,50,000
Closing Inventory	:	₹ 20,000 more than Opening Inventory

Answer 1

Preliminary Calculations:

1. Total Revenue from Operations (Net Sales):

\[\text{Credit Revenue from Operations} = 120\% \times ₹ 10,00,000 = ₹ 12,00,000\]

$$\text{Total Revenue from Operations} = \text{Cash Revenue} + \text{Credit Revenue}$$

$$\text{Total Revenue from Operations} = ₹ 10,00,000 + ₹ 12,00,000$$

$${\text{Total Revenue from Operations} = ₹ 22,00,000}$$

2. Cost of Revenue from Operations (COGS):

$$\text{Gross Profit} = 40\% \text{ of } ₹ 22,00,000 = ₹ 8,80,000$$

$$\text{Cost of Revenue from Operations (COGS)} = \text{Total Revenue} - \text{Gross Profit}$$

$$\text{Cost of Revenue from Operations (COGS)} = ₹ 22,00,000 - ₹ 8,80,000$$

$${\text{COGS} = ₹ 13,20,000}$$

3. Operating Expenses & Operating Cost:

$$\text{Operating Expenses} = 10\% \text{ of } ₹ 22,00,000 = ₹ 2,20,000$$

$$\text{Operating Cost} = \text{COGS} + \text{Operating Expenses}$$

$$\text{Operating Cost} = ₹ 13,20,000 + ₹ 2,20,000$$ 
$${\text{Operating Cost} = ₹ 15,40,000}$$

4. Average Inventory:

$$\text{Closing Inventory} = ₹ 1,50,000 + ₹ 20,000 = ₹ 1,70,000$$

$$\text{Average Inventory} = \frac{\text{Opening Inventory} + \text{Closing Inventory}}{2}$$

$$\text{Average Inventory} = \frac{1,50,000 + 1,70,000}{2} = \frac{3,20,000}{2}$$

$${\text{Average Inventory} = ₹ 1,60,000}$$

Ratio Calculations:

(i) Operating Ratio:

$$\text{Operating Ratio} = \left( \frac{\text{Operating Cost}}{\text{Total Revenue from Operations}} \right) \times 100$$

$$\text{Operating Ratio} = \left( \frac{15,40,000}{22,00,000} \right) \times 100 = 70\%$$

$${\text{Operating Ratio} = 70\%}$$

(ii) Inventory Turnover Ratio:

$$\text{Inventory Turnover Ratio} = \frac{\text{Cost of Revenue from Operations (COGS)}}{\text{Average Inventory}}$$

$$\text{Inventory Turnover Ratio} = \frac{13,20,000}{1,60,000} = 8.25$$

$${\text{Inventory Turnover Ratio} = 8.25\text{ Times}}$$