Question

Calculate Inventory Turnover Ratio from the following:

	₹
Cash Revenue from Operations (Cash Sales)	6,00,000
Credit Revenue from Operations (Credit Sales)	4,00,000
Gross Profit	25% on Cost

Closing Inventory: 3 times of Opening Inventory.

Opening Inventory: 10% of Cost of Revenue from Operations.

Answer 1

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

Revenue from Operations = Cash Sales + Credit Sales

= ₹ 6,00,000 + ₹ 4,00,000

= ₹ 10,00,000

Gross Profit = 25% on cost

Let the Cost of Goods Sold be x.

Gross Profit = Revenue from Operations − Cost of Goods Sold

25% of x = ₹ 10,00,000 − x

`25/100 x + x` = ₹ 10,00,000

`125/100 x` = ₹ 10,00,000

x (Cost of Goods Sold) = ₹ 10,00,000 × `100/125`

= ₹ 8,00,000

Opening Inventory = 10% of Cost of Revenue from Operations

= `10/100 xx ₹ 8,00,000`

= ₹ 80,000

Closing Inventory = ₹ 80,000 × 3

= ₹ 2,40,000

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

= `(₹ 80,000  + ₹ 2,40,000)/2`

= ₹ 1,60,000

Inventory Turnover Ratio = `(₹ 8,00,000)/(₹ 1,60,000)`

= 5 times