Question

Calculate Inventory Turnover Ratio from the following:

Opening Inventory ₹ 42,500 ; Closing Inventory ₹ 37,500 ; Revenue from Operations (Sales) ₹3,00,000 ; Gross Profit 20% on cost.

Answer 1

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

Gross Profit is 20% on cost. Hence, goods costing ₹ 100 is sold for ₹ 120.

∴ If Revenue from Operations is ₹ 120, then cost is ₹ 100.

If Revenue from Operations is ₹ 3,00,000, then Cost = `100/120 xx 3,00,000`

= ₹ 2,50,000

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

= `(₹ 42,500  + ₹ 37,500)/2`

= `(₹ 80,000)/2`

= ₹ 40,000

Inventory Turnover Ratio = `(₹ 2,50,000)/(₹ 40,000)`

= 6.25 times