Question

Calculate the inventory turnover ratio if:

• Cost of Revenue from operations is ₹ 3,20,000.
• Gross profit is 20% of Revenue from Operations.
• Closing inventory is 4 times of opening inventory.
• Opening inventory is 10% of Revenue from operations.

Answer 1

Cost of Revenue from Operation is ₹ 3,20,000

Cost of Revenue from Operation = Revenue from Operations − Gross profit

Let Revenue from Operation be `x`

3,20,000 = x − 0.20x

3,20,000 = 0.80x

x = `(3,20,000)/0.80`

x = ₹ 4,00,000

Revenue from Operation = ₹ 4,00,000

Opening Inventory = 10% of Revenue from operations

= `10/100 xx 4,00,000`

= ₹ 40,000

Closing Inventory = 40,000 × 4

= ₹ 1,60,000

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

= `(40,000 + 1,60,000)/2`

= `(2,00,000)/2`

= ₹ 1,00,000

Inventory Turnover Ratio = `"Cost of revenue from operations"/"Average inventory"`

= `(3,20,000)/(1,00,000)`

= 3.2 times