Question

Following figures have been obtained from the books of Pawan Roadways Ltd:

	2022 ₹	2023 ₹
Revenue from Operations (at Gross Profit of 25%)	36,00,000	60,00,000
Trade Receivables on 1st January	5,40,000
Trade Receivables on 31st December	6,60,000	9,40,000
Inventory on 1st January	6,50,000
Inventory on 31st December	7,00,000	10,00,000

Calculate the Trade Receivables Turnover Ratio. Also Calculate Inventory Turnover Ratio. Give necessary Comments.

Answer 1

For 2022

Trade Receivables Turnover Ratio = `"Credit Revenue from Operations"/"Average Trade Receivables"`

Average Trade Receivables = `("Opening Trade Receivables" + "Closing Trade Receivables")/2`

= `(₹ 5,40,000  + ₹ 6,60,000)/2`

= `(₹ 12,00,000)/2`

= ₹ 6,00,000

Trade Receivables Turnover Ratio = `(₹ 36,00,000)/(₹ 6,00,000)`

= 6 Times

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

Gross Profit = Revenue from Operations − Cost of Revenue from Operations

25% of ₹ 36,00,000 = ₹ 36,00,000 − Cost of Revenue from Operations

`25/100 xx ₹ 36,00,000` = ₹ 36,00,000 − Cost of Revenue from Operations

Cost of Revenue from Operations = ₹ 36,00,000 − ₹ 9,00,000

= ₹ 27,00,000

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

= `(₹ 6,50,000  + ₹ 7,00,000)/2`

= `(₹ 13,50,000)/2`

= ₹ 6,75,000

Inventory Turnover Ratio = `(₹ 27,00,000)/(₹ 6,75,000)`

= 4 Times

For 2023

Trade Receivables Turnover Ratio = `"Credit Revenue from Operations"/"Average Trade Receivables"`

Average Trade Receivables = `("Opening Trade Receivables" + "Closing Trade Receivables")/2`

= `(₹ 6,60,000  + ₹ 9,40,000)/2`

= `(₹ 16,00,000)/2`

= ₹ 8,00,000

Trade Receivables Turnover Ratio = `(₹ 60,00,000)/(₹ 8,00,000)`

= 7.5 Times

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

Gross Profit = Revenue from Operations − Cost of Revenue from Operations

25% of ₹ 60,00,000 = ₹ 60,00,000 − Cost of Revenue from Operations

`25/100 xx ₹ 60,00,000` = ₹ 60,00,000 − Cost of Revenue from Operations

Cost of Revenue from Operations = ₹ 60,00,000 − ₹ 15,00,000

= ₹ 45,00,000

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

= `(₹ 7,00,000  + ₹ 10,00,000)/2`

= `(₹ 17,00,000)/2`

= ₹ 8,50,000

Inventory Turnover Ratio = `(₹ 45,00,000)/(₹ 8,50,000)`

= 5.29 Times

Comments:

(1) The Trade Receivables Turnover Ratio increased from 6 to 7.5 times by 2023. It shows that the sum from Trade Receivables is being collected quickly.

(2) In 2023, the Inventory Turnover Ratio also increased. It shows that inventory is being converted into revenue from operations quickly. As a result, the management’s sales strategy is highly effective.