Question

From the following data, calculate the Inventory Turnover Ratio:

Total Sales ₹ 10,00,000; Sales Return ₹ 1,00,000; Gross Profit ₹ 1,80,000; Closing Inventory ₹ 2,00,000; Excess of Closing Inventory over Opening Inventory ₹ 40,000.

Answer 1

Calculation of Net Sales (Revenue from Operations):

\[\text{Net Sales} = \text{Total Sales} - \text{Sales Return}\]

$$\text{Net Sales} = ₹ 10,00,000 - ₹ 1,00,000$$

$${\text{Net Sales} = ₹ 9,00,000}$$

Calculation of Cost of Revenue from Operations:

$$\text{Cost of Revenue from Operations} = \text{Net Sales} - \text{Gross Profit}$$

$$\text{Cost of Revenue from Operations} = ₹ 9,00,000 - ₹ 1,80,000$$ 
$${\text{Cost of Revenue from Operations} = ₹ 7,20,000}$$

Calculation of Opening Inventory:

We are given that Closing Inventory is ₹ 40,000 more than Opening Inventory:

$$\text{Closing Inventory} = \text{Opening Inventory} + ₹ 40,000$$

$$₹ 2,00,000 = \text{Opening Inventory} + ₹ 40,000$$

$$\text{Opening Inventory} = ₹ 2,00,000 - ₹ 40,000$$

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

Calculation of Average Inventory:

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

$$\text{Average Inventory} = \frac{1,60,000 + 2,00,000}{2}$$

$$\text{Average Inventory} = \frac{3,60,000}{2}$$

$${\text{Average Inventory} = ₹ 1,80,000}$$

Calculation of Inventory Turnover Ratio:

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

$$\text{Inventory Turnover Ratio} = \frac{7,20,000}{1,80,000} = 4$$

Inventory Turnover Ratio = 4 Times