Question

From the following information, calculate the Inventory Turnover Ratio:

Opening Inventory	₹ 2,00,000
Purchases	₹ 4,60,000
Carriage Inwards	₹ 20,000
Closing Inventory	₹ 60,000
Wages	₹ 30,000
Freight Outwards	₹ 37,500

Answer 1

Calculation of Cost of Revenue from Operations (Cost of Goods Sold):

$$\begin{aligned} \text{Cost of Revenue from Operations} &= \text{Opening Inventory} + \text{Purchases} + \text{Direct Expenses} - \text{Closing Inventory} \\ \text{Direct Expenses} &= \text{Carriage Inwards} + \text{Wages} = 20,000 + 30,000 = \mathbf{₹\ 50,000} \\ \text{Cost of Revenue from Operations} &= 2,00,000 + 4,60,000 + 50,000 - 60,000 \\ &={₹\ 6,50,000} \end{aligned}$$

Calculation of Average Inventory:

$$\begin{aligned} \text{Average Inventory} &= \frac{\text{Opening Inventory} + \text{Closing Inventory}}{2} \\ &= \frac{2,00,000 + 60,000}{2} ={₹\ 1,30,000} \end{aligned}$$

Calculation of Inventory Turnover Ratio:

$$\begin{aligned} \text{Inventory Turnover Ratio} &= \frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}} \\ &= \frac{6,50,000}{1,30,000} ={5\ \text{Times}} \end{aligned}$$