Question

From the following information, calculate opening and closing inventory:

Gross Profit Ratio - 25%

Revenue from operations - ₹ 8,00,000

Inventory turnover ratio - 4 times

Opening inventory was 2 times of the closing inventory.

Answer 1

Cost of Revenue from operations = Revenue from operations – Gross Profit

= ₹ 8,00,000 – [₹ 8,00,000 × 25%]

= ₹ 8,00,000 – ₹ 2,00,000 

= ₹ 6,00,000

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

4 = `(₹ 6,00,000)/"Average Inventory"`

= ₹ 1,50,000

Let the closing inventory be x, then

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

₹ 1,50,000 = `(2x+x)/2` 

x = `(₹ 1,50,000xx2)/3`

= ₹ 1,00,000 (Closing Inventory)

If closing Inventory is ₹ 1,00,000 then opening Inventory will be ₹ 1,00,000 × 2 = ₹ 2,00,000