Question

From the following Information, calculate the Inventory Turnover Ratio:

Credit Revenue from Operations ₹ 6,00,000; Cash Revenue from Operations ₹ 2,00,000; Gross Profit 25% of Cost; Closing Inventory was 3 times the Opening Inventory. Opening Inventory was 10% of Cost of Revenue from Operations.

Answer 1

Calculation of Total Revenue from Operations:

\[\text{Total Revenue from Operations} = \text{Credit Revenue} + \text{Cash Revenue}\]

$$\text{Total Revenue from Operations} = ₹ 6,00,000 + ₹ 2,00,000$$

$${\text{Total Revenue from Operations} = ₹ 8,00,000}$$

Calculation of Cost of Revenue from Operations:

Since Gross Profit is 25% on Cost, let the Cost be $X$.

$$\text{Gross Profit} = 25\% \text{ of } X = 0.25X$$

We know that:

$$\text{Total Revenue from Operations} = \text{Cost} + \text{Gross Profit}$$

$$8,00,000 = X + 0.25X$$

$$8,00,000 = 1.25X$$

$$X = \frac{8,00,000}{1.25}$$

$${\text{Cost of Revenue from Operations (COGS)} = ₹ 6,40,000}$$

Calculation of Opening and Closing Inventory:

1. Opening Inventory:

$$\text{Opening Inventory} = 10\% \text{ of Cost of Revenue from Operations}$$

$$\text{Opening Inventory} = 10\% \text{ of } ₹ 6,40,000$$

$${\text{Opening Inventory} = ₹ 64,000}$$

2. Closing Inventory:

$$\text{Closing Inventory} = 3 \times \text{Opening Inventory}$$

$$\text{Closing Inventory} = 3 \times ₹ 64,000$$

$${\text{Closing Inventory} = ₹ 1,92,000}$$

Calculation of Average Inventory:

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

$$\text{Average Inventory} = \frac{64,000 + 1,92,000}{2}$$

$$\text{Average Inventory} = \frac{2,56,000}{2}$$

$${\text{Average Inventory} = ₹ 1,28,000}$$

Calculation of Inventory Turnover Ratio:

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

$$\text{Inventory Turnover Ratio} = \frac{6,40,000}{1,28,000} = 5$$

Inventory Turnover Ratio = 5 Times