Question

Star Ltd., an electronic company, is interested to analyse its credit policy and see how much amount is usually invested in Trade Receivables. Following information is provided by the company:

Particulars
Trade Receivables Turnover Ratio	4 Times
Cost of Revenue from Operations	₹3,00,000
Gross Profit	25%
Opening Trade Receivables	₹ 50,000

Cash Revenue from Operations is 20% of Total Revenue from Operations.

From the information given above, answer the following questions:

1. Revenue from Operations is ______.
   1. ₹ 3,80,000
   2. ₹ 4,80,000
   3. ₹ 4,00,000
   4. ₹ 4,60,000
2. Credit Revenue from Operations is  ______.
   1. ₹ 3,00,000
   2. ₹ 3,20,000
   3. ₹ 3,60,000
   4. ₹ 2,80,000
3. Gross Profit earned during the year is ______.
   1. ₹ 1,00,000
   2. ₹ 90,000
   3. ₹ 80,000
   4. ₹ 75,000
4. Closing Trade Receivables is ______.
   1. ₹ 1,00,000
   2. ₹ 1,05,000
   3. ₹ 1,10,000
   4. ₹ 1,20,000

Answer 1

1. Revenue from Operations is ₹ 4,00,000.
2. Credit Revenue from Operations is ₹ 3,20,000.
3. Gross Profit earned during the year is ₹ 80,000.
4. Closing Trade Receivables is ₹ 1,10,000.

Explanation:

(A) Revenue from Operations

Let Revenue from Operations be $X$.
$$\text{Gross Profit} = 25\% \text{ of } X = 0.25X$$

We know that:

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

$$3,00,000 = X - 0.25X$$

$$3,00,000 = 0.75X$$

$$X = \frac{3,00,000}{0.75} = {₹\ 4,00,000}$$ 

(B) Credit Revenue from Operations

Given that Cash Revenue from Operations is 20% of Total Revenue from Operations:

$$\begin{aligned} \text{Credit Revenue from Operations} &= \text{Total Revenue from Operations} - \text{Cash Revenue from Operations} \\ &= 100\% - 20\% = 80\% \text{ of Total Revenue} \\ &= 4,00,000 \times \frac{80}{100} ={₹\ 3,20,000} \end{aligned}$$

(C) Gross Profit earned during the year

$$\begin{aligned} \text{Gross Profit} &= 25\% \text{ of Revenue from Operations} \\ &= 4,00,000 \times \frac{25}{100} ={₹\ 1,00,000} \end{aligned}$$

(D) Closing Trade Receivables

We know that:

$$\text{Trade Receivables Turnover Ratio} = \frac{\text{Credit Revenue from Operations}}{\text{Average Trade Receivables}}$$

$$4 = \frac{3,20,000}{\text{Average Trade Receivables}}$$

$$\text{Average Trade Receivables} = \frac{3,20,000}{4} ={₹\ 80,000}$$ 

Now, using the Average Trade Receivables formula:

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

$$80,000 = \frac{50,000 + \text{Closing Trade Receivables}}{2}$$

$$1,60,000 = 50,000 + \text{Closing Trade Receivables}$$

$$\text{Closing Trade Receivables} = 1,60,000 - 50,000 = \mathbf{₹\ 1,10,000}$$