Question

What relationship will be established to study:

Inventory Turnover

Answer 1

Inventory Turnover ratio is computed to determine the efficiency with which the stock is used. This ratio is based on the relationship between cost of goods sold and average stock kept during the year.

Inventory/Stock Turnover Ratio = `"Cost of Goods Sold"/"Average Stock"`

Cost of goods sold = Opening stock + Purchases + Direct Expenses - Closing Stock

or, Cost of goods sold = Net sales - Gross Profit

Average Stock = `("Opening stock" + "Closing Stock")/2`