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What Relationships Will Be Established to Study: - Accountancy

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ConceptTypes of Ratios

Question

Short Answer Question

What relationships will be established to study:

a. Inventory Turnover

b. Trade Receivables Turnover

c. Trade Payables Turnover

d. Working Capital Turnover

Solution

a. Inventory Turnover Ratio: This 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 Stovk = `"Opening stock + Closing Stock "/2`

b. Debtors Turnover Ratio or Trade Receivables Turnover Ratio: This ratio is computed to determine the rate at which the amount is collected from the debtors. It establishes the relationship between net credit sales and average accounts receivables.

Debtors Turnover Ratio =

`"Net Credit Sales"/"Average Accounts Receivables"`

Net Credit Sales = Total Sales - Cash Sales

Average Accounts Receivables =

`"(Opening Debtors + Opening B/R) + (Closing Debtors + Closing B/R)"/2`

c. Trade Payables Turnover Ratio: This ratio is known as Creditors Turnover Ratio. It is computed to determine the rate at which the amount is paid to the creditors. It establishes the relationship between net credit purchases and average accounts payables.

Payable Turnover Ratio = `"Net Credit Purchases"/"Average Accounts Payable"`

Net Credit Purchases = Total Purchases - Cash Purchases

Average Accounts Receivables = 

`"(Opening Creditors + Opening B/P) + (Closing Creditors + Closing B/P)"/2`

d. Working Capital Turnover Ratio: This ratio is computed to determine how efficiently the working capital is utilised in making sales. It establishes the relationship between net sales and working capital.

Working Capital Turnover Ratio = `"Net Sales"/"Working Capital"`

Net Sales = Total sales - Sales return

Working Capital = Current Assets - Current Liabilities

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Solution What Relationships Will Be Established to Study: Concept: Types of Ratios.
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