Question

Calculate Inventory Turnover Ratio from the following particulars :

Cost of Revenue from Operations (Cost of Goods Sold) Rs. 6,40,000

Gross Profit 20% on Sales

Closing Inventory : 4 times of Opening Inventory

Opening Inventory : 10% of Cost of Revenue from Operations.

Answer 1

(i) Revenue from Operations (Sales) include a profit of 20% on Sales. Hence, goods costing Rs.80 must have been sold for Rs. 100. As such, if Cost of Revenue from Operations is Rs. 80, Revenue from Operations are Rs. 100.

If Cost of Revenue from Operations is Rs. 6,40,000

Revenue from Operations are :
$\frac{100}{80}\times Rs.6,40,000=Rs.8,00,000$.

(ii) Opening Inventory is 10% of Cost of Revenue from Operations. Hence,

Opening Inventory = Rs. 6,40,000 $\times \frac{10}{100}$= Rs. 64.000.

(iii) Closing Inventory = Rs. 64,000 $\times 4$ = Rs. 2,56,000

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

=$\frac{64,000+2,56,000}{2}=Rs.1,60,000$

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

= $\frac{Rs.6,40,000}{Rs.1,60,000}=4\text{times}$