Question

From the following information, calculate Inventory Turnover Ratio; Operating Ratio and Working Capital Turnover Ratio:
Opening Inventory ₹ 28,000; Closing Inventory ₹ 22,000; Purchases ₹ 46,000; Revenue from Operations, i.e., Net Sales ₹ 80,000; Return ₹10,000; Carriage Inwards ₹ 4,000; Office Expenses ₹ 4,000; Selling and Distribution Expenses ₹ 2,000; Working Capital ₹ 40,000.

Answer 1

(i)

Opening Inventory = 28,000

Closing Inventory = 22,000

$$\begin{gathered} \mathrm{Average}\mathrm{Inventory}=\frac{\mathrm{Opening}\mathrm{Inventory}+\mathrm{Closing}\mathrm{Inventory}}{2} \\ =\frac{28,000+22,000}{2}=\mathrm{Rs}25,000 \end{gathered}$$

Cost of Goods Sold = Opening Inventory + Purchases + Carriage Inwards − Closing Inventory

= 28,000 + 46,000 + 4,000 − 22,000 = 56,000

$\mathrm{Inventory}\mathrm{Turnover}\mathrm{Ratio}=\frac{\mathrm{Cost}\mathrm{of}\mathrm{Goods}\mathrm{Sold}}{\mathrm{Average}\mathrm{Inventory}}=\frac{56,000}{25,000}=2.24\mathrm{Times}$

(ii)

Operating Expenses = Office Expenses + Selling and Distribution Expenses

= 4,000 + 2,000 = 6,000

Net Sales = Rs 80,000*

$$\begin{gathered} \mathrm{Operating}\mathrm{Ratio}=\frac{\mathrm{Operating}\mathrm{Cost}}{\mathrm{Net}\mathrm{Sales}}\times 100 \\ =\frac{62,000}{80,000}\times 100=77.5\% \end{gathered}$$

(iii)

Working Capital = 40,000
$\mathrm{Working}\mathrm{Capital}\mathrm{Turnover}\mathrm{Ratio}=\frac{\mathrm{Net}\mathrm{Sales}}{\mathrm{Working}\mathrm{Capital}}=\frac{80,000}{40,000}=2\mathrm{Times}$

*Note: Sales return will not be considered as amount of net sales is provided in the question.