Question

From the following information obtained from the books of Kundan Ltd.,
Calculate the inventory turnover ratio for the years 2015-16 and 2016-17:

$\begin{array}{ccc}\text{Particulars}& 2015-16& 2016-17\\ & \left(Rs\right)& \left(Rs\right)\\ \text{Inventory on 31st March}& 7,00,000& 17,00,000\\ \text{Revenue from operations}& 50,00,000& 75,00,000\end{array}$

(Gross profit is 25% on cost of revenue from operations)

In the year 2015-16, inventory increased by Rs 2,00,000.

Answer 1

Inventory Turnover Ratio =$\frac{\text{Cost of Revenue from Operation}}{\text{Average Invenory}}$

For 2015-16:

Cost of Inventory =$50,00,000-25\%$ of cost

Therefore, Cost =$50,00,000\times \frac{100}{125}=Rs40,00,000$

Average Inventory=$\frac{(5,00,000+7,00,000)}{2}$

=$\frac{12,00,000}{2}=Rs6,00,000$

Turnover ratio=$\frac{40,00,000}{6,00,000}=6.67$ times

For 2016-17:

Cost of Inventory =$75,00,000-25\%$ of cost

Therefore, Cost =$75,00,000\times \frac{100}{125}$

=Rs 60,00,000

Average Inventory =$\frac{(7,00,000+17,00,000)}{2}$

=$\frac{24,00,000}{2}=Rs12,00,000$

Turnover ratio =$\frac{60,00,000}{12,00,000}=5$ times