Question

Opening Inventory Rs. 29,000; Closing Inventory Rs. 31,000; Revenue from Operations (Sales) Rs. 3,20,000; Gross Profit Ratio 25% on Revenue from Operations.
Calculate:
(i) Inventory Turnover Ratio and
(ii) Average Age of Inventory.

Answer 1

(i) Cost of Revenue from Operations (Cost of Goods Sold) = Revenue from Operations i.e., Sales - Gross Profit

= Rs. 3,20,000 - 25% of 3,20,000

= Rs. 3,20,000 - 80,000 = Rs. 2,40,000

Average Inventory = $\frac{Rs.29,000+Rs.31,000}{2}=Rs.30,000$

Inventory Turnover Ratio
$=\frac{\text{Cost of Revenue from Operations}}{AverageInventory}$

$=\frac{Rs.2,40,000}{Rs.30,000}=8\text{times}$.

(ii) Average Age of Inventory (or Inventory Holding Period)

$=\frac{\text{Days in a year}}{InventoryturnoverRatio}=\frac{365}{8}=46\text{days}$