Question

What relationships will be established to study:

a. Inventory Turnover

b. Trade Receivables Turnover

c. Trade Payables Turnover

d. Working Capital Turnover

Answer 1

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.

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.

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.

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.