Question

From the following information, calculate opening and closing inventory:
Gross Profit Ratio - 25%
Revenue from operations - Rs 8,00,000
Inventory turnover ratio - 4 times
Opening inventory was 2 times of the closing inventory.

Hint:

Steps for ITR problems: 1. Find Cost of Revenue from Operations (COGS) = Revenue - Gross Profit. 2. Find Average Inventory = COGS / ITR. 3. Use the relationship between Opening and Closing Inventory and Average Inventory formula: Avg Inv = (Opening Inv + Closing Inv) / 2.

Answer 1

Step 1: Calculate Cost of Revenue from Operations (COGS):
Gross Profit Ratio = 25% (on Revenue from Operations).
Gross Profit = 25% of Rs 8,00,000 = Rs 2,00,000.
COGS = Revenue from Operations - Gross Profit
COGS = Rs 8,00,000 - Rs 2,00,000 = Rs 6,00,000.
Step 2: Calculate Average Inventory:
Inventory Turnover Ratio (ITR) = Cost of Revenue from Operations / Average Inventory
4 = Rs 6,00,000 / Average Inventory
Average Inventory = Rs 6,00,000 / 4 = Rs 1,50,000.
Step 3: Calculate Opening and Closing Inventory:
Let Closing Inventory be CI.
Opening Inventory (OI) = 2 * CI.
Average Inventory = (Opening Inventory + Closing Inventory) / 2
Rs 1,50,000 = (2 * CI + CI) / 2
Rs 1,50,000 = (3 * CI) / 2
3 * CI = Rs 1,50,000 * 2 = Rs 3,00,000
CI = Rs 3,00,000 / 3 = Rs 1,00,000.
Opening Inventory (OI) = 2 * CI = 2 * Rs 1,00,000 = Rs 2,00,000.
Results:
Opening Inventory = Rs 2,00,000
Closing Inventory = Rs 1,00,000