Question

From the following information, calculate opening and closing inventory :

• Gross Profit Ratio – 25%
• Revenue from operations – ₹ 8,00,000
• Inventory turnover ratio – 4 times
• Opening inventory was 2 times of the closing inventory.

Hint:

Key Formulas for Turnover Ratios: - TR Turnover = Credit Sales / Avg TR. (Avg TR = (Op TR + Cl TR)/2). - Inventory Turnover = COGS / Avg Inv. (Avg Inv = (Op Inv + Cl Inv)/2). - COGS = Sales - Gross Profit OR Opening Inv + Purchases + Direct Exp - Closing Inv. Work backwards from the ratio formula, using related information (like GP ratio, Sales/COGS relation, Opening/Closing relation) to find missing values.

Answer 1

Let's calculate the opening and closing inventory.

1. Calculate Cost of Revenue from Operations (COGS):

Gross Profit Ratio = 25%
Revenue from Operations = Rs 8,00,000
COGS = Revenue from Operations × (1 - Gross Profit Ratio)
COGS = Rs 8,00,000 × 0.75 = Rs 6,00,000

2. Calculate Average Inventory:

Inventory Turnover Ratio = COGS ÷ Average Inventory
4 = Rs 6,00,000 ÷ Average Inventory
Average Inventory = Rs 6,00,000 ÷ 4 = Rs 1,50,000

3. Determine Closing Inventory (X):

Opening Inventory = 2X
Average Inventory = (Opening Inventory + Closing Inventory) ÷ 2
Rs 1,50,000 = (2X + X) ÷ 2
Rs 3,00,000 = 3X
X = Rs 1,00,000

4. Final Inventory Values:

Closing Inventory = X = Rs 1,00,000
Opening Inventory = 2X = Rs 2,00,000

Answer:

Opening Inventory: Rs 2,00,000
Closing Inventory: Rs 1,00,000