Question

From the following information of Ajanta Ltd., calculate ‘Inventory Turnover Ratio’: \[ {Opening Inventory = Rs.19,000, Closing Inventory = Rs.21,000} \] \[ {Purchases = Rs.80,000, Revenue from Operations = Rs.80,000, Wages = Rs.9,000} \] \[ {Carriage Inwards = Rs.4,000, Carriage Outwards = Rs.2,000, Return Outwards = Rs.1,000, Rent Paid = Rs.5,000} \]

Hint:

A higher inventory turnover ratio indicates efficient management of inventory in relation to sales.

Answer 1

Formula: \[ {Inventory Turnover Ratio} = \frac{ {Cost of Goods Sold (COGS)}}{ {Average Inventory}} \] Step 1: Calculate Cost of Goods Sold (COGS) \[ {COGS} = {Purchases} + {Carriage Inwards} - {Return Outwards} - {Closing Inventory} + {Opening Inventory} \] \[ {COGS} = Rs.80,000 + Rs.4,000 - Rs.1,000 - Rs.21,000 + Rs.19,000 = Rs.81,000 \] Step 2: Calculate Average Inventory \[ {Average Inventory} = \frac{ {Opening Inventory + Closing Inventory}}{2} \] \[ {Average Inventory} = \frac{Rs.19,000 + Rs.21,000}{2} = Rs.20,000 \] Step 3: Calculate Inventory Turnover Ratio \[ {Inventory Turnover Ratio} = \frac{Rs.81,000}{Rs.20,000} = 4.05 { times} \]