Question

From the following information, calculate 'Inventory Turnover Ratio':

Revenue from operations	Rs 15,00,000
Opening inventory	Rs 2,00,000

Gross profit is 25% of cost of revenue from operations. Closing inventory was 2 times the opening inventory.

Hint:

Cost of revenue = 15,00,000 x 100/125 = Rs. 12,00,000. Average inventory = (2,00,000 + 4,00,000)/2 = Rs. 3,00,000. Divide cost by average inventory to get 4 times.

Answer 1

Step 1: Formula:
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory.
We have the revenue but not the cost, so we first find the cost using the gross profit data.

Step 2: Cost of Revenue from Operations:
Gross Profit is 25% of cost of revenue from operations.
Let the cost be 100. Then gross profit is 25 and revenue from operations is 125.
Cost = 15,00,000 x 100/125 = Rs. 12,00,000.
Gross Profit = 15,00,000 - 12,00,000 = Rs. 3,00,000, which is 25% of 12,00,000.

Step 3: Closing and average inventory:
Opening inventory is Rs. 2,00,000.
Closing inventory is 2 times the opening inventory = 2 x 2,00,000 = Rs. 4,00,000.
Average Inventory = (2,00,000 + 4,00,000) / 2 = Rs. 3,00,000.

Step 4: Inventory Turnover Ratio:
Inventory Turnover Ratio = 12,00,000 / 3,00,000 = 4 times.
We use the cost of revenue (not the revenue of Rs. 15,00,000), because inventory is carried at cost.

Final Answer:
The Inventory Turnover Ratio is 4 times.