Question

The following information has been obtained from the books of Naval Ltd. Trade receivables turnover ratio of the company is 4 times, cost of revenue from operations Rs 6,40,000; gross profit ratio 20%, closing trade receivables were Rs 20,000 more than that in the beginning, cash revenue from operations being 33-1/3% of credit revenue from operations. Calculate its opening and closing trade receivables.

Hint:

Revenue = Rs. 8,00,000, credit revenue = Rs. 6,00,000, so average receivables = Rs. 6,00,000 / 4 = Rs. 1,50,000. With closing = opening + Rs. 20,000, opening is Rs. 1,40,000 and closing is Rs. 1,60,000.

Answer 1

Step 1: Recall the formula:
Trade Receivables Turnover Ratio = Credit Revenue from Operations / Average Trade Receivables.
Only credit sales create receivables, so cash sales are removed first.

Step 2: Find Revenue from Operations:
Let Revenue from Operations be X. Gross profit is 20% of X.
Cost of Revenue from Operations = X - 20% of X = 80% of X = Rs. 6,40,000.
X = Rs. 6,40,000 x 100 / 80 = Rs. 8,00,000.
Check: Gross Profit = Rs. 1,60,000, and 6,40,000 + 1,60,000 = Rs. 8,00,000.

Step 3: Split into cash and credit revenue:
Cash revenue is 33-1/3% (one-third) of credit revenue.
So Revenue = Credit + one-third of Credit = 4/3 of Credit Revenue = Rs. 8,00,000.
Credit Revenue = Rs. 8,00,000 x 3/4 = Rs. 6,00,000. Cash Revenue = Rs. 2,00,000.

Step 4: Find Average Trade Receivables:
Turnover ratio is 4 times, so 4 = Rs. 6,00,000 / Average Trade Receivables.
Average Trade Receivables = Rs. 6,00,000 / 4 = Rs. 1,50,000.

Step 5: Find opening and closing receivables:
Let opening receivables be Y. Closing receivables are Y + Rs. 20,000.
Average = (Y + Y + 20,000) / 2 = Rs. 1,50,000.
2Y + 20,000 = Rs. 3,00,000, so 2Y = Rs. 2,80,000 and Y = Rs. 1,40,000.
Closing Trade Receivables = Rs. 1,40,000 + Rs. 20,000 = Rs. 1,60,000.

Final Answer:
Opening Trade Receivables = Rs. 1,40,000.
Closing Trade Receivables = Rs. 1,60,000.