11.CHAPTER 4 RATIO ANALYSIS: ACTIVITY RATIOS : INVENTORY TURNOVER RATIO, ASSIGNMENT # 8 with Answers

LEARNING OUTCOMES:

STUDENTS WILL BE ABLE TO:

CALCULATE, SOLVE, COMPUTE:
THE INVENTORY TURNOVER RATIO USING VARIOUS  FORMULAS
 AND KNOWING ITS SIGNIFICANCE


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INTRODUCTION TO INVENTORY TURNOVER RATIO


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INVENTORY /STOCK TURNOVER RATIO COMPUTATION EXPLAINED

Ques 1 . (EXAMPLES)
Inventory turnover ratio of a company is 3 times. 
1. Increase in value of closing inventory by 5000.
2. Goods worth 5000 purchased. 


Ans.
1. Increase in the value of closing inventory by 5, 000.
Reason: cost of revenue from operations will decrease by 5000. Also, average inventory will increase by rupees 2500.

2. Goods worth rupees 5,000 purchased. 

Effect: Decline. 

Reason: Both purchase and closing inventory will increase by  5000.

cost of revenue from operations remain the same.But average inventory will increase by rupees 2500.

Ques. 2 (EXAMPLE)

From the following information obtained from the books of Kundan calculate inventory turnover ratio for the year 2018-19 and 2019-20..
                                                              2018-19.       2019-20
Inventory on 31st March                        700000        1700000
revenue from operations                       5000000        7500000
gross profit is 25% on cost of revenue from operations. In the year 2018-19, inventory increased by 200000.

Ans.2

2018-19
Revenue from operation = 50 lakh, gross profit = 25% of cost of revenue from operations
suppose cost of revenue from operations = X
revenue from operation = cost of revenue from operations + gross profit
50 lakh = X + 25% of X
50 lakh = X + 1/ 4 X
= 5/ 4 X = 50 lakh
X = 50 lakh i* 4 / 5
= 40 lakh
Thus, cost of revenue from operations = 40 lakh
In 2018-19 closing inventory = 7 lakh and it is given that inventory increased by rupees 200000
average inventory = opening inventory plus closing inventory/ 2 
therefore inventory turnover ratio = 40 lakh /6 lakh

2019-20
revenue from operation = 7500000 gross profit =25% on cost of revenue from operation
suppose cost of revenue from operation = Y
revenue from operations = cost of revenue from operations + gross profit
75 lakh = Y + 25% of Y
75 lakh = Y + 1/4 Y
= 5/4 Y = 75 lakh
= Y = 75 lakh x 4 /5 = 60 lakh
Thus, cost of revenue from operation = 60 lakh
opening inventory=700000 (i.e. closing Inventory of 2018-19) and closing inventory = 17 lakh
average inventory=7 lakh + 17 lakh/ 2
= 12 lakh
therefore, inventory turnover ratio =60 lakh/ 12 lakh = 5 times


ASSIGNMENT # 8

Ques 1

Revenue from operations 500000

gross profit 20% on revenue from operations
inventory turnover ratio 5 times
Opening inventory is 1.5 times more than closing inventory.

Calculate opening and closing inventories.

Ans. Opening inventory 114285
Closing inventory 45714

Ques 2  

From the following details, calculate inventory turnover ratio..
Closing inventory 60,000
revenue from operations 500000 (including cash revenue from operations 100000)
purchases 300000 (including credit purchases 60,000).
Goods are sold at a profit of 25% on cost.

Ans.3.64 times

Ques 3

Inventory turnover ratio of a company is 3 times. State, giving whether the following transactions will improve, decline or not change the ratio..

1. payment to creditors.
2. building sold.
3. income tax paid.
4. wages paid. 

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                 CONCLUDING NOTES

TASK 

VERIFY THE ANSWERS TO ASSIGNMENT #  8


ANS. 1

Cost of revenue from operation = revenue from operation - gross profit

=500000-20 % of  500000=400000 
suppose closing inventory = X.
Therefore, opening inventory = X + 1.5 X = 2.5 X 

Therefore, average inventory = 2.5 X + X / 2 = 1.75 X

Inventory turnover ratio = Cost of revenue from operation / average inventory
=5  =  4 lakh /1.75 X

8.75 X  =  4 lakh  

X = 4 lakh/ 8.75  = 45,714 

Thus, 
Closing inventory = 45714 and opening inventory = 2.5 x 45714 = 114285

ANS. 2

Revenue from operations = 5 lakh. 
Suppose cost of revenue from operation = X

Revenue from operation =Cost of revenue from operation + gross profit

5 lakh = X + 25% of X

500000 = X + 1/4 X

5 /4 X = 5 lakh 

X= 5 lakh x 4/5 =  4 lakh 

Thus,  Cost of revenue from operations = 4 lakh

Also, Cost of revenue from operation = opening inventory + net purchases - closing inventory

400000= opening inventory + 300000 - 60000 

opening inventory = 4 lakh - 3 lakh + 60000 = 160000

Average inventory = opening inventory + closing Inventory / 2

 = 160000 + 60000/2 = 110000

Therefore,
 Inventory turnover ratio = cost of revenue from operation /average inventory = 4 lakh  / 110000 = 3.64 times

ANS. 3

 Inventory turnover ratio
 = cost of revenue from operation /average inventory = 3

1. Payment to creditors. 
Effect: No change. 
Reason: No effect on cost of revenue from operations or average inventory. 

2. Building sold. 
Effect: No change. 
Reason: no effect on cost of revenue from operation or average inventory.

3. Income tax paid. 
Effect: no change. 
Reason: no effect on cost of revenue from operations for average inventory. 

4. Wages paid.
 Effect: improve .
Reason: Cost of revenue from operation increases while average inventory remains the same.