Ratio analysis -Inventory Turnover Ratio

Turnover Ratios or Activity Ratios or Performance Ratios

Turnover ratios are used to determine how efficiently the financial assets and liabilities of an organization have been used for the purpose of generating revenues. These ratios measure the operating efficiency of an enterprise.

The types of Turnover ratios are: –
Inventory Turnover Ratio or Stock Turnover Ratio.
Debtors Turnover Ratio.
Creditors Turnover Ratio.
Cash Turnover Ratio.
Working Capital Turnover Ratio.
Fixed Assets Turnover Ratio.
Capital Turnover Ratio or Sales to Net Worth Ratio.
It is also referred as the stock turnover ratio which is used to measure the number of sales generated from its inventory and how efficiently the inventories in a company is used. 
This ratio reveals the number of times stock is replaced during a given accounting period.

It is calculated by the following formula:
Illustration 1:
From the following information calculate stock turnover ratio. Opening stock 30,000, purchases 90,000, carriage inward 7500, sales 1,50,000, closing stock 15,000, gross profit 37,500.

1. MANAGEMENT ACCOUNTING Ratio Analysis By: Smt.UMA MINAJIGI REUR HEAD, DEPT. OF COMMERCE & Management Smt. V G Degree College for Women, Kalaburagi

2. MANAGEMENT ACCOUNTING Ratio Analysis Turnover ratios – 1 Solved Problems

3. Classification of Accounting Ratio Types of ratios are given below: Liquidity Ratios Leverage Ratio Turnover Ratio Profitability Ratio

4. Turnover Ratios or Activity Ratios or Performance Ratios Turnover ratios are used to determine how efficiently the financial assets and liabilities of an organization have been used for the purpose of generating revenues. These ratios measure the operating efficiency of an enterprise. The types of Turnover ratios are: – Inventory Turnover Ratio or Stock Turnover Ratio. Debtors Turnover Ratio. Creditors Turnover Ratio. Cash Turnover Ratio. Working Capital Turnover Ratio. Fixed Assets Turnover Ratio. Capital Turnover Ratio or Sales to Net Worth Ratio.

5. Capital turnover is the measure that indicates organization’s efficiency in relation to the utilization of capital employed in the business and it is calculated as a ratio of total annual turnover divided by the total amount of stockholder’s equity (also known as net worth) and the higher the ratio, the better is the utilization of capital employed. The capital turnover (also called  equity turnover ) is a measure that calculates how efficiently the company is managing the  capital invested  by the shareholders in the company to generate revenues. If the ratio is high, it shows that the company is efficiently utilizing the amount of capital invested. In contrast, if the ratio is low, then it indicates that the company is not managing its capital investment efficiently to generate the required  revenue , i.e., the company has to invest the funds appropriately to achieve the sales target by utilizing the owner’s funds in the company.

6. Inventory Turnover Ratio or Stock Turnover Ratio It is also referred as the  stock turnover ratio  which is used to measure the number of sales generated from its inventory and how efficiently the inventories in a company is used.  This ratio reveals the number of times stock is replaced during a given accounting period. It is calculated by the following formula: S  

7. Inventory Turnover Ratio or Stock Turnover Ratio S   Calculation of Cost of Goods Sold: Opening Stock XX Add: Purchases X Add: Direct Expenses X XXX Less: Closing Stock X Cost of Goods sold XX Or Cost of Goods sold = Sales – Gross Profit

8. Inventory Turnover Ratio or Stock Turnover Ratio S   Calculation of Average Stock : Note: If opening stock is not given, in such cases closing stock will be the average stock.  

9. Interpretation: Standard Ratio is 8 times in a year. If the actual ratio is more than 8 times it indicates that more sales are effected and effective inventory management, and goods sold efficiently in a year. Stock turnover is very efficient. If the actual ratio is less than 8 times it indicates that the concern has unsaleable goods. Inefficient inventory management and carrying of excess stock. Stock turnover is inefficient.

10. Illustration 1: From the following information calculate stock turnover ratio. Opening stock 30,000, purchases 90,000, carriage inward 7500, sales 1,50,000, closing stock 15,000, gross profit 37,500. Solution 1: S   Calculation of Cost of Goods Sold: Opening Stock XX Add: Purchases X Add: Direct Expenses X XX Less: Closing Stock X Cost of Goods sold XX Or Cost of Goods sold = Sales – Gross Profit  

11. Illustration 1: From the following information calculate stock turnover ratio. Opening stock 30,000, purchases 90,000, carriage inward 7500, sales 1,50,000, closing stock 15,000, gross profit 37,500. Cost of Goods Sold Opening Stock 30,000 Add: Purchases 90,000 Add: Direct Expenses (Carriage Inward) 7500 1,27,500 Less: Closing Stock 15,000 Cost of Goods sold 1,12,500   = 22,500   S   S = 5 times  

12. Illustration 2: From the following information calculate stock turnover ratio. Credit Sales Rs.3,00,000, Cash Sales Rs.5,00,000, Sales Returns Rs.50,000, Opening Stock Rs.50,000, Closing Stock Rs.70,000, Gross Profit 20%. Solution 2: S   Calculation of Cost of Goods Sold: Opening Stock XX Add: Purchases X Add: Direct Expenses X XX Less: Closing Stock X Cost of Goods sold XX Or Cost of Goods sold = Sales – Gross Profit  

13. Illustration 2: From the following information calculate stock turnover ratio. Credit Sales Rs.3,00,000, Cash Sales Rs.5,00,000, Sales Returns Rs.50,000, Opening Stock Rs.50,000, Closing Stock Rs.70,000, Gross Profit 20%. Cost of Goods sold = Sales – Gross Profit Calculation of Sales: Credit Sales : Rs. 3,00,000 Cash Sales: Rs. 5,00,000 Rs. 8,00,000 Less: Sales Returns 50,000 Net Sales 7,50,000 Gross Profit = (20% of Net Sales) Cost of Goods sold = 7,50,000 – (20% of 7,50,000) Cost of Goods sold = 7,50,000 – 1,50,000 Cost of Goods sold = 6,00,000 Gross Profit = 20% of 7,50,000 Gross Profit = 1,50,000 Cost of Goods sold = Sales – Gross Profit   = 60,000   Average Stock = 60,000

14. S   S = 10 times   Illustration 2: From the following information calculate stock turnover ratio. Credit Sales Rs.3,00,000, Cash Sales Rs.5,00,000, Sales Returns Rs.50,000, Opening Stock Rs.50,000, Closing Stock Rs.70,000, Gross Profit 20%. Cost of Goods sold = Sales – Gross Profit Cost of Goods sold = 6,00,000 Average Stock = 60,000

15. Illustration 3: From the following information calculate stock turnover ratio. Solution 3: S   Particulars 2016 2017 Opening Stock 50,000 70,000 Purchases during the year 1,50,000 2,00,000 Sales during the year 4,00,000 5,00,000 Closing stock 40,000 30,000

16. Solution 3: Particulars 2016 2017 Opening Stock 50,000 70,000 Purchases during the year 1,50,000 2,00,000 Sales during the year 4,00,000 5,00,000 Closing stock 40,000 30,000 Particulars 2016 2017 Opening Stock 50,000 70,000 Add: Purchases during the year 1,50,000 2,00,000 2,00,000 2,70,000 Less: Closing stock 40,000 30,000 Cost of Goods sold 1,60,000 2,40,000 Calculation of Cost of Goods sold: Particulars 2016 2017 Opening Stock 50,000 70,000 Closing stock 40,000 30,000 Average Stock = Average Stock 45,000 50,000 Particulars 2016 2017 Opening Stock 50,000 70,000 Closing stock 40,000 30,000 Average Stock = Average Stock 45,000 50,000 Calculation of Average Stock:

17. 2016 Cost of Goods sold = 1,60,000 Average Stock = 45,000 S S = 3.56 Times   2017 Cost of Goods sold = 2,40,000 Average Stock = 50,000 S S = 4.8 Times  

18. Illustration 4: Find out Gross Profit from the particulars given below: Stock Turnover ratio 8 times Cost of goods sold Not Known Average stock Rs. 2,50,000 Selling price 20% above cost Solution 4: S   Calculation of Cost of Goods Sold: Opening Stock XX Add: Purchases X Add: Direct Expenses X XX Less: Closing Stock X Cost of Goods sold XX Or Cost of Goods sold = Sales – Gross Profit  

19. Illustration 4: Find out Gross Profit from the particulars given below: Stock Turnover ratio 8 times Cost of goods sold Not Known Average stock Rs. 2,50,000 Selling price 20% above cost Solution 4: S   8       Gross Profit is 20% of Cost of Sales Gross Profit = 20% of 20,00,000 = 4,00,000 Gross Profit = 4,00,000

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