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Calculate Inventory Turnover Ratio in each of the following alternative cases: Case 1: Cash Sales 25% of Credit Sales; Credit Sales Rs. 3,00,000; Gross Profit 20% on Revenue from Operations, i.e., Net Sales; Closing Inventory Rs. 1,60,000; Opening Inventory Rs. 40,000. Case 2:  Cash Sales 20% of Total Sales; Credit Sales Rs. 4,50,000; Gross Profit 25% on Cost; Opening Inventory Rs. 37,500; Closing Inventory Rs. 1,12,500.

SOLUTION

Case 1

Credit Sales = 3,00,000
Cash sales = 25% of Credit Sales
Cash Sales =3,00,000 × 25 / 100
 =75,000

Total Sales = Cash Sales + Credit Sales
= 3,00,000 + 75,000
= 3,75,000

Gross Profit = 20% on Sales
Gross profit = 3,75,000 × 20 / 100
= 75000

Cost of Goods Sold = Total Sales − Gross Profit
= 3,75,000 − 75,000
= 3,00,000

Average Stock= Opening Stock + Closing Stock / 2
 = 40,000 + 1,60,000 / 2
= 1,00,000
Stock turnover ratio= Cost of Goods sold / Average Stock
 = 3,00,000 / 1,00,000
= 3 Times

Case 2

Let Total Sales = x
Cash sales = Total sales × 20 / 100
Cash sales = X × 20 / 100
= 20X / 100

Total Sales = Cash Sales + Credit Sales
X = 20X / 100 + 4,50,000
Or, X – 20X / 100 = 4,50,000
Or , 80X / 100 = 4,50,000
Or , X = 5,62,500

Gross Profit = a × 25 / 100
= 25a / 100

Gross Profit = Sales − Cost of Goods Sold
25a / 100 = 5,62,500 – a
Or a+ / 100 = 5,62,500
Or 125a / 100 = 5,62,500
Or, a = 4,50,000

Cost of goods sold = a = 4,50,000

Average Stock= Opening Stock + Closing Stock / 2
= 37,000 + 1,32,500 / 2
= 75,000
Stock turnover ratio= Cost of Goods sold / Average Stock
 = 4,45,000 / 75,000
= 6 Times


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