The inventory turnover ratio of a Company is 3 times. State, giving reason, whether the ratio improves, declines or does not change because of increase in the value of closing inventory by Rs. 5,000.

SOLUTION

Inventory turnover ratio will decline because increase in the value of closing inventory by Rs. 5,000 will decrease the cost of Revenue from Operations [Opening Inventory + Purchases Closing Inventory] and will increase the value of average inventory’ (i.e., Opening Inventory + Closing Inventory / 2)


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