Question : From the following information, calculate the inventory turnover ratio:
Inventory in the beginning = Rs.18,000
Inventory at the end = Rs.22,000
Net purchases = Rs.46,000
Wages = Rs.14,000
Revenue from operations = Rs.80,000
Carriage inwards = Rs.4,000
Option 1: 2 times
Option 2: 3 times
Option 3: 4 times
Option 4: 5 times
Correct Answer: 3 times
Solution :
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory
Cost of Revenue from Operations = Inventory in the beginning + Net Purchases + Wages + Carriage inwards − Inventory at the end
= Rs. 18,000 + Rs. 46,000 + Rs. 14,000 + Rs. 4,000 − Rs. 22,000 = Rs. 60,000
Average Inventory = Inventory in the beginning + Inventory at the end / 2
= Rs. 18,000 + Rs. 22,000/ 2 = Rs. 20,000
∴ Inventory Turnover Ratio = Rs. 60,000/ Rs. 20,000 = 3 Times
Hence option 2 is the correct answer.
