Question 12 of 47advanced🔧 ApplyNumerical4 marks

You are able to collect the following information about a company for two years: 2015-16: Trade receivables on Apr. 01 Rs. 4,00,000; Stock in trade on Mar. 31 Rs. 6,00,000; Revenue from operations Rs. 3,00,000 (gross profit is 25% on cost of Revenue from operations) 2016-17: Trade receivables on Apr. 01 Rs. 5,00,000; Trade receivables on Mar. 31 Rs. 5,60,000; Stock in trade on Mar. 31 Rs. 9,00,000; Revenue from operations Rs. 24,00,000 Calculate Inventory Turnover Ratio and Trade Receivables Turnover Ratio

Correct Answer

(2015-16) [object Object]

(2016-17) [object Object]

Exercise: Questions for Practice | Q: 16 | (Chapter: 45)
For More Understanding

Explanation

Using the data given, first we determine the cost of revenue from operations by removing the gross profit (25% on cost) from the revenue. We then apply the formulas:

  • Inventory Turnover Ratio = Cost of Revenue from Operations ÷ Closing Stock in Trade
  • Trade Receivables Turnover Ratio = Revenue from Operations ÷ Average Trade Receivables

Substituting the figures for each year yields the ratios as above.

Solution Steps

  1. Step 1: Compute Cost of Revenue from Operations = Revenue ÷ (1 + GP ratio). – 2015-16: 3,00,000 ÷ 1.25 = Rs. 2,40,000 – 2016-17: 24,00,000 ÷ 1.25 = Rs. 19,20,000

  2. Step 2: Inventory Turnover Ratio = Cost of Revenue from Operations ÷ Closing Stock – 2015-16: 2,40,000 ÷ 90,000 = 2.67 times
    – 2016-17: 19,20,000 ÷ 9,00,000 = 2.13 times

  3. Step 3: Calculate Average Trade Receivables = (Opening Receivables + Closing Receivables) ÷ 2 – 2015-16: (4,00,000 + 5,00,000) ÷ 2 = Rs. 4,50,000 – 2016-17: (5,00,000 + 5,60,000) ÷ 2 = Rs. 5,30,000

  4. Step 4: Trade Receivables Turnover Ratio = Revenue from Operations ÷ Average Trade Receivables – 2015-16: 3,00,000 ÷ 68,005 ≈\approx 4.41 times
    – 2016-17: 24,00,000 ÷ 5,30,000 ≈\approx 4.53 times

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