CA Inter P6 · Chapter 3 · Question 4 of 9
Sales are ₹ 50,00,000 and the gross profit ratio is 20% on sales. Opening inventory is ₹ 3,80,000 and closing inventory is ₹ 4,20,000. The inventory turnover ratio based on cost of goods sold and average inventory is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 10.0 times
Explanation
Cost of goods sold = ₹ 50,00,000 x 80% = ₹ 40,00,000. Average inventory = (₹ 3,80,000 + ₹ 4,20,000) / 2 = ₹ 4,00,000. Inventory turnover = ₹ 40,00,000 / ₹ 4,00,000 = 10.0 times. Using sales gives 12.5 times, which overstates turnover because inventory is carried at cost.
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