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✦ FREE LEARNING — CLASS 11 & 12 — CBSE · PSEB — ACCOUNTS · ECONOMICS · BST ✦
Calculate the Inventory Turnover Ratio from the following information: Opening Inventory ₹40,000; Purchases ₹3,20,000; and Closing Inventory ₹1,20,000.
State, giving reasons, which of the following transactions would (i) increase, (ii) decrease, (iii) neither increase nor decrease the Inventory Turnover Ratio:
(a) Sale of goods for ₹40,000 (Cost ₹32,000). (b) Increase in the value of Closing Inventory by ₹40,000. (c) Goods purchased for ₹80,000. (d) Purchases Return ₹20,000. (e) Goods costing ₹10,000 withdrawn for personal use. (f) Goods costing ₹20,000 distributed as free samples.
Cost of Goods Sold = Opening Stock + Purchases − Closing Stock = 40,000 + 3,20,000 − 1,20,000 = ₹2,40,000
Average Stock = (40,000 + 1,20,000) ÷ 2 = ₹80,000
Inventory Turnover Ratio = 2,40,000 ÷ 80,000 = 3 times
(a) Sale of goods for ₹40,000 (Cost ₹32,000) — Increase
Reason: Closing Stock decreases and Cost of Goods Sold increases by the cost amount, so both effects push the ratio up.
(b) Increase in value of Closing Stock by ₹40,000 — Decrease
Reason: A higher Closing Stock reduces Cost of Goods Sold (via the COGS formula) and increases Average Stock, both of which lower the ratio.
(c) Goods purchased for ₹80,000 — Decrease
Reason: This increases Closing Stock (the new goods remain unsold), reducing Cost of Goods Sold’s proportion while increasing Average Stock.
(d) Purchases Return ₹20,000 — Increase
Reason: Both Purchases and Closing Stock fall by the same ₹20,000, so Cost of Goods Sold is unaffected (the two decreases cancel in the COGS formula), while Average Stock decreases — so the ratio increases.
(e) Goods costing ₹10,000 withdrawn for personal use — Increase
Reason: Closing Stock decreases, which (via the standard COGS formula) increases the computed Cost of Goods Sold and decreases Average Stock.
(f) Goods costing ₹20,000 distributed as free samples — Increase
Reason: Closing Stock decreases, increasing the computed Cost of Goods Sold and decreasing Average Stock.
Accounting & Commerce Educator
Sarbjit Singh holds a B.Com and M.Com degree and has over 12 years of teaching experience in double entry bookkeeping, financial accounting, and business studies.
This guide covers "T.S. Grewal Class 12 Vol 3 Chapter 4 Q.89 - Accounting Ratios", focusing on key definitions, step-by-step concepts, applications, and revision guidelines relevant to Chapter 4 - Accounting Ratios.
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