Calculate Inventory Turnover Ratio from the following information: Opening Inventory Rs. 40,000; Purchases Rs. 3,20,000; and Closing Inventory Rs. 1,20,000. State, giving reason, which of the following transactions would (i) increase, (ii) decrease, (iii) neither increase nor decrease the Inventory Turnover Ratio: (a) Sale of goods for Rs. 40,000 (Cost Rs. 32,000). (b) increase in the value of Closing Inventory by Rs. 40,000. (c) Goods purchased for Rs. 80,000. (d) Purchases Return Rs. 20,000. (e) goods costing Rs. 10,000 withdrawn for personal use. (f) Goods costing Rs. 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= Opening Stock + Closing Stock / 2
 =40,000+1,20,000 / 2
Stock turnover ratio= Cost of Goods sold  /  Average Stock
 = 2,40,000 / 80,000
= 3 Times

(a) Sale of goods for Rs. 40,000 (Cost Rs. 32,000) – Increase
Reason: This transaction will decrease stock at the end (closing stock). Decrease in closing stock will result increase the proportion of Cost of Goods Sold and decrease in Average Stock

(b) Increase in value of Closing Stock by 40,000 – Decrease
Reason: Increase in Closing Stock results decrease in Cost of Goods Sold and increase in Average Stock.

(c) Goods purchased for Rs. 80,000 – Decrease
Reason: This Transaction increases the amount of Closing Stock. Increase in Closing Stock reduces the proportion of Cost of Goods Sold and Increase in Average Stock.

(d) Purchase Return Rs. 20,000 – Increase
Reason: It will result decrease in Cost of Goods Sold and Average Stock with same amount.

(e) Goods costing Rs. 10,000 withdrawn for personal use – Increase
Reason: Drawing of goods will decrease the amount of Closing Stock and increase in Cost of Goods Sold.

(f) Goods costing Rs. 20,000 distributed as free sample- Increase
Reason: Goods distributed as free sample reduces Closing Stock. Reduction in Closing Stock will result increase in Cost of Goods Sold and decrease in Average Stock.

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