Turnover Ratio: Inventory Turnover, Debtors Turnover, Fixed Assets Turnover
Arjun EP
Turnover Ratio
Sales (turnover) are the most important element of any business organization.
Success or failure is depended on sales.
Turnover ratio is also called efficiency ratio.
The company issues equity shares, preference shares and debentures to raise capital.
The company purchased fixed assets from this capital.
By using fixed assets, it sales goods or service.
By selling goods, the company earns profit.
In other words, how the company has used fixed assets to generate sales.
Under this method, following ratios are calculated:
Inventory turnover ratio
Debtors’ turnover ratio (Bills receivable turnover ratio)
Average collection period
Fixed assets turnover ratio
Capital employed turnover ratio
Total assets turnover ratio
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Click on link for YouTube videos |
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Accounting for Share |
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Share in Nepali |
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Debentures |
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Final Accounts: Class 12 |
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Final Accounts in Nepali |
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Work Sheet |
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Ratio Analysis (Accounting Ratio) |
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Fund Flow Statement |
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Cash Flow Statement |
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Theory Accounting Xii |
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Theory: Cost Accounting |
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Cost Accounting |
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LIFO−FIFO |
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Cost Sheet, Unit Costing |
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Cost Reconciliation Statement |
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Stock turnover ratio
Stock is similar to inventory and merchandise.
Stock turnover ratio is also called inventory turnover ratio or merchandise turnover ratio.
It shows the relationship between costs of goods sold and inventory level or sales and closing stock.
It indicates whether inventory has been used efficiently or not.
It indicates investment in stock, quality of goods, stock, reserve etc.
Formula of stock turnover ratio when opening stock and closing stock are given:
|
Stock turnover ratio (STR) |
= |
Cost of goods sold ÷ Average stock |
Where:
Average stock = (Opening stock + Closing stock) ÷ 2
Formula of stock turnover ratio when opening stock and closing stock are given:
|
Stock turnover ratio (STR) |
= |
Net sales ÷ Closing stock |
Keep in Mind (KIM)
|
If there is opening stock and closing stock, always use = Cost of goods sold ÷ Average stock |
|
Cost of goods sold (COGS) = Sales – Gross profit |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3A
Following extracted information is given:
|
Sales |
$/₹/Rs 900,000 |
|
|
Closing stock |
$/₹/Rs 40,000 |
|
Required: Stock turnover ratio
[Answer: STR = 22.5 times]
SOLUTION:
Stock turnover ratio (STR) = Net sales ÷ Closing stock = 900,000 ÷ 40,000 = 22.5 times
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3B
Following extracted information is given to you:
|
Opening stock |
Rs 2,00,000 |
|
Purchase expenses |
Rs 50,000 |
|
|
Closing stock |
Rs 1,00,000 |
|
Carriage outward |
Rs 40,000 |
|
|
Purchase |
Rs 5,00,000 |
|
|
|
|
Required: (1) Cost of goods sold; (2) Average stock; (3) Stock turnover ratio
[Answer: COGS = Rs 6,50,000; AS = Rs 1,50,000; STR = 4.33 times]
SOLUTION:
(a) Cost of goods sold
= Opening stock + Purchase + Purchase expenses – Closing stock
= 2,00,000 + 5,00,000 + 50,000 – 1,00,000
= Rs 6,50,000
(b) Average stock = (Opening stock + Closing stock) ÷ 2 = (200,000 + 100,000) ÷ 2 = 150,000
(c) Stock turnover ratio = Cost of goods sold ÷ Average stock = 650,000 ÷ 150,000 = 4.33 times
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3C
Following extracted information is given to you:
|
Total sales |
Rs 8,00,000 |
|
Cash sales |
Rs 2,00,000 |
|
Gross profit |
Rs 2,00,000 |
|
Stock turnover ratio |
3 times |
Required: (a) Average stock; (b) Opening stock and closing stock
[Answer: AS = Rs 2,00,000; Opening stock = Rs 1,00,000; Closing stock = Rs 3,00,000]
SOLUTION:
(a) Average stock
Cost of goods sold = Sales − Gross profit = 800,000 – 200,000 = Rs 600,000
|
Stock turnover ratio |
= |
Cost of goods sold ÷ Average stock |
|
3 times |
= |
600,000 ÷ Average stock |
|
Average stock |
= |
600,000 ÷ 3 |
|
|
= |
Rs 200,000 |
(b) Opening and closing stock (let be opening stock ?)
|
Average stock |
= |
(?+3?) ÷ 2 |
|
200,000 |
= |
4? ÷ 2 |
|
200,000 |
= |
2? |
|
? |
= |
100,000 |
Now,
Opening stock (?) = Rs 1,00,000
Closing stock (3?) = 3 x 1,00,000 = Rs 3,00,000
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3D
Following extracted information is given (amount in $/₹/Rs):
|
Sales |
9,00,000 |
|
Sales return |
40,000 |
|
Opening stock |
90,000 |
|
Purchased |
4,80,000 |
|
Purchased return |
20,000 |
|
Closing stock |
40,000 |
|
Carriage on purchased |
20,000 |
|
|
|
Required: Stock turnover ratio
[Answer: STR = 8 times]
SOLUTION:
Given and working note:
Trading Account
|
Particulars |
|
Amount |
Particulars |
|
Amount |
|
To Opening stock |
|
90,000 |
By Sales |
900,000 |
|
|
To Purchased |
480,000 |
|
Less: Returned |
– 40,000 |
860,000 |
|
Less: Returned |
–20,000 |
460,000 |
By Closing stock |
|
40,000 |
|
To Carriage |
|
20,000 |
|
|
|
|
To Gross profit |
|
330,000 |
|
|
|
|
|
|
900,000 |
|
|
900,000 |
Cost of goods sold (COGS) = Sales – Gross profit = 860,000 – 330,000 = 530,000
Average inventory = (opening stock + Closing stock) ÷ 2 = (90,000 + 40,000) ÷ 2 = 65,000
Now,
Stock turnover ratio (STR) = Cost of goods sold ÷ Average inventory = 530,000 ÷ 65,000 = 8 times
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Click on link for YouTube videos: |
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Accounting Equation |
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Basic Journal Entries in Nepali |
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Basic Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cash Book |
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Trial Balance & Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Final Accounts: Class 11 |
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Adjustment in Final Accounts |
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Capital and Revenue |
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Single Entry System |
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Non-Trading Concern |
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Government Accounting |
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Goswara Voucher (Journal Voucher) |
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Debtor’s turnover ratio
It is also called receivable turnover ratio.
It shows the relationship between net credit sales and average debtors.
It evaluates the efficiency of debtors managed.
Formula of debtor turnover ratio
|
Debtor’s turnover ratio (DTR) |
= |
Credit sales ÷ Total debtor |
|
Or |
= |
Credit sales ÷ Average debtor |
Where:
Average debtor = (Opening debtor + Closing debtor) ÷ 2
Keep in Mind (KIM)
|
Bad debts and provision for bad debts should not deduct from total debtors |
|
Account receivable, bill receivable, book debts are added with debtors |
|
Average debtor = (Opening debtor + Closing debtor) ÷ 2 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3E
Following extracted information is given:
|
Total sales |
9,00,000 |
|
Debtors |
1,40,000 |
|
Cash sales |
4,00,000 |
|
Bill receivable |
2,50,000 |
Required: Debtors turnover ratio
[Answer: DTR = 2.3 times]
SOLUTION:
Total debtors = debtors + bill receivable = 1,40,000 + 250,000 = Rs 3,90,000
Now,
Debtor’s turnover ratio (DTR)
= Credit sales ÷ Total debtor
= 900,000 ÷ 390,000
= 2.3 times0
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3F
Following information is given:
Following extracted information is given:
|
Total sales |
10,00,000 |
|
Debtors (1 Jan) |
1,00,000 |
|
Cash sales |
2,00,000 |
|
Debtors (31 Dec) |
3,00,000 |
Required: Debtors turnover ratio
[Answer: DTR = 4 times]
SOLUTION:
Credit sales = Total sales – Cash sales = 10,00,000 ‒ 2,00,000 = 8,00,000
Average debtors = (100,000 +300,000) ÷ 2 = 200,000
Now,
Debtors turnover ratio (DTR)
= Credit sales ÷ Average debtors
= 800,000 ÷ 200,000
= 4 times
Average Collection Period
It is also called debt collection period.
It is calculated to know the average days or months to receive cash from debtors.
Bill receivable and account receivable are added with debtors.
It shows average time between credit sales and its cash collection.
Credit should not be allowed for long time.
Formula of average collection period
|
Average collection period (ACP) Or |
= = |
(Debtors x Days in years) ÷ Credit sales Days in year ÷ Debtors turnover ratio |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3G
Following extracted information is given:
|
Total sales |
25,00,000 |
|
Credit sales |
10,00,000 |
|
Debtors |
1,60,000 |
|
Bills receivable |
50,000 |
|
Days in year |
360 |
|
Bad debts |
10,000 |
Required: (a) Debtors turnover ratio; (b) Debtors collection period
[Answer: DTR = 15 times; DCP = 29 or 24 days]
SOLUTION:
Given and working note:
|
Credit sales |
Total debtors |
|
= Total – cash sales |
= Debtors + bill receivable ‒ Bad debts |
|
= 25,00,000 – 10,00,000 |
= 160,000 + 50,000 ‒ 10,000 |
|
= 15,00,000 |
= 200,000 |
Now,
(a) Debtors’ turnover ratio (DTR)
= Credit sales ÷ Total debtors
= 15,00,000 ÷ 200,000
= 7.5 times
(b) Debtors’ collection period (DCP)
= (Debtors x Days in years) ÷ Credit sales
= (200,000 x 360 days) ÷ 15,00,000
= 48 days
Alternatively,
DCP
= Days in year ÷ Debtors turnover ratio
= 360 days ÷ 7.5 times
= 48 days
Keep in Mind (KIM)
|
Total debtors= Debtors + Account receivable + bill receivable + book debts |
|
bad debts and provision for bad debts are deducted from total debtors |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3H
The following information is given by XYZ Company: (Amount in $/₹/Rs)
|
Particulars |
1 January |
31 December |
|
|
Sundry debtors |
3,00,000 |
9,00,000 |
|
|
Bills receivable |
1,00,000 |
3,00,000 |
|
|
Provision for bad debts |
30,000 |
90,000 |
|
Additional information:
Total sales Rs 19,00,000; sales return Rs 50,000 and cash sales Rs 2,50,000.
Required: Debtors turnover ratio
[Answer: DTR = 2 times]
SOLUTION:
Given and working note:
Net credit sales
= Total sales – Sales return – Cash sales
= 19,00,000 – 50,000 – 2,50,000
= 16,00,000
Average debtors
= (Opening debtors + Opening B/R + Closing debtors + Closing B/R) ÷ 2
= (300,000 + 100,000 + 900,000 + 300,000) ÷ 2
= 800,000
Now,
Debtors’ turnover ratio (DTR)
= Credit sales ÷ Average debtors
= 16,00,000 ÷ 8,00,000
= 2 times
Fixed Assets Turnover Ratio
Company purchases fixed assets to generate profit by using them.
This ratio indicates how efficiently fixed assets are used.
Higher fixed assets turnover ratio shows better use of fixed assets and vice versa.
Formula of fixed assets turnover ratio
|
Fixed assets turnover ratio (FATR) = Net sales ÷ Net fixed assets |
Where:
Net assets = Assets – Depreciation
Net sales = Sales – Sales return
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3I
Following information is given:
|
Fixed assets |
20,00,000 |
Accumulated depreciation |
400,000 |
|
Sales |
50,00,000 |
Sales return |
500,000 |
Required: Fixed assets turnover ratio
[Answer: FATR = 2.8 times]
SOLUTION:
Given and working note:
Net fixed assets = Fixed assets – depreciation
= 20,00,000 – 4,00,000
= 16,00,000
Net sales
= Sales – return
= 50,00,000 – 5,00,000
= 45,00,000
Now,
Fixed assets turnover ratio (FATR)
= Net sales ÷ Net fixed assets
= 45,00,000 ÷ 16,00,000
= 2.8 times
Capital Employed Turnover Ratio
Capital employed is invested capital and turnover is sales.
This ratio shows relationship between sales and capital employed.
It measures the efficiency of capital employed in the business.
Capital employed includes shareholders equity and long-term debts.
As ratio increase, profit also increases.
Formula of capital employed turnover ratio
Capital employed turnover ratio (CETR) = Sales ÷ Capital employed
Where:
Capital employed = Shareholders equity + Long term loan
Capital employed = Fixed assets + Working capital
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3J
Following extracted information is given:
|
Fixed assets |
24,00,000 |
|
Current assets |
20,00,000 |
|
COGS |
60,00,000 |
|
Gross profit |
16,00,000 |
|
Current liabilities |
12,00,000 |
|
|
|
Required: Capital employed turnover ratio
[Answer: CETR = 2.3 times]
SOLUTION:
Given and working note:
|
Total sales |
Capital employed |
|
= COGS + Gross profit |
= fixed assets + working capital |
|
= 60,00,000 + 16,00,000 |
= fixed assets + (current assets – current liabilities) |
|
= 76,00,000 |
= 24,00,000 + (20,00,000 – 11,20,000) |
|
|
= 16,00,000 |
Now,
Capital employed turnover ratio (CETR)
= Sales ÷ Capital employed
= 76,00,000 ÷ 32,80,000
= 2.3 times
Total assets turnover ratio
This ratio indicates how efficiently total assets are used by the company to generate its sales.
Preliminary expenses, discount on debentures/shares, profit and loss (Dr) and brokerage should deduct from total assets.
Formula of Total assets turnover ratio
|
Total assets turnover ratio (TATR) |
= |
Net sales ÷ Total assets |
|
Or |
= |
Net sales ÷ Total tangible assets |
Where:
Net sales = Sales – Sales return
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3K
Following selected information is given:
|
Total assets Sales |
10,00,000 49,00,000 |
Current assets Preliminary expenses |
600,000 300,000 |
Required: Total assets turnover ratio
[Answer: TATR = 7 times]
SOLUTION:
Total assets turnover ratio (TATR)
= Sales ÷ Total tangible assets
= 49,00,000 ÷ 7,00,000
= 7 times
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 3L
ABC Company Ltd has following balance sheet on 31st December 2020: (Amount: $/₹/Rs)
|
Liabilities |
Amount |
Assets |
Amount |
|
Equity shares capital @ Rs 100 |
3,00,000 |
Fixed assets |
5,20,000 |
|
5% Preference shares capital |
1,00,000 |
Inventories |
60,000 |
|
Retained earning |
80,000 |
Account receivable |
60,000 |
|
10% Debentures |
1,60,000 |
Debtors |
50,000 |
|
Account payable |
1,00,000 |
Cash and bank |
70,000 |
|
Creditors |
60,000 |
Preliminary expenses |
40,000 |
|
|
8,00,000 |
|
8,00,000 |
Additional information: (Amount: $/₹/Rs)
|
Cash sales |
80,000 |
|
Opening inventories |
40,000 |
|
Credit sales |
3,20,000 |
|
Opening debtors |
90,000 |
|
Gross profit |
50% of sales |
|
Days in year |
365 days |
Required: (1) Inventories turnover ratio; (2) Debtors turnover ratio; (3) Average collection period;
(4) Fixed assets turnover ratio; (5) Total assets turnover ratio; (6) Capital employed turnover ratio
[Answer: ITR = 4 times; DTR = 3.2 times; ACP = 114 days;
FATR = 0.77 times; TATR = 0.526 times; ROCE = 0.71 times]
SOLUTION:
Inventory turnover ratio (ITR)
|
Total sales |
Cost of goods sold |
Average inventories |
|
= Cash sales + credit sales |
= Sales – Gross profit |
= (Opening stock + Closing stock) ÷ 2 |
|
= 80,000 + 320,000 |
= 4,00,000 – 4,00,000@50% |
= (40,000 + 60,000) ÷ 2 |
|
= Rs 4,00,000 |
= Rs 2,00,000 |
= 50,000 |
Now,
ITR = Cost of goods sold ÷ Average inventories
= 200,000 ÷ 50,000
= 4 times
Debtor’s turnover ratio (DTR)
Average debtors
= (Opening debtors + Opening A/R + Closing debtors + Closing A/R) ÷ 2
= (90,000 + Nil + 50,000 + 60,000) ÷ 2
= Rs 100,000
DTR = Credit sales ÷ Average debtor
= 320,000 ÷ 100,000
= 3.2 times
Average collection period (ACP)
ACP = Days in years ÷ Debtor turnover ratio
= 365 days ÷ 3.2 times
= 114 days
Fixed assets turnover ratio (FATR)
FATR = Total sales ÷ Fixed assets
= 400,000 ÷ 520,000
= 0.77 times
Total assets turnover ratio (TATR)
Net assets = Total assets – preliminary expenses = 8,00,000 – 40,000 = Rs 7,20,000
TATR = Total assets ÷ Net assets
= 400,000 ÷ 760,000
= 0.53 time
Return on capital employed (ROCE)
Shareholders equity
= Equity shares + Preference shares + Retained earning – preliminary expenses
= 3,00,000 + 1,00,000 + 80,000 – 40,000
= Rs 4,40,000
Capital employed
= Shareholders equity + Long-term debts
= 4,40,000 + 1,60,000
= Rs 5,60,000
ROCE = Total sales ÷ Capital employed
= 400,000 ÷ 560,000
= 0.71 time
#####
|
PROBLEMS AND ANSWERS |
PROBLEM: 3A
Extracted profit and loss account and balance sheet of ABC Company are given below (amount is $/₹/Rs):
|
Opening stock |
50,000 |
|
Debtors |
60,000 |
|
Closing stock |
70,000 |
|
Bill receivable |
30,000 |
|
Gross profit |
2,70,000 |
|
Building |
1,30,000 |
|
Sales |
7,00,000 |
|
Machinery |
40,000 |
|
Sales return |
20,000 |
|
10% Loan |
20,000 |
|
Working capital |
1,30,000 |
|
|
|
Required: (a) Stock turnover ratio; (b) Debtors turnover ratio; (c) Average collection period (360 days in year);
(d) Fixed assets turnover ratio; (e) Capital employed turnover ratio
[Answer: STR = 6.83 times; DTR = 7.56 times; ACP = 48 days;
FATR = 4 times; CETR = 2.27 times] * CE = FA + WC
PROBLEM: 3B
ABC Company has following extracted information (amount is $/₹/Rs):
|
Opening stock |
80,000 |
|
Account receivable |
1,20,000 |
|
Closing stock |
40,000 |
|
Account payable |
90,000 |
|
Gross profit |
2,60,000 |
|
Fixed assets |
3,00,000 |
|
Sales |
6,50,000 |
|
Depreciation |
30,000 |
|
Shareholders’ equity |
3,75,000 |
|
6% Debentures |
1,25,000 |
Required: (a) Stock turnover ratio; (b) Debtors turnover ratio; (c) Receivable collection period (365 days in year); (d) Net fixed assets turnover ratio; (e) Capital employed turnover ratio
[Answer: ITR = 6.5 times; RTR = 5.42 times; RCP = 67 days;
FATR = 2.41 times; CETR = 1.3 times
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