Page 69 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes
!
Caution Standard norm of the ratio: Higher the ratio is better the fi rm in converting the
stock into sales and vice versa.
The next step is to find out the number of days or weeks or months taken or consumed by the

firm to convert the stock into sales volume.

365 days/ 52 weeks/ 12 months
Stock Velocity =
Stock Turnover Ratio
!

Caution Standard norm of the ratio: Lower the duration is better the position of the fi rm
in converting the stock into sales and vice versa.

Example: The cost of goods sold is ` 500,000. The opening stock is ` 40,000 and the
closing stock is ` 60,000 (at cost). Calculate inventory turnover ratio.

Solution:
Opening Stock + Clo sin g Stock 40 ,000 + 60 ,000
Average Stock = = = 50 ,000
2 2
Cost of Goods Sold 5,00,000
Stock Turnover Ratio = = = 10 : 1
Average stock 50,000

4.6.2 Debtors Turnover Ratio

This ratio exhibits the speed of the collection process of the firm in collecting the overdues amount

from the debtors and against Bills receivables. The speediness is being computed through debtors
velocity from the ratio of Debtors Turnover Ratio.

Debtors Turnover Ratio = NetCreditSales or Net Credit Sales
+

Average Debtors Debtor + Bills Receivable
!
Caution Standard norm of the ratio: Higher the ratio is better the position of the fi rm
in collecting the overdue means the effectiveness of the collection department and vice
versa.
Debtors velocity: This is an extension of the earlier ratio to denote the effectiveness of the
collection department in terms of duration.

365 days/ 52 weeks/ 12 months
Debtors Velocity =
Debtor Turnover Ratio
!

Caution Standard norm of the ratio: Lesser the duration shows greater the effectiveness
in collecting the dues which means that the collection department takes only minimum
period for collection and vice versa.

Example: Sundaram & Co. Sells goods on cash as well as credit basis. The following
particulars are extracted from the books of accounts for the calendar 2005:

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