Page 196 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 11: Ratio Analysis

6. Liquid Asset = Current Assets – (...................... + Prepaid Expenses) Notes

7. The ...................... are nothing but the current assets which can be more easily converted
into cash to meet out the quick liabilities.

11.4 Turnover Ratios

It highlights the relationship in between the sales and various assets. The ratio indicates that the

rate of speed which is taken by the firm for converting the assets into sales.
11.4.1 Stock Turnover Ratio

The ratio expresses the speed of converting the stock into sales. In other words, how fast the
stock is being converted into sales in a year. The greater the ratio of conversion leads to lesser the
number of days/weeks/months required to convert the stock into sales.
Cost of Goods Sold Sales
Stock Turnover Ratio = or
Average Stock Closing Stock
!
Caution Standard norm of the ratio:
Higher the ratio is better the firm 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 firm 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 + Closing 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

11.4.2 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.
Net Credit Sales Net Credit Sales
Debtors Turnover Ratio = or
Average Debtors Debtor + Bills Receivable

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