Page 198 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 11: Ratio Analysis

Notes
!
Caution Standard norm of the ratio:

Lesser the ratio is better the position of the firm in liquidity management means enjoying

the more credit period from the creditors and vice versa.
365 days /52 weeks /12 months
Creditors Velocity =
Creditors Turnover Ratio
!
Caution Standard norm of the ratio:

Greater the duration is better the liquidity management of the firm in availing the credit

period of the creditors and vice versa.

Example: Find out the value of creditors from the following:
Sales ` 1,00,000 Opening stock ` 10,000

Gross profit on sales 10% Closing stock ` 20,000
Creditors velocity 73 days Bills payable ` 16,000
Note: All purchases are credit purchases
Solution: To find out the volume of purchases, the formula of cost of goods sold should be taken

into consideration.
Cost of goods sold = Opening Stock + Purchases – Closing Stock
= 10,000 + Purchases – .20,000
Cost of goods sold = Sales – Gross Profi t
= 1,00,000 – 10% on 1,00,000 = 90,000
The next step is to apply the found value in the early equation
Purchases = 90,000 – 10,000 + 20,000 = 1,00,000
To find out the value creditors, the creditor velocity and creditors turnover ratio:

365 days
Creditors Velocity =
Creditors Turnover Ratio
Credit Purchases
Creditors Turnover Ratio =
Bills Payable + Sundry Creditors
1,00,000
=
16,000 + Sundry Creditors
The next step is to find out the sundry creditors, the reversal process to be adopted

365 days
73 days =
Creditors Turnover Ratio
365 days
Creditors Turnover Ratio = = 5 times
73 days
The next step is to substitute the found value in the equation of creditors turnover ratio

` 1,00,000
16,000+ Sundry creditors =
5
Sundry Creditors = 20,000 – 16,000 = 4,000

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