Page 132 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 6: Financial Statements: Analysis and Interpretation

Solution: Notes
Net Profit After Taxes 5,00,000
Return on Total Capital Employed = 100 100 20%
Total Capital Employed 25,00,000

6.3.4 Turnover Ratios

Turnover ratios can be of following types:

Activity Turnover Ratio

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.
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

Notes 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

Notes 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

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