(C) ACTIVITY RATIOS OR TURNOVER RATIO

1. Inventory Turnover Ratio:- This ratio indicates the relationship between the
cost of revenue from operations during the year and average Inventory kept during that year.

Trade Receivables include Debtors and Bills Receivable.

Cost of Revenue from Operations can be calculated by two ways :- Average Trade Receivables are calculated by adding the trade receivables at the beginning of a
(i) Cost of Revenue from Operations = Opening Inventory + Purchases + Carriage + Wages + period as well as at the end of the period and by dividing the total by 2. While calculating this
Other Direct Charges - Closing Inventory ratio provision for bad and doubtful debts is not deducted from total trade receivables, so
OR that it may not give a false impression that trade receivables are collected quickly.
(ii) Cost of Revenue from Operations = Net Revenue from Operations - Gross Profit. If the amount of credit revenue from operations is not given in the question, the ratio may be
Average Inventory can be calculated as follows:- calculated by taking the figure of total revenue from operations.
Average Inventory = (Opening Inventory + Closing Inventory ) / 2 Significance :- This ratio indicates the speed with which the amount is collected from
Significance: - This ratio indicates whether inventory has been efficiently used or not. It trade receivables. The higher the ratio, the better it is, since it indicates that amount from trade
shows the speed with which the inventory is rotated into Revenue from Operations or the receivables is being collected more quickly. The more quickly the trade receivables pay, the
number of times the inventory is turned into Revenue from Operations during the year. The less the risk from bad debts, and so the lower the expenses of collection and increase in the
higher the ratio, the better it is, since it indicates that inventory is selling quickly. In a business liquidity of the firm. A lower trade receivables turnover ratio will indicate the inefficient credit
where inventory turnover ratio is high, goods can be sold at a low margin of profit and even sales policy of the management. It means that credit sales have been made to customers who
then the profitability may be quite high. do not deserve much credit. It is difficult to set up a standard for this ratio. It depends upon the
A low inventory turnover ratio indicates that inventory does not sell quickly and remains lying policy of the management and the nature of industry. By comparing the trade receivables
in the godown for quite a long time. This results in increased storage costs, blocking of funds turnover
and losses on account of goods becoming obsolete or unsalable.
This ratio can be used for comparing the efficiency of sales policies of two firms doing same
Average Collection Period: Trade Receivables turnover ratio can also be converted
into number of days within which the cash is collected from Trade Receivables. It is calculated
type of business. The inventory policy of the management of that firm, whose inventory
as under:
turnover ratio is higher, will be treated as more efficient.
Similarly, by comparing the inventory turnover ratio of current year with the previous year,
the management can assess whether inventory has been more efficiently used or not.

Average Age of Inventory: Inventory Turnover ratio can also be converted into
number of days, in the following manner:

3. Trade Payables Turnover Ratio: This ratio indicates the relationship between
credit purchases and average trade payables during the year:

Average age of inventory is also termed 'Inventory Holding Period'.

2. Trade Receivables Turnover Ratio: This ratio indicates the relationship

between credit Revenue from Operations and average trade receivables during the year.:
Trade Payables include Creditors and Bills Payables
if the amount of credit purchase is not given calculated on the basis of total purchase. in the
question, the ratio may be calculated on the basis of total purchase
Significance: This ratio indicates the speed with which the amount is being paid to trade
payables. The higher the ratio, the better it is, since it will indicate that the trade payables are
being paid more quickly which increases the credit worthiness of the firm.

Average Payment Period: Trade Payables Turnover Ratio could be converted into
Average Payment period which indicates the period which is normally taken by the firm to
make payment to its Trade Payables. It is calculated as follows:

4. Working Capital Turnover Ratio :

Significance : This ratio is of particular importance in non-manufacturing concerns

where current assets play a major role in generating sales. This ratio reveals how efficiently
working capital has been utilised in making sales. In other words it shows the number of times
working capital has been rotated in producing sales) A high working capital turnover ratio
shows efficient use of working capital and quick turnover of current assets like inventory and
Trade Receivables. A low working capital turnover ratio indicates under-utilisation of working
capital. However, a very high turnover ratio of working capital is also dangerous, as it is a sign
of over-trading, i.e., doing business with too little working capital. It is an indicator of the
shortage of working capital and may put the concern in financial difficulties. On the other
hand, a very low turnover ratio of working capital may be a sign of under-Trading in
comparison to working capital, i.e., the working capital is in excess of the requirements of
busines
 PRACTICAL QUESTION
Activity Ratios or Turnover Ratios
Q. 39. Calculate inventory turnover ratio from the following Q. 41. Calculate Inventory Turnover Ratio and Average Age of Inventory from the following:
Amount STATEMENT OF PROFIT AND LOSS
Opening Inventory 92,400 for the year ended 31st March, 2018
Closing Inventory 67,600 Particulars Note Amount
Purchases 2,75,200 I. Revenue from Operations 12,00,000
Revenue from Operations 5,00,000 II. Expenses:
Revenue from Operations Returns 20,000 Purchase of Stock in Trade 6,50,000
[Ans. Inventory Turnover Ratio 3.75 Times.] Change in Inventories of Stock in Trade 1 (30,000)
Employee Benefit Expenses 2 2,40,000
Q. 40. Following is the Statement of Profit & Loss of Triveni Ltd. Calculate Inventory
Other Expenses 3 90,000
Turnover Ratio: Total Expenses 9,50,000
STATEMENT OF PROFIT AND LOSS III. Profit before Tax (I-II) 2,50,000
for the year ended 31st March, 2018
Particulars Note Amount
I. Revenue from Operations 10,00,000 Note Particulars
II. Other Income 50,000 1. Change in Inventories of Stock in Trade
III. Total Revenue (I+II) 10,50,000 Opening Inventory 1,25,000
Less: Closing Inventory 1,55,000
IV. Expenses 2. (30,000)
Purchase of Stock in Trade 5,36,000 Employee Benefit Expenses:
Change in Inventories of Stock in Trade 1 25,000 Wages 1,48,000
Employee Benefit Exp. 1,20,000 3. Salaries 92,000
Finance Costs 30,000 2,40,000
Other Expenses 24,000 Other Expenses:
Total Expenses 7,35,000 Manufacturing Expenses 72,000
Administration Expenses 10,000
V. Profit before Tax (III-IV) 3,15,000 Selling Expenses 8,000
Less: Income Tax 1,25,000 90,000
VI. Profit after Tax 1,90,000
Notes to Accounts: [Ans. Inventory Turnover Ratio 6 Times; Average Age of Inventory 61 days]
Particulars Hint. Cost of Revenue from Operations = Purchase of Stock in Trade + Change in Inventory
1. Opening Inventory 95,000 + Wages + Manufacturing Exp.
Less: Closing Inventory 70,000
25,000 Q. 42. From the following data, calculate 'Inventory Turnover Ratio' when gross profit ratio is
[Ans. Inventory Turnover Ratio 6.8 times.] given 20%:
Cash Sales 1,50,000
Credit Sales 2,50,000
Return Inward 25,000
Opening Inventory 25,000
Closing Inventory 35,000

[Ans. 10 Times]

Q. 43. Calculate the (I) Inventory Turnover Ratio and (II) Average Age of Inventory from the
following :-
 Opening Inventory 54,000 Q. 49.
Closing Inventory 66,000 Revenue from Operations 7,00,000
Revenue from Operations 5,00,000 Gross Profit 1,40,000
Gross profit 40% on Revenue from Operations. Inventory Turnover Ratio 7 Times
[Ans. (I) Inventory Turnover Ratio 5 Times and (II) Average Age of Inventory 73 days.] Find out the value of Closing Inventory, if Closing Inventory is 16,000 more than the Opening
Inventory.
Q. 44. Calculate Inventory Turnover Ratio from the following: [Ans. Closing Inventory 88,000.]
Opening Inventory 42,500 Q. 50.
Closing Inventory 37,500 Cash Revenue from Operations 1,00,000
Revenue from Operations 3,00,000 Credit Revenue from Operations 5,00,000
Gross Profit 20% on cost. Gross Profit 1,20,000
[Ans. Inventory Turnover Ratio 6.25 times] Inventory Turnover Ratio 4 times
Q. 45. Compute Inventory Turnover Ratio from the following: Calculate the value of Opening and Closing Inventory in each of the following alternative
Cost of Revenue from Operations 5,60,000 cases:
Purchases 4,40,000 Case I If closing inventory was ₹1,00,000 in excess of opening inventory.
Wages 1,30,000
Case II If closing inventory was 2 times that in the beginning.
Carriage Inwards 15,000
Opening Inventory 75,000 Case III If closing inventory was 2 times more than that in the beginning.
[Ans. Closing Inventory 1,00,000; Inventory Turnover Ratio 6.4 times] Case IV If closing inventory was 3 times that in the beginning.
Hint. Wages and Carriage Inwards are direct expenses. Hence, these will be included in cost Ans
of revenue from operations. Opening Inventory Closing Inventory
Q. 46. From the following information, calculate Inventory Turnover Ratio : Case I 70,000 1,70,000
Case II 80,000 1,60,000
Purchases 10,00,000;
Case III- 60,000 1,80,000
Revenue from Operations 12,00,000;
Case IV 60,000 1,80,000
Direct Expenses 48,000;
Q. 51. (A) 3,00,000 is the cost of Revenue from Operations, Inventory turnover 8 times;
Gross Profit 15% on Revenue from Operations;
Closing Inventory 1,64,000. Inventory at the beginning is 2 times more than the inventory at the end. Calculate the values
[Ans. Opening Inventory 1,36,000; Inventory Turnover Ratio 6.8 times] of Opening & Closing Inventory.
Q. 47. Calculate Opening Inventory from the following information: [Ans. Opening Inventory 56,250; Closing Inventory 18,750]
Purchases 5,70,000; Q. 51. (B) 1,50,000 is the cost of Revenue from Operations, Inventory turnover 8 times;
Freight 20,000; Inventory at the beginning is 1.5 times more than the inventory at the end. Calculate the values
Miscellaneous Expenses 10,000; of Opening & Closing Inventory.
Revenue from Operations 5,00,000; [Ans. Opening Inventory 26,786; Closing Inventory 10,714]
Closing Inventory 70,000; Q. 52. Average Inventory carried by a trader is 60,000; Inventory turnover ratio is 10 times.
Gross Loss 16% on Revenue from Operations.
Goods are sold at a profit of 10% on cost. Find out the profit.
[Ans. Opening Inventory 60,000.]
[Ans. Profit 60,000.]
Hints: (i) Freight is a component of Direct Expenses. Hence, it will be included in Cost of
revenue from Operations.
Q. 53. Determine the amount of Revenue from Operations from the following particulars :-
(ii) Miscellaneous Expenses being indirect expenses will not be included in Cost of revenue
Opening Inventory 40,000
from Operations.
Inventory Turnover Ratio 6 times
Q. 48. From the given information, calculate the Inventory Turnover Ratio: Gross Profit 20% of Revenue from Operations
Revenue from Operations: 2,00,000; GP: 25%; Opening Inventory was 1/4th of the value of You are informed that closing inventory is two times in comparison to opening inventory.
Closing Inventory. Closing Inventory was 40% of Revenue from Operations. [Ans. Revenue from Operations 4,50,000.]
[Ans, Inventory Turnover Ratio 3 Times.] Q. 54. A company's inventory turnover is 5 times. Inventory at the end of the year is 4,000
more than inventory at the beginning of the year. Revenue from Operations during the year (all
credit) were 3,00,000. Rate of Gross Profit is 25% on cost of Revenue from Operations.
Current Liabilities at the end of the year were 50,000. Quick Ratio is 1: 1. Calculate :-
(i) Cost of Revenue from Operations.
(ii) Opening inventory.
(iii) Closing inventory. Q. 56. Calculate Trade Receivables Turnover Ratio from the following:-
(iv) Quick Assets. Cash Revenue from Operations 3,40,000
(v) Current Assets at the end. Credit Revenue from Operations 6,00,000
[Ans. (i) 2,40,000; (ii) 46,000; (iii)50,000; (iv) 50,000; (v) 1,00,000.] Opening Trade Receivables 75,000
Q. 55. Following information is given to you: Closing Trade Receivables 1,25,000
[Ans. Trade Receivables Turnover Ratio 6 Times.]
Revenue from Operations 8,00,000
Less: Purchases 5,90,000 Q. 57. Calculate Trade Receivables Turnover Ratio and Average Collection Period from the
Changes in Inventory.. following :-
(Opening Inventory - Closing Inventory) (44,000-60,000) -16,000 Total Revenue from Operations for the year 12,00,000
Direct Expenses 50,000 6,24,000 Credit Revenue from Operations: 70% of Total Revenue: from Operations
Gross Profit 1,76,000 Revenue from Operations Returns (out of Credit Revenue from Operations) 40,000
as at 31st March, 2018 Opening Trade Receivables 73,250
Note Closing Trade Receivables 86,750
Particulars Amount [Ans. Trade Receivables Turnover Ratio 10 Times; Average Collection Period 37 days.]
No.
I EQUITY AND LIABILITIES:
Q. 58. Calculate Trade Receivables Turnover Ratio and Average Collection Period from the
Shareholder's Funds :
(a) Share Capital 4,50,000 following
(b) Reserve & Surplus 1 1,90,000 Total Revenue from Operations for the year 4,80,000
Non-Current Liabilities: Cash Revenue from Operations: being 20% of Credit Revenue from Operations
Long-term Borrowings 2 2,00,000 Opening Trade Receivables 60,000
Current Liabilities: Excess of Closing Trade Receivables over Opening Trade Receivables 30,000
(a) Trade Payables 1,50,000 [Ans. Trade Receivables Turnover Ratio 5.33 Times; Average Collection Period 68.48 days or
(b) Other Current Liabilities 3 10,000 69 days.]

TOTAL 10,00,000 Q. 59. Calculate Trade Receivables Turnover Ratio and Average Collection Period from the
II. ASSETS: following figures:-
Non-Current Assets: Total Revenue from Operations 10,00,000
Fixed Assets 7,20,000 Cash Revenue from Operations 1,50,000
Current Assets: Revenue from Operations Return 10,000
(a) Inventory 60,000 Opening Debtors 50,000
(b) Trade Receivables 1,75,000 Opening B/R 10,000
(c) Cash & Cash Equivalents 25,000 Closing Debtors 60,000
(d) Other Current Assets 4 20,000 Closing B/R 20,000
TOTAL 10,00,000 [Ans. Trade Receivables Turnover Ratio 12 times; Average Collection Period 30.42 or 31
days.]
Note Particulars Q. 60. From the following particulars determine the Opening Trade Receivables :
1. Reserve & Surplus: Credit Revenue from Operations 4,32,000
General Reserve 1,20,000 Trade Receivables turnover Ratio 12 Times
Profit & Loss Balance 70,000 Closing Trade Receivables 40,000
2. 1,90,000 [Ans. Opening Trade Receivables 32,000.]
Long-term Borrowings:
Q. 61. Credit Revenue from Operations of X Ltd. during the year ended 31st March, 2016
8% Debentures 2,00,000
3. Other Current Liabilities: were 5,64,000. If trade receivables turnover ratio is 6 times, calculate trade receivables in the
4. Outstanding Expenses 10,000 beginning and at the end of the year. Trade Receivables at the end were 10,000 more than that
Other Current Assets: at the beginning of the year.
Prepaid Expenses 20,000 [Ans. Opening Trade Receivables 89,000; Closing Trade Receivables 99,000.]
On the basis of the informations given above, calculate any two of the following
ratios: Liquid Ratio, Inventory Turnover Ratio, and Debt Equity Ratio. Q. 62. A Company made Credit Revenue from Operations of 8,76,000 during the year ended
[Ans. Liquid Ratio 1.25: 1; Inventory Turnover Ratio 12 Times; Debt Equity Ratio 0.3125: 1.] 31st March, 2016. If Trade Receivables Turnover Ratio is 18.25 times calculate:-
(I) Average Trade Receivables; and Closing Balance of Bills Payable 10,000
(II) Closing Trade Receivables, [Ans. Trade Payables turnover Ratio 5 times; Average Payment Period 73 days.]
if closing Trade Receivables are three times in comparison to opening Trade Receivables.
Q. 67. Calculate Working Capital Turnover Ratio from the following information:
[Ans. (I) Average Trade Receivables 48,000 (II) Closing Trade Receivables 72,000]
Current Assets 8,60,000
Q. 63. Calculate the amount of Opening Trade Receivables and Closing Trade Receivables
Current Liabilities 3,40,000
from the following particulars: Cost of Revenue from Operations 20,00,000
Cost of Revenue from Operations 9,00,000 Gross Profit 30% of Cost
Gross Profit on Revenue from Operations: 25% [Ans. Working Capital Turnover Ratio: 5 times.]
Cash Revenue from Operations :
20% of Credit Revenue from Operations Q. 68. Calculate Working Capital Turnover Ratio from the following information:
Trade Receivables Turnover Ratio 5 Times Inventory 3,10,000
Closing Trade Receivables were 3 times than that in the beginning. Trade Receivables 1,30,000
[Ans. Opening Trade Receivables 1,00,000; Closing Trade Receivables 3,00,000.] Cash 20,000
Q. 64. Calculate Closing Trade Receivables from the following information: : Trade Payables 60,000
Cost of Revenue from Operations 16,00,000 Cost of Revenue from Operations 30,40,000
Gross Profit on Cost 25% G.P. 24% of RFO
Cash Revenue from Operations: [Ans. Working Capital Turnover Ratio = Net Revenue from Operations/ Working Capital =
25% of Credit Revenue from Operations 10 Times.]
Trade Receivables Turnover Ratio 5 Times Q. 69.Determine the value of Current Liabilities of Y ltd from the following
Closing Trade Receivables were 1.5 times than that in the beginning. Cost of Revenue from Operations 6,00,000
[Ans. Closing Trade Receivables 3,84,000.] Gross Profit 25% of RFO
Hint: Ratio between Opening and Closing Trade Receivables 2:3. Current Assets 2,50,000
Q. 65. Following figures have been obtained from the books of Pawan Roadways Ltd:- Working Capital Turnover Ratio 5 times
[Ans. Current Liabilities 90,000]
2016 2017
Revenue from Operations (at Gross Profit of 25%) 36,00,000 60,00,000 Q. 70. Following information is given to you:
Trade Receivables on 1st January 5,40,000 Trade Receivables on 1st April, 2014 6,80,000
Trade Receivables on 31st December 6,60,000 9,40,000 Trade Receivables on 31st March, 2015 8,20,000
Inventory on 1st January 6,50,000 Trade Receivables Turnover Ratio 6 times
Inventory on 31st December 7,00,000 10,00,000 Credit Revenue from Operations 80% of RFO
Calculate the Trade Receivables Turnover Ratio. Also Calculate Inventory Turnover Ratio. Working Capital Turnover Ratio 9 time
Give necessary Comments. Current Ratio 2.25
Calculate:
[Ans. 2016: Trade Receivables Turnover Ratio 6 times; 2017: Trade Receivables Turnover
(i) Revenue from Operations
Ratio 7.5 times; Inventory Turnover Ratio in 2016, 4 Times; in 2017 5.29 Times.]
(ii) Working Capital
Comments:(1) In 2017, Trade Receivables Turnover Ratio has increased from 6 times to 7.5 (iii) Current Assets.
times. It indicates that amount from trade receivables is being collected more quickly. (2) In [Ans (i) Revenue from Operations 56,25,000 (ii) Working Capital 6,25,000 (iii) Current
2017, Inventory Turnover Ratio has also increased. It indicates that inventory is being rotated Assets.11,25,0000]
into Revenue from Operations more quickly. As such, the sales policy of the management is Q. 71. Calculate working Capital turnover ratio from the following
quite efficient. Revenue from Operations 39,20,000
Non-Current Assets 21,00,000
Q. 66. Calculate Trade Payables Turnover Ratio and Average Payment Period from the Total Assets 36,00,000
following: Shareholder's Funds 18,00,000
Total Purchases 24,00,000 Non-Current Liabilities 10,00,000
Cash Purchases 6,40,000 [Ans. 5.6 Times]
Purchases Returns (out of credit purchases) 60,000 Q. 72. Following information is related to X Ltd. :-
Opening Balance of Creditors 3,00,000
Opening Balance of Bills Payable 20,000
2016 2017
Closing Balance of Creditors 3,50,000
Net Revenue from Operation 8,00,000 12,00,000
Gross Profit 25% on Revenue from Operations
BALANCE SHEETS OF X LTD.

Note 31.3.2016 31.3.2017

Particulars No.
1. EQUITY AND LIABILITIES:
(1) Shareholder's Funds:
(a) Share Capital 2,00,000 2,50,000
(b) Reserve and Surplus 1,65,000 1,72,000
(2) Non-Current Liabilities:
Long-term Borrowings 60,000 40,000
(3) Current Liabilities:
(a) Trade Payables 1,20,000 1,50,000
(b) Short-term Provision 20,000 10,000
TOTAL 5,65,000 6,22,000

II. ASSETS:
(1) Non-Current Assets:
Fixed Assets 2,85,000 3,50,000
(2) Current Assets:
(a) Inventory 1,20,000 1,50,000
(b) Trade Receivables 80,000 75,000
(c) Cash and Cash Equivalents 75,000 45,000
(d) Other Current Assets 1 5,000 2,000
TOTAL 5,65,000 6,22,000

Note: (1) Other Current Assets: Prepaid Expenses 5,000 2,000

Calculate the following ratios:
(1) Current Ratio; (ii) Quick Ratio; (ii) Inventory Turnover Ratio; (iv) Working Capital
Turnover Ratio; and (v) Trade Receivables Turnover Ratio.
Ans 2016 2017
(i) Current Ratio 1.96:1 1.69:1
(ii) Quick Ratio 1.11:1 0.75:1
(iii) Inventory Turnover Ratio 5 Times 6.67 Times
(iv) Working Capital Turnover Ratio 5.71 Times 10.71 Times
(v) Trade Receivables Turnover Ratio 10 Times 15.48 Times