From the following information calculate Gross Profit Ratio, Inventory Turnover Ratio and Trade Receivable Turnover Ratio. | Particulars | Amount (₹) | | --- | --- | | Revenue from Operations | 3,00,000 | | Cost of Revenue from Operations | 2,40,000 | | Inventory at the end | 62,000 | | Gross Profit | 60,000 | | Inventory in the beginning | 58,000 | | Trade Receivables | 32,000 |

> [!TLDR] > The Gross Profit Ratio is 20%, the Inventory Turnover Ratio is 4 times, and the Trade Receivables Turnover Ratio is 9.375 times. Understanding a business's financial health involves more than just looking at absolute figures; it requires analyzing relationships between different financial items. This is where ratio analysis comes in. Ratios help us assess profitability, efficiency, and liquidity by comparing related figures from the financial statements. Let's calculate the three ratios requested: ### 1. Gross Profit Ratio The Gross Profit Ratio is a profitability ratio that measures the relationship between Gross Profit and Revenue from Operations. It indicates the percentage of revenue that remains after deducting the cost of goods sold. A higher ratio generally signifies better operational efficiency in managing production or purchasing costs relative to sales price. > [!FORMULA] > Gross Profit Ratio = Gross Profit / Revenue from Operations × 100 **Calculation:** * Gross Profit = ₹60,000 * Revenue from Operations = ₹3,00,000 Gross Profit Ratio = ₹60,000 / ₹3,00,000 × 100 = 0.20 × 100 = **20%** ### 2. Inventory Turnover Ratio The Inventory Turnover Ratio is an efficiency ratio that measures how many times a company sells and replaces its inventory during a period. It indicates how efficiently a business is managing its inventory. A higher ratio generally suggests that inventory is selling quickly, which can reduce storage costs and the risk of obsolescence. > [!FORMULA] > Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory **Calculation:** * Cost of Revenue from Operations = ₹2,40,000 We need to calculate Average Inventory first. #### Working Note 1: Calculation of Average Inventory Average Inventory is the average of opening and closing inventory. Average Inventory = (Opening Inventory + Closing Inventory) / 2 * Inventory in the beginning (Opening Inventory) = ₹58,000 * Inventory at the end (Closi

From the following information calculate Gross Profit Ratio, Inventory Turnover Ratio and Trade Receivable Tur

Numerical Questions · Q22

From the following information calculate Gross Profit Ratio, Inventory Turnover Ratio and Trade Receivable Turnover Ratio.

Particulars	Amount (₹)
Revenue from Operations	3,00,000
Cost of Revenue from Operations	2,40,000
Inventory at the end	62,000
Gross Profit	60,000
Inventory in the beginning	58,000
Trade Receivables	32,000

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Concept understanding — Inventory Turnover Ratio

Inventory Turnover Ratio – A First Look

Think of a kirana shop. The owner buys a carton of biscuits, keeps it on the shelf, and sells it. If that carton sits unsold for six months, the money used to buy it is stuck — it's not earning anything. But if the same carton sells out in a week and is replaced by a new one, the owner's money is working hard, turning over again and again.

That's the core idea: how fast does inventory sell? The Inventory Turnover Ratio measures exactly this speed.

The Precise Meaning

The ratio tells you how many times a business sells and replaces its entire stock of inventory during an accounting period (usually a year).

\text{Inventory Turnover Ratio} = \frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}

Where:

Cost of Revenue from Operations = Opening Inventory + Purchases + Direct Expenses – Closing Inventory (this is the cost of goods sold, not the selling price)
Average Inventory = (Opening Inventory + Closing Inventory) ÷ 2

A high ratio means inventory moves quickly — good for cash flow. A low ratio means goods sit idle — money is locked up, and there's risk of obsolescence or spoilage.

Why It Matters (The "So What?")

For a Class 12 student, this ratio is part of Turnover Ratios under Accounting Ratios (NCERT Class 12, Part B, Chapter 5). It helps answer three questions:

Efficiency – Is the company managing its stock well? A ratio of 8 means inventory is sold and replaced 8 times a year (roughly every 45 days).
Liquidity – Slow-moving inventory can signal poor sales or overstocking, which strains cash.
Comparison – Compare with past years or with competitors in the same industry. A textile firm and a vegetable vendor will have very different ideal ratios — context matters.

Watch out

A very high ratio isn't always good. It could mean the company keeps too little stock and risks running out (stockouts), losing customers. A very low ratio could mean obsolete goods no one wants.

Accounting Treatment – What Gets Debited/Credited?

The ratio itself is a calculation, not a journal entry. But the numbers that feed into it come from real accounts:

Cost of Revenue from Operations is the Trading Account's debit side (the cost of goods sold). It is not a separate ledger account — it's a derived figure.
Inventory appears in the Balance Sheet under Current Assets. When inventory is sold, the journal entry is:

Particulars	Debit (₹)	Credit (₹)
Cost of Revenue from Operations A/c (or Trading A/c) Dr.	XXX
To Inventory A/c		XXX
(Being cost of inventory sold transferred)

This entry reduces Inventory (credit) and increases the cost side of the Trading Account (debit). The ratio then uses the average of opening and closing Inventory balances.

Format / Proforma (as per NCERT)

The ratio is presented in the Comparative Statement or Common Size Statement format. Here's the standard proforma for calculating it:

Important

Format for Computing Inventory Turnover Ratio

Particulars	Amount (₹)
1. Cost of Revenue from Operations
Opening Inventory	XXX
Add: Purchases	XXX
Add: Direct Expenses (e.g., carriage, wages)	XXX
Less: Closing Inventory	(XXX)

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The Gross Profit Ratio is 20%, the Inventory Turnover Ratio is 4 times, and the Trade Receivables Turnover Ratio is 9.375 times.

Understanding a business's financial health involves more than just looking at absolute figures; it requires analyzing relationships between different financial items. This is where ratio analysis comes in. Ratios help us assess profitability, efficiency, and liquidity by comparing related figures from the financial statements.

Let's calculate the three ratios requested:

1. Gross Profit Ratio

The Gross Profit Ratio is a profitability ratio that measures the relationship between Gross Profit and Revenue from Operations. It indicates the percentage of revenue that remains after deducting the cost of goods sold. A higher ratio generally signifies better operational efficiency in managing production or purchasing costs relative to sales price.

Gross Profit Ratio = Gross Profit / Revenue from Operations \times 100

Calculation:

Gross Profit = ₹60,000
Revenue from Operations = ₹3,00,000

Gross Profit Ratio = ₹60,000 / ₹3,00,000 × 100 = 0.20 × 100 = 20%

2. Inventory Turnover Ratio

The Inventory Turnover Ratio is an efficiency ratio that measures how many times a company sells and replaces its inventory during a period. It indicates how efficiently a business is managing its inventory. A higher ratio generally suggests that inventory is selling quickly, which can reduce storage costs and the risk of obsolescence.

Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory

Calculation:

Cost of Revenue from Operations = ₹2,40,000

We need to calculate Average Inventory first.

Working Note 1: Calculation of Average Inventory

Average Inventory is the average of opening and closing inventory.

Average Inventory = (Opening Inventory + Closing Inventory) / 2

Inventory in the beginning (Opening Inventory) = ₹58,000
Inventory at the end (Closing Inventory) = ₹62,000

Average Inventory = (₹58,000 + ₹62,000) / 2 = ₹1,20,000 / 2 = ₹60,000

Now, we can calculate the Inventory Turnover Ratio:

Inventory Turnover Ratio = ₹2,40,000 / ₹60,000 = 4 times

3. Trade Receivables Turnover Ratio …

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1. Gross Profit Ratio

2. Inventory Turnover Ratio

Working Note 1: Calculation of Average Inventory

3. Trade Receivables Turnover Ratio …

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