Inventory (Stock) Turnover Ratio = Cost of Goods Sold (Cost of Revenue from Operations) ÷ Average Inventory.

The Inventory Turnover Ratio is an activity/efficiency ratio that shows how many times a firm's average stock is sold and replenished during an accounting period. A higher ratio generally indicates efficient inventory management (fast-moving stock, less money blocked in inventory), while a very low ratio may indicate slow-moving or obsolete stock.

Formula:

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

where:

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

Cost of Revenue from Operations (Cost of Goods Sold) itself is computed as:

= Opening Stock + Net Purchases + Direct Expenses − Closing Stock

(or, for a trading/manufacturing concern as shown in Schedule III format: Net Sales − Gross Profit)

This ratio is one of the "Activity/Turnover Ratios" (alongside Trade Receivables Turnover Ratio, Trade Payables Turnover Ratio, Working Capital Turnover Ratio) studied in the "Accounting Ratios" chapter, and feeds directly into the Operating Cycle/liquidity analysis of a company.

Stock turnover ratio is 6 times — option (A).

Stock (inventory) Turnover Ratio = Cost of Goods Sold / Average Stock.

Step 1 - Cost of Goods Sold (COGS):

Gross Profit = 25% of Sales = 25% of 4,00,000 = Rs. 1,00,000.

COGS = Sales - Gross Profit = 4,00,000 - 1,00,000 = Rs. 3,00,000.

Step 2 - Stock:

Only closing stock of Rs. 50,000 is given, so it is used as the stock figure.

Step 3 - Ratio:

3,00,000 / 50,000 = 6 times.

The amount of profit is Rs. 2,25,000 — option (B).

Step 1 - Cost of Goods Sold (COGS):

Stock Turnover Ratio = COGS / Average Stock, so

COGS = 12 x 75,000 = Rs. 9,00,000.

Step 2 - Sales:

Profit is 20% of sales, so cost is the remaining 80% of sales.

Sales = COGS / 0.80 = 9,00,000 / 0.80 = Rs. 11,25,000.

Step 3 - Profit:

Profit = 20% of 11,25,000 = Rs. 2,25,000.

The ratio relates net sales to the working capital employed to generate them, showing how efficiently working capital is being used.

Working Capital Turnover Ratio measures the efficiency with which a firm's working capital is being utilised to generate sales/revenue. It is computed as:

Working Capital Turnover Ratio = Net Revenue from Operations ÷ Working Capital

where Working Capital = Current Assets − Current Liabilities.

A higher ratio generally indicates efficient use of working capital (more sales generated per rupee of working capital employed), while a very high ratio may also signal overtrading (insufficient working capital relative to the scale of operations).

Stock Turnover Ratio = Cost of Goods Sold ÷ Average Stock; Liquid Ratio = Liquid (Quick) Assets ÷ Current Liabilities.

Part 1 — Stock Turnover Ratio formula:

Stock Turnover Ratio = Cost of Goods Sold ÷ Average Stock

where Average Stock = (Opening Stock + Closing Stock) ÷ 2. (When cost of goods sold is not available, Net Sales may be used.) It shows how many times stock is sold and replaced during the period.

Part 2 (Or) — Liquid Ratio formula:

Liquid (Quick/Acid-Test) Ratio = Liquid Assets ÷ Current Liabilities

where Liquid Assets = Current Assets − Inventory − Prepaid Expenses. The ideal norm is 1 : 1.

Average Inventory = Cost of Revenue from Operations ÷ Inventory Turnover Ratio = ₹2,40,000 ÷ 4 = ₹60,000.

Inventory Turnover Ratio = Cost of Revenue from Operations ÷ Average Inventory.

Rearranging: Average Inventory = Cost of Revenue from Operations ÷ Inventory Turnover Ratio.

Inventory (Stock) Turnover Ratio measures the speed at which stock is converted into sales.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory. It tells us how many times, on average, a firm's stock is sold and replaced during a given period. A higher ratio generally indicates efficient stock management and quick movement of goods, while a low ratio may indicate slow-moving or obsolete stock. The other options given test different things: Working Capital Turnover Ratio measures sales generated per rupee of working capital; Current Ratio and Liquid Ratio are liquidity ratios, not turnover/velocity ratios.

Stock Turnover Ratio = Cost of Goods Sold ÷ Average Stock, measuring how efficiently inventory is converted into sales.

The Stock (Inventory) Turnover Ratio measures the number of times the average stock held by a business is "turned over" (sold and replenished) during an accounting period. A higher ratio generally indicates efficient inventory management and strong sales, while a very low ratio can indicate slow-moving or obsolete stock.

Formula:

Stock Turnover Ratio = Cost of Goods Sold ÷ Average Stock

where Average Stock = (Opening Stock + Closing Stock) ÷ 2

If Cost of Goods Sold is not available, Net Sales may be used as an approximation in its place.

Stock Turnover Ratio = Cost of Goods Sold (or Cost of Revenue from Operations) / Average Inventory; it shows how efficiently stock is converted into sales.

This West Bengal HS Accountancy MCQ tests the formula of the stock turnover ratio. The numerator must be the cost of goods sold and the denominator the average inventory, so that the ratio expresses 'number of times'. Options placing inventory in the numerator or using gross profit are incorrect; hence option (c).

Correct option: (b) ₹2,25,000. COGS = 12 × 75,000 = ₹9,00,000; sales = 9,00,000 ÷ 0.80 = ₹11,25,000; profit = 20% × 11,25,000 = ₹2,25,000.

Working: Cost of Goods Sold = Stock Turnover Ratio × Average Stock = 12 × 75,000 = ₹9,00,000. Profit is 20% on sales, so COGS = 80% of sales → Sales = 9,00,000 ÷ 0.80 = ₹11,25,000. Profit = 20% of 11,25,000 = ₹2,25,000.

Stock Turnover Ratio = COGS / Average Stock, so COGS = 6 x 40,000 = 2,40,000.