Calculate the following ratios on the basis of following information: (i) Gross Profit Ratio (ii) Current Ratio (iii) Acid Test Ratio (iv) Inventory Turnover Ratio (v) Fixed Assets Turnover Ratio. | Particulars | Amount (₹) | | --- | --- | | Gross Profit | 50,000 | | Revenue from Operations | 1,00,000 | | Inventory | 15,000 | | Trade Receivables | 27,500 | | Cash and Cash Equivalents | 17,500 | | Current Liabilities | 40,000 | | Land & Building | 50,000 | | Plant & Machinery | 30,000 | | Furniture | 20,000 |

Calculate the following ratios on the basis of following information: (i) Gross Profit Ratio (ii) Current Rati

Numerical Questions · Q21

Calculate the following ratios on the basis of following information: (i) Gross Profit Ratio (ii) Current Ratio (iii) Acid Test Ratio (iv) Inventory Turnover Ratio (v) Fixed Assets Turnover Ratio.

Particulars	Amount (₹)
Gross Profit	50,000
Revenue from Operations	1,00,000
Inventory	15,000
Trade Receivables	27,500
Cash and Cash Equivalents	17,500
Current Liabilities	40,000
Land & Building	50,000
Plant & Machinery	30,000
Furniture	20,000

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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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Gross Profit Ratio = 50%; Current Ratio = 1.5:1; Acid Test Ratio = 1.125:1; Inventory Turnover Ratio = 3.33 times; Fixed Assets Turnover Ratio = 1:1.

Let us go through each ratio step by step. The key is to understand what each ratio measures and which figures from the given data belong to which category.

(i) Gross Profit Ratio

This ratio tells us the percentage of revenue that is left after covering the direct cost of goods sold. The formula is:

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

We are given:

Gross Profit = ₹50,000
Revenue from Operations = ₹1,00,000

Plugging in:

Gross Profit Ratio = (50,000 / 1,00,000) × 100 = 50%

Note

A 50% gross profit ratio means that for every rupee of sales, 50 paise is gross profit. The other 50 paise goes toward the cost of goods sold.

(ii) Current Ratio

This ratio measures the short-term liquidity of the business — its ability to pay off current liabilities using current assets.

Current Ratio = Current Assets / Current Liabilities

First, identify Current Assets from the given data:

Inventory = ₹15,000
Trade Receivables = ₹27,500
Cash and Cash Equivalents = ₹17,500

Total Current Assets = 15,000 + 27,500 + 17,500 = ₹60,000

Current Liabilities = ₹40,000 (given)

Current Ratio = 60,000 / 40,000 = 1.5 : 1

Watch out

Do not include Land & Building, Plant & Machinery, or Furniture in current assets — these are fixed (non-current) assets. Only inventory, receivables, and cash are current.

(iii) Acid Test Ratio (Quick Ratio)

This is a stricter test of liquidity. It excludes inventory because inventory may not be quickly convertible to cash.

Acid Test Ratio = (Current Assets - Inventory) / Current Liabilities

Current Assets (as above) = ₹60,000

Inventory = ₹15,000

Liquid Assets = 60,000 - 15,000 = ₹45,000

Acid Test Ratio = 45,000 / 40,000 = 1.125 : 1

Tip

A quick ratio above 1 is generally considered healthy. Here, 1.125 means the firm has ₹1.125 of liquid assets for every rupee of current liability.

(iv) Inventory Turnover Ratio

This ratio shows how many times the inventory is sold and replaced over the period. It measures efficiency in managing stock.

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

We need Cost of Revenue from Operations (also called Cost of Goods Sold). We can derive it from the Gross Profit:

Cost of Revenue from Operations = Revenue from Operations - Gross Profit

= 1,00,000 - 50,000 = ₹50,000 …

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(i) Gross Profit Ratio

(ii) Current Ratio

(iii) Acid Test Ratio (Quick Ratio)

(iv) Inventory Turnover Ratio

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