Q.Or. Inventory turnover ratio is 3 times. Sales are ₹1,80,000. Opening Stock ₹2,000 more than the Closing Stock. Calculate Opening and Closing Stock, when goods are sold at 20% profit on cost.
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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).
Inventory Turnover Ratio=Average InventoryCost of Revenue from Operations
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.
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:
| Date | Particulars | L.F. | 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:
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) |
Working backward from the turnover ratio and sales (converted to cost) gives average inventory, and the given gap between opening and closing stock splits it into the two figu …
Convert sales to cost of goods sold using the given profit margin, use the turnover ratio to find average stock, then use the ₹2,000 gap to split it into opening and closing stock.
Given: Inventory Turnover Ratio = 3 times; Sales = ₹1,80,000; Opening Stock is ₹2,000 more than Closing Stock; goods sold at 20% profit on cost.
Step 1 — Cost of Revenue from Operations (COGS):
Since profit is 20% on cost, Sales = Cost + 20% of Cost = 1.20 × Cost
Cost of Revenue from Operations = 1,80,000 ÷ 1.20 = ₹1,50,000
Step 2 — Average Inventory:
Inventory Turnover Ratio = Cost of Revenue from Operations ÷ Average Inventory
3 = 1,50,000 ÷ Average Inventory
Average Inventory = 1,50,000 ÷ 3 = ₹50,000
Step 3 — Split into Opening and Closing Stock:
Average Inventory = (Opening Stock + Closing Stock) ÷ 2 = 50,000 …
- CBSE 2026Set ANNUAL1 markQ.Mention the formula to calculate Inventory Turnover Ratio.
›Reveal solutionSolution
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 …
- CBSE 2025Set ANNUAL1 markMCQQ.If Sales Rs. 4,00,000, Gross profit 25%, Closing stock Rs. 50,000, what will be the stock turnover ratio? (A) 6 times (B) 7 times (C) 8 times (D) 10 times.
›Reveal solutionSolution
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: …
- CBSE 2025Set ANNUAL1 markMCQQ.Average stock is Rs. 75,000 and stock turnover is 12. If profit on sales is 20%, then the amount of profit will be (A) Rs. 1,80,000 (B) Rs. 2,25,000 (C) Rs. 3,75,000 (D) None of these.
›Reveal solutionSolution
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. …
- CBSE 2025Set ANNUAL1 markQ.Give the formula of Working Capital Turnover Ratio.
›Reveal solutionSolution
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.
…
- CBSE 2024Set ANNUAL1 markQ.Write down the formula of Stock Turnover Ratio. Or Write down the formula of Liquid Ratio.
›Reveal solutionSolution
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: …
- CBSE 2022Set ANNUAL1 markQ.Very short answer type questions :(xii) The inventory turnover ratio of a company is 4 and its cost of revenue from operations is ₹ 2,40,000, then average inventory will be ?
›Reveal solutionSolution
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.
| Item | Amount (₹) |
|---|---| …
- CBSE 2021Set ANNUAL1 markMCQQ.Which ratio measures the velocity of conversion of stock into sales?(a) Working capital turnover ratio(b) Current ratio(c) Inventory turnover ratio(d) Liquid ratio
›Reveal solutionSolution
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 wo …
- CBSE 2020Set ANNUAL1 markQ.Give the formula of stock turnover ratio.
›Reveal solutionSolution
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
…
- CBSE 2019Set ANNUAL1 markMCQQ.Stock Turnover Ratio =(a) Average Inventory / Cost of Revenue from Operation(b) Average Inventory / Cost of Goods Solds(c) Cost of Goods Sold / Average Inventory(d) Gross Profit / Average Inventory
›Reveal solutionSolution
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' …
- CBSE 2017Set ANNUAL1 markMCQQ.Average Stock is ₹ 75,000 and Stock Turnover (based on cost of goods sold) is 12. If profit on sales is 20%, then the amount of profit will be(a) ₹ 1,80,000.(b) ₹ 2,25,000.(c) ₹ 3,75,000.(d) None of these.
›Reveal solutionSolution
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.
…
- CBSE 2015Set ANNUAL1 markMCQQ.If Stock Turnover Ratio is 6 and average stock is ₹ 40,000, then Cost of Goods Sold will be(a) ₹ 60,000.(b) ₹ 2,28,000.(c) ₹ 2,40,000.(d) ₹ 2,52,000.
›Reveal solutionSolution
Stock Turnover Ratio = COGS / Average Stock, so COGS = 6 x 40,000 = 2,40 …
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