Q.From the illustrative data in Section 1 (Cost of Revenue from Operations ₹14,00,000, Average Inventory ₹1,75,000; Net Credit Revenue from Operations ₹18,00,000, Average Trade Receivables ₹1,50,000), calculate the Inventory Turnover Ratio and the Trade Receivables Turnover Ratio, along with the Average Collection Period.

Both ratios divide a flow figure from the year (cost of sales, or credit sales) by an average balance held during the year, showing how many times that balance was 'turned over'.

Step 1 — Inventory Turnover Ratio.

Inventory Turnover Ratio = Cost of Revenue from Operations ÷ Average Inventory = 14,00,000 ÷ 1,75,000 = 8 times.

This means the company sold and replenished its entire average inventory 8 times over the course of the year — a reasonably fast rate of inventory movement.

Step 2 — Trade Receivables Turnover Ratio.

Trade Receivables Turnover Ratio = Net Credit Revenue from Operations ÷ Average Trade Receivables = 18,00,000 ÷ 1,50,000 = 12 times.

Step 3 — Average Collection Period.

Average Collection Period = 12 months ÷ Trade Receivables Turnover Ratio = 12 ÷ 12 = 1 month. …

If the question gives days in a year (365) instead of 12 months, simply substitute 365 for 12 in the Average Collection Period/Payment Period formula — the underlying l …

A very common mistake in the Trade Receivables Turnover Ratio is using TOTAL Revenue from Operations (₹20,00,000, including cash sales) instead of only the NET CREDIT Revenue from Operations (₹18,00,000) — since only credit sales ac …