Lesson eLearning

A trading business reports cost of goods sold (COGS) of Rs.5,00,000 for the year. The average inventory during the year is Rs.50,000. (a) Find the inventory turnover ratio. (b) Compute the average number of days inventory remains unsold.

medium 3 marks Class 12 · Accountancy · Accounting Ratios
Answer
Inventory Turnover = 10 times, Days Inventory = 36.5 days

The correct answer is Inventory Turnover = 10 times, Days Inventory = 36.5 days — Thus, inventory turns over 10 times a year and stays in stock for about 36.5 days on average.

Step-by-step solution

  1. Inventory Turnover Ratio formula: Inventory Turnover = COGS ÷ Average Inventory.
  2. Plug the numbers: = 5,00,000 ÷ 50,000 = 10 times. This is part (a).
  3. To find days inventory, use: Days Inventory = 365 ÷ Inventory Turnover.
  4. Substitute the turnover: = 365 ÷ 10 = 36.5 days.
  5. Thus, inventory turns over 10 times a year and stays in stock for about 36.5 days on average.
Common mistake: Using sales instead of COGS in the numerator

Concept tested: Inventory Turnover (Efficiency Ratio)

Published · How this solution was prepared and checked

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