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in Accounts by (58.3k points)

An extract from Gupta & Co. reveals the following: 

Inventory as on 1st July, 2014 23,500
Purchases 2,23,000
Inventory as on 30 June 2015 21,500
Sales (all credit) 8,21,250
Accounts Receivable balance as on 30 June 2015 1,57,500

Calculate: 

(a) Inventory turnover ratio 

(b) Accounts recievable turnover ratio 

(c) Collection Period

1 Answer

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by (64.7k points)
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Best answer

(a) Inventory Turnover Ratio = Cost Of Goods Sold / Average Inventory 

Where, Cost of Goods Sold = opening stock + purchases – closing stock 

= 23,500 + 2,23,000 – 21,500 = Rs.2,25,000 

And Average Inventory = (Opening stock + closing stock) / 2 

= (23,500 + 21,500) /2 = Rs. 22,500 

Inventory Turnover Ratio = (Rs.2,25,000 / Rs. 22,500) 

= 10 times

(b) Accounts Receivable Turnover Ratio = Credit Sales / Average Accounts Receivable 

= (8,21,250 / 1,57,500) 

= 5.214 

(c) Collection Period = Days in a year / Debtors’ turnover ratio 

= (365 / 5.124) 

= 71.23 days 

= 72 days approx.

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