Question

A trading firm’s average inventory is Rs 20,000 (cost). If the inventory turnover ratio is 8 times and the firm sells goods at a profit f 20% on sales, ascertain the profit of the firm.

Answer 1

Stock Turnove Ratio = \(\frac {\textit{Cost of goods sold}}{\textit{Average stock}} \)

Or, 8 = \(\frac {\textit{Cost of goods sold}}{\textit{20,000}} \)

or, Cost of Goods Sold = 20,000 × 8

or, Cost of Goods Sold = 1,60,000

Let Sale Price be Rs. 100

Then Profit is Rs. 20

Hence, the Cost of Revenue from Operations = Rs. 100

Rs. 20 = Rs. 80 

If the Cost of Revenue from Operations is Rs. 80, then Revenue from operations = 100

If the Cost of Revenue from Operations is Rs. 1, then Revenue from operations = 
If the Cost of Goods Sold is 1,60,000 then Sales 

=  × 1,60,000 

= 2,00,000
Profit = Revenue from Operations
=2,00,000 – 1,60,000 = Rs. 40,000