Inventory turnover ratio

Inventory turnover ratio (in days) (in months) Illustration From the given information calculate the inventory turnover ratio and inventory conversion period (in months) of Sania Ltd. Revenue from operations , , Inventory at the beginning of the year , Inventory at the end of the year Purchases made during the year , Carriage inwards , Cost of revenue from operations , , Inventory turnover ratio = = times Average inventory Cost of revenue from operations = Opening inventory + Net Purchases + Direct expenses (carriage inwards) – Closing inventory = , + , + , – , = ` , , Opening inventory + Closing inventory Average inventory = , + , = ` , (in months) Number of months in a year Inventory conversion period = Inventory turnover ratio = months (ii) Trade receivables turnover ratio Trade receivables turnover ratio is the comparison of credit revenue from operations with average trade receivables during an accounting period. It gives the velocity of collection of cash from trade receivables. It is calculated as follows: Credit revenue from operations Trade receivables turnover ratio = Average trade receivables Opening trade receivables + Closing trade receivables Average trade receivables Trade receivables = Trade debtors + Bills receivable Credit revenue from operations (net credit sales) is taken for trade receivables turnover ratio as trade receivables arise only from credit sales. Greater the trade receivables turnover ratio, greater is the efficiency of management in collection of receivables. Tutorial note In the absence of opening trade receivables, closing trade receivables can be taken instead of average trade receivables to calculate the ratio. Debt collection period Debt collection period is the average time taken to collect the amount due from trade receivables. Lesser the debt collection period, greater is the efficiency of management in collection of cash from trade receivables. It is calculated as follows: Number of days in a year Debt collection period = (in days) (in months) Trade receivables turnover ratio Number of months in a year Debt collection period = Trade receivables turnover ratio Illustration The credit revenue from operations of Harini Ltd. amounted to ` , , . Its debtors and bills receivable at the end of the accounting period amounted to ` , , and ` , respectively. Calculate trade receivable turnover ratio and also collection period in months. Credit revenue from operations Trade receivables turnover ratio = Average trade receivables , , times. , , Trade receivables = Debtors + Bills receivable = , , + , = ` , , Tutorial note Closing trade receivables are taken instead of average trade receivables as the opening trade receivables are not given.