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 of `20%` on sales, ascertain the profit of the firm.

Answer 1

Answer:

Explanation:

Stock Turnove Ratio =  

Cost of goods sold

Average stock

Or, 8 =  

Cost of goods sold

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 = \frac { 100 }{ 80 }

If the Cost of Goods Sold is 1,60,000 then Sales  

= \frac { 100 }{ 80 } × 1,60,000  

= 2,00,000

Profit = Revenue from Operations

=2,00,000 – 1,60,000 = Rs. 40,00

Answer 2

Explanation:

Solution :

The Inventory Turnover Ratio is 8 times.

Average Inventory is Rs. 20,000

★ Inventory Turnover Ratio :

$\sf{\longrightarrow{\dfrac{Cost \: of \: Goods \: Sold}{Average \: Inventory}}} \:$

$\sf{\longrightarrow\:8\:=\:{\dfrac{Cost \: of \: Goods \: Sold}{20,000}}}$

Cost of Goods Sold = 20,000 × 8

Cost of Goods Sold = 1,60,000

Profit of 20% on Sales (given)

Gross Profit = 20% on Sales

We know,

20% = 1/5

1/5th on Sales = 1/4th on Cost

Gross Profit =

1,60,000 × (1/4)

40,000

Gross Profit = 40,000

Net Sales = 1,60,000 + 40,000

Net Sales = 2,00,000

Profit of 20% on Sales

2,00,000 × (20/100)

40,000

Therefore, Gross Profit = Rs. 40,000