Turnover Ratios or Activity Ratios or Performance Ratios Turnover ratios are used to determine how efficiently the financial assets and liabilities of an organization have been used for the purpose of generating revenues. These ratios measure the operating efficiency of an enterprise. The types of Turnover ratios are: – Inventory Turnover Ratio or Stock Turnover Ratio. Debtors Turnover Ratio. Creditors Turnover Ratio. Cash Turnover Ratio. Working Capital Turnover Ratio. Fixed Assets Turnover Ratio. Capital Turnover Ratio or Sales to Net Worth Ratio. It is also referred as the stock turnover ratio which is used to measure the number of sales generated from its inventory and how efficiently the inventories in a company is used.  This ratio reveals the number of times stock is replaced during a given accounting period. It is calculated by the following formula: Illustration 1: From the following information calculate stock turnover ratio. Opening stock 30,000, purchases 90,000, carriage inward 7500, sales 1,50,000, closing stock 15,000, gross profit 37,500.

1. MANAGEMENT ACCOUNTING
RATIO ANALYSIS
BY:
SMT.UMA MINAJIGI REUR
HEAD, DEPT. OF COMMERCE & MANAGEMENT
SMT. V G DEGREE COLLEGE FOR WOMEN, KALABURAGI

2. MANAGEMENT ACCOUNTING
RATIO ANALYSIS
TURNOVER RATIOS – 1
SOLVED PROBLEMS

3. Classification of Accounting Ratio
Types of ratios are given below:
1. Liquidity Ratios
2. Leverage Ratio
3. Turnover Ratio
4. Profitability Ratio

4. Turnover Ratios or Activity Ratios or Performance Ratios
Turnover ratios are used to determine how efficiently the financial assets and
liabilities of an organization have been used for the purpose of generating revenues.
These ratios measure the operating efficiency of an enterprise.
The types of Turnover ratios are: –
1. Inventory Turnover Ratio or Stock Turnover Ratio.
2. Debtors Turnover Ratio.
3. Creditors Turnover Ratio.
4. Cash Turnover Ratio.
5. Working Capital Turnover Ratio.
6. Fixed Assets Turnover Ratio.
7. Capital Turnover Ratio or Sales to Net Worth Ratio.

5. Capital turnover is the measure that indicates organization’s efficiency in
relation to the utilization of capital employed in the business and it is calculated as a ratio
of total annual turnover divided by the total amount of stockholder’s equity (also known
as net worth) and the higher the ratio, the better is the utilization of capital employed.
The capital turnover (also called equity turnover) is a measure that calculates
how efficiently the company is managing the capital invested by the shareholders in the
company to generate revenues. If the ratio is high, it shows that the company is
efficiently utilizing the amount of capital invested. In contrast, if the ratio is low, then it
indicates that the company is not managing its capital investment efficiently to generate
the required revenue, i.e., the company has to invest the funds appropriately to achieve
the sales target by utilizing the owner’s funds in the company.

6. INVENTORY TURNOVER RATIO OR STOCK TURNOVER RATIO
It is also referred as the stock turnover ratio which is used to measure the number of
sales generated from its inventory and how efficiently the inventories in a company is
used.
This ratio reveals the number of times stock is replaced during a given accounting
period.
It is calculated by the following formula:
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤

7. INVENTORY TURNOVER RATIO OR STOCK TURNOVER RATIO
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤
Calculation of Cost of Goods Sold:
Opening Stock XX
Add: Purchases X
Add: Direct Expenses X
XXX
Less: Closing Stock X
Cost of Goods sold XX
Or
Cost of Goods sold = Sales – Gross Profit

8. INVENTORY TURNOVER RATIO OR STOCK TURNOVER RATIO
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤
Calculation of Average Stock :
Note: If opening stock is not given, in such cases closing stock will be the
average stock.
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤 =
𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐒𝐭𝐨𝐜𝐤 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐒𝐭𝐨𝐜𝐤
𝟐

9. Interpretation:
Standard Ratio is 8 times in a year.
If the actual ratio is more than 8 times it indicates that more sales are effected and
effective inventory management, and goods sold efficiently in a year.
Stock turnover is very efficient.
If the actual ratio is less than 8 times it indicates that the concern has unsaleable
goods. Inefficient inventory management and carrying of excess stock.
Stock turnover is inefficient.

10. Illustration 1:
From the following information calculate stock turnover ratio. Opening stock 30,000,
purchases 90,000, carriage inward 7500, sales 1,50,000, closing stock 15,000, gross
profit 37,500.
Solution 1:
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤
Calculation of Cost of Goods Sold:
Opening Stock XX
Add: Purchases X
Add: Direct Expenses X
XX
Less: Closing Stock X
Cost of Goods sold XX
Or
Cost of Goods sold = Sales – Gross Profit
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤 =
𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐒𝐭𝐨𝐜𝐤 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐒𝐭𝐨𝐜𝐤
𝟐

11. Illustration 1:
From the following information calculate stock turnover ratio. Opening stock
30,000, purchases 90,000, carriage inward 7500, sales 1,50,000, closing stock
15,000, gross profit 37,500.
Cost of Goods Sold
Opening Stock 30,000
Add: Purchases 90,000
Add: Direct Expenses
(Carriage Inward)
7500
1,27,500
Less: Closing Stock 15,000
Cost of Goods sold 1,12,500
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤 =
𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐒𝐭𝐨𝐜𝐤 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐒𝐭𝐨𝐜𝐤
𝟐
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤 =
𝟑𝟎,𝟎𝟎𝟎+𝟏𝟓,𝟎𝟎𝟎
𝟐
= 22,500
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝟏,𝟏𝟐,𝟓𝟎𝟎
𝟐𝟐,𝟓𝟎𝟎
= 5 times

12. Illustration 2:
From the following information calculate stock turnover ratio. Credit Sales
Rs.3,00,000, Cash Sales Rs.5,00,000, Sales Returns Rs.50,000, Opening Stock
Rs.50,000, Closing Stock Rs.70,000, Gross Profit 20%.
Solution 2:
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤
Calculation of Cost of Goods Sold:
Opening Stock XX
Add: Purchases X
Add: Direct Expenses X
XX
Less: Closing Stock X
Cost of Goods sold XX
Or
Cost of Goods sold = Sales – Gross Profit
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤 =
𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐒𝐭𝐨𝐜𝐤 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐒𝐭𝐨𝐜𝐤
𝟐

13. Illustration 2:
From the following information calculate stock turnover ratio. Credit Sales
Rs.3,00,000, Cash Sales Rs.5,00,000, Sales Returns Rs.50,000, Opening Stock
Rs.50,000, Closing Stock Rs.70,000, Gross Profit 20%.
Cost of Goods sold = Sales – Gross Profit
Calculation of Sales:
Credit Sales : Rs. 3,00,000
Cash Sales: Rs. 5,00,000
Rs. 8,00,000
Less: Sales Returns 50,000
Net Sales 7,50,000
Gross Profit = (20% of Net Sales)
Cost of Goods sold = 7,50,000 – (20% of 7,50,000)
Cost of Goods sold = 7,50,000 – 1,50,000
Cost of Goods sold = 6,00,000
Gross Profit = 20% of 7,50,000
Gross Profit = 1,50,000
Cost of Goods sold = Sales – Gross Profit
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤 =
𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐒𝐭𝐨𝐜𝐤 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐒𝐭𝐨𝐜𝐤
𝟐
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤 =
𝟓𝟎,𝟎𝟎𝟎+𝟕𝟎,𝟎𝟎𝟎
𝟐
= 60,000
Average Stock = 60,000

14. S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝟔,𝟎𝟎,𝟎𝟎𝟎
𝟔𝟎,𝟎𝟎𝟎
= 10 times
Illustration 2:
From the following information calculate stock turnover ratio. Credit Sales
Rs.3,00,000, Cash Sales Rs.5,00,000, Sales Returns Rs.50,000, Opening Stock
Rs.50,000, Closing Stock Rs.70,000, Gross Profit 20%.
Cost of Goods sold = Sales – Gross Profit
Cost of Goods sold = 6,00,000
Average Stock = 60,000

15. Illustration 3:
From the following information calculate stock turnover ratio.
Solution 3:
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤
Particulars 2016 2017
Opening Stock 50,000 70,000
Purchases during the year 1,50,000 2,00,000
Sales during the year 4,00,000 5,00,000
Closing stock 40,000 30,000

16. Solution 3:
Particulars 2016 2017
Opening Stock 50,000 70,000
Purchases during the year 1,50,000 2,00,000
Sales during the year 4,00,000 5,00,000
Closing stock 40,000 30,000
Particulars 2016 2017
Opening Stock 50,000 70,000
Add: Purchases during the year 1,50,000 2,00,000
2,00,000 2,70,000
Less: Closing stock 40,000 30,000
Cost of Goods sold 1,60,000 2,40,000
Calculation of Cost of Goods sold:
Particulars 2016 2017
Opening Stock 50,000 70,000
Closing stock 40,000 30,000
Average Stock = 𝟓𝟎, 𝟎𝟎𝟎 + 𝟒𝟎, 𝟎𝟎𝟎
𝟐
𝟕𝟎, 𝟎𝟎𝟎 + 𝟑𝟎, 𝟎𝟎𝟎
𝟐
Average Stock 45,000 50,000
Calculation of Average Stock:

17. 2016
Cost of Goods sold = 1,60,000
Average Stock = 45,000
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝟏,𝟔𝟎,𝟎𝟎𝟎
𝟒𝟓,𝟎𝟎𝟎
= 3.56 Times
2017
Cost of Goods sold = 2,40,000
Average Stock = 50,000
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝟐,𝟒𝟎,𝟎𝟎𝟎
𝟓𝟎,𝟎𝟎𝟎
= 4.8 Times

18. Illustration 4:
Find out Gross Profit from the particulars given below:
Stock Turnover ratio 8 times
Cost of goods sold Not Known
Average stock Rs. 2,50,000
Selling price 20% above cost
Solution 4:
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤
Calculation of Cost of Goods Sold:
Opening Stock XX
Add: Purchases X
Add: Direct Expenses X
XX
Less: Closing Stock X
Cost of Goods sold XX
Or
Cost of Goods sold = Sales – Gross Profit
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤 =
𝐎𝐩𝐞𝐧𝐢𝐧𝐠 𝐒𝐭𝐨𝐜𝐤 + 𝐂𝐥𝐨𝐬𝐢𝐧𝐠 𝐒𝐭𝐨𝐜𝐤
𝟐

19. Illustration 4:
Find out Gross Profit from the particulars given below:
Stock Turnover ratio 8 times
Cost of goods sold Not Known
Average stock Rs. 2,50,000
Selling price 20% above cost
Solution 4:
S𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤
8 𝐭𝐢𝐦𝐞𝐬 =
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝
𝟐,𝟓𝟎,𝟎𝟎𝟎
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝 = 8 𝐭𝐢𝐦𝐞𝐬 ∗ 𝟐, 𝟓𝟎, 𝟎𝟎𝟎
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐆𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝 = 𝟐𝟎, 𝟎𝟎, 𝟎𝟎𝟎
Gross Profit is 20% of Cost of Sales
Gross Profit = 20% of 20,00,000 = 4,00,000
Gross Profit = 4,00,000

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Debtors Turnover Ratio