ACTIVITY/ TURNOVER RATIO(TIMES)

1. STOCK TURNOVER RATIO

2. DEBTORS TURNOVER RATIO (COLLECTION PERIOD )
3. CREDITORS TURN OVER RATIO (PAYMENT PERIOD)

1. STOCK TURNOVER RATIO =

COST OF GOODS SOLD/ AVERAGE INVENTORY
Average inventory=( opening stock + closing stock)/2

Gross sales = 500000

Sales return= 25000
Opening stock= 70000
Closing stock = 85000
Purchases= 300000
Direct expenses= 100000
Find out Stock turnover Ratio?

Average inventory= (70000+85000)/2

= 77500
COGS=385000(70000+300000+100000-85000)
STOCK TURNOVER RATIO = 385000/77500= 4.96 Times (5 times)

Stock turnover ratio= Net sales/ average inventory

Net sales= 500000-25000=475000

Stock turnover ratio= 475000/77500= 6.12 (app 6 times)

2. Opening stock= 30000
Purchases= 110000
Direct expenses= 10000
Gross profit = 75000
Gross sales= 220000
Sales return= 10000
 Closing stock = 15000
Find out stock turnover ratio?
Stock turn over ratio = COGS/AVERAGE INVENTORY = 6 TIMES
STOCK TURNOVER RATIO= NET SALES/ AVERAGE
INVENTORY = 9.3 TIMES

DEBTORS TURNOVER RATIO

= Net credit Sales/ Average accounts receivables

Accounts receivables debtors and bills receivables

Average accounts receivable=

(opening debtors + closing debtors+Opening bills receivables + closing bills

receivables)/ 2

Net credit sales = total sales- (cash sales+ sales return)

Suppose cash and credit sales information is missing you can take total sales
in the numerator.

Debtors on 1.1.2013= 70000

Debtors on 31.12.2013 =90000

Biils receivables as on 1.1.2013= 20000

Bills receivables as on 31.12.2013 = 30000

Total sales 700000

Sales return = 20000

Cash sales= 100000

Calculate debtors turnover ratio?

Net credit sales= 580000

Average accounts receivables= 105000

Debtors turnover ratio=580000/105000=5.52 times

Debtors velocity/ collection period-

= (365days/12 months/52 weeks)/ Debtors turnover ratio

=365days/5.52times

= 66 days

3. Total sales= 100000

Cash sales= 25000
Sales return= 5000
Opening bills receivables= 10000
Closing bills receivables= 15000
Find out Debtors turnover ratio and debtors collection period.
Ans= debtors turnover tatio= 5.6 times
Debtors collection period=365/5.6= 65days
In months= 12/5.6=2.14 month
In weeks=52/5.6= 9 weeks

CREDITORS TURNOVER RATIO

CREDITORS ARE OUR SUPPLIERS

CREDITORS TURN OVER RATIO

= NET CREDIT PURCHASES/AVERAGE ACCOUNTS PAYABLES

NET CREDIT PURCHASES=TOTAL PURCHASES-(CASH PURCHASES+

PURCHASE RETURNS)

ACCOUNTS PAYABLES INCLUDES BOTH CREDITORS AND BILLS

PAYABLES

AVERAGE ACCOUNTS PAYABLE= (OPENING CREDITOR+CLOSING

CREDITOR+OPENING BILLS PAYABLE+CLOSING BILLS PAYABLE)/2

Question1. Total purchases= 300000

Cash purchases= 175000

Purchase return=25000

Opening creditors=30000

Closing creditors= 15000

Bills payable opening= 7000

Bills payable closing =8000

Ans. Creditor turnover ratio=3.33 times

Payment period/ creditors velocity= (365/12/52)/creditors turnover ratio

Payment period=365days/3.33 times

=109.6(110days)

LIQUIDITY RATIO

Liquidity position means how quickly the firm is converting its current
assets( short term investments) to realize cash in order to meet its current
liabilities(short term obligations).
1. Current ratio= total current assets/total current liabilities
2. Quick ratio/ liquid ratio= liquid assets/ total current liabilities
3. Absolute liquidity ratio= absolute liquid assets/ tcl
4. Inventory to working capital ratio= inventory/ working capital
Liquid current assets= cash in hand+ cash at bank+debtors+bills
receivables+accrued incomes+marketable securities

Absolute liquid assets are = cash in hand+cash at bank+marketable securities

Inventory = closing stock

Ex: cash in hand=12000

Cash at bank=50000

Debtors=10000

Bills receivables=20000

Closing stock=5000( is not a liquid current asset)

Creditors=10000

Bills payables=5000

Bank over draft=10000

Outstanding fees=5000

1. Current ratio=97000/30000=3.23:1
2. Liquid ratio/ quick ratio=92000/30000=3.06:1
3. Absolute liquidity ratio=62000/30000=2.06:1
4. Wc=97000-30000=67000
Inventory to working capital ratio=(5000/67000)*100=7.4%