| # | |
| sales | 15,000 |
| opening stock | 5,600 |
| purchase | 9,700 |
| closing stock | 4,400 |
| gross profit | 4,500 |
| net profit | 2,000 |
A. 3.50 times
B. 3.00 times
C. 2.00 times
D. 2.18
Correct Answer:
Option D – 2.18
Explanation
Definition of rate of turnover: Number of times a firm sells out its merchandise or finished goods inventory, computed by dividing the total sales revenue in a period by the average inventory in that period.
The inventory turnover ratio is calculated by dividing the cost of goods sold for a period by the average inventory for that period. Average inventory is used instead of ending inventory because many companies’ merchandise fluctuates greatly throughout the year. thus we have;
cost of goods sold = opening stock + puchases – closing stock
5600+ 9700 = 15300 – 4400 = 10900 (to get the average inventory, add the opening and closing stock, then divide it by 2. thus we have);
opening stock + closing stock / 2
5600 + 4400=10000 / 2 = 5000
rate of turn over = 10900/5000 = 2.18 times
