TURNOVER

RATIOS
 INTRODUCTION
 Turnover Ratios are also known as
activity ratios. They measure the
efficiency or effectiveness with
which a firm manages its
resources or assets. They are so
called because they indicate the
speed with which assets are
converted or turned over into
sales. This category of ratio
includes those ratios which
 TYPES OF TURNOVER
RATIOS
1. INVENTORY TURNOVER RATIO
2. ASSETS TURNOVER RATIO
3. CAPITALS TURNOVER RATIO
4. RECEIVABLES/DEBTORS
TURNOVER RATIO
5. PAYABLES TURNOVER RATIO

 INVENTORY TURNOVER
RATIO
 Inventory turnover or stock turnover –
this indicates whether inventory has
been efficiently used or not.
 Inventory turnover = Cost of Goods
Sold
 Average
Stock


 Cost of Goods Sold = (opening stock +

purchases + direct expenses) – closing
stock
 ASSETS TURNOVER
RATIO
 This ratio shows the relationship
between total assets and sales of the
concern.
 ASSETS TURNOVER = NET SALES
 TOTAL
ASSETS
1. Fixed assets turnover = Sales
 Fixed
Assets
2. Current assets turnover = Sales

 CAPITAL TURNOVER
 These ratios are calculated to study the uses of various
types of capital.
 The various turnovers are as under:


1.

TOTAL CAPITAL TURNOVER: Is the same as assets
turnover.
 FORMULA:- Sales or Cost of Sales
 Total Capital Employed


2.

CAPTAL TURNEOVER: Ratio between capital employed
and sales. Capital employed is either equal to SHAREHOLDER’S
FUND plus LONG TERM LOANS or equal to TOTAL ASSETS minus
CURRENT LIABILITIES.
 FORMULA:- Sales
 Capital Employed


3.

WORKING CAPITAL TURNOVER : Is the same as net
 RECEIVALBLE TURNOVER
 This ratio is also called as DEBTORS
TURNOVER RATIO OR DEBTORS
VELOCITY RATIO
 It measures the numbers of times the
receivables rotate in a year in terms of
sales
 It is also calculated to measure the
efficiency of credit policy and credit
collection


 FORMULA :
 RECEIVABLE TURNOVER = Net
 PAYABLES TURNOVER
 It is also known as CREDITOR’S
VELOCITY or CREDITOR’S TURNOVER.
 It shows the relationship between NET
PURCHASES for the whole year and
TOTAL PAYABLES.
 It indicates the number of times the
payables rotate in a year.


 FORMULA :
PAYABLES TURNOVER = Net Purchases
 Payables

 

PROBLEMS ON


TURNOVER
RATIOS
 INVENTORY TURNOVER
RATIO
Following inventory data have been taken from the

financial records of ALFA LTD.
 Inventory opening = Rs. 35,000
 Purchases = Rs.
2,60,000
 Sales = Rs.
3,00,000
 Closing inventory = Rs. 65,000
Calculate inventory turnover ratio:-


Sol=> Inventory Turnover Ratio= Cost of Sales
 Avg. Stock
Cost of Sales= Opening Stock + Purchases - Closing Stock

 = 35,000+2,60,000-65,000
 = Rs. 2,30,000
Avg. Stock= Opening + Closing Stock = 35000+65000 = Rs.

50,000
 2 2
 Therefore, ITR = 2,30,000 = 4.6 times
 ASSETS AND CAPITAL
TURNOVER RATIO
 Following is the b/s of ABC CO. LTD.
Share capital 4,00,000 Fixed assets
3,50,000
Debentures 50,000 Stock
70,000
Creditors 50,000 Debtors
50,000
 Cash
30,000
 5,00,000
5,00,000
Sales for the yr. amounted to Rs.7,00,000.

calculate different types of turnover of assets

and capital:-
 RECEIVABLES RATIO
 From
the following find out receivables
turnover ratios:-
Net sales 13,41,300
Receivables 2,82,200


 Sol => Receivables Turnover = Net

Sales


Avg. Receivable
 =
13,41,300
 PAYABLES TURNOVER
RATIO
 From
the following find out the payables
turnover:-
Net purchases 4,00,000
Payables 80,000


 Sol => Payables Turnover = Net

Purchases


Payables
 =
4,00,000