(a) Inventory: For manufacturing and trading firms a considerable amount of funds may be tied up in financing of raw material, work in progress and finished goods. A good inventory management practice is to keep inventory level consistent with the need to fulfil customer’s order in time.
Inventory turnover ratio =Cost of goods sold/Average inventory
or
Inventory turnover ratio =Cost of goods sold/Average inventory
or
=Sales/Average Inventory
Average inventory =(Opening Stock + Closing Stock)/ 2
Higher the inventory turnover ratio or lower the stock turnover period the better it is.
(b) Debtors: the three main debtors’ ratios are as follows:
(i) Debtor turnover ratio: It is calculated as follows:
Credit Sales/Average Debtors
This ratio measures the efficiency of a firm in converting debtors into cash higher ratios indicate better efficiency.
(ii) Average Collection period: It is calculated as follows:
(Average debtors/ Credit sales)× 365
This ratio measures the time it takes to collect the amount from debtors.
(iii) Bad debts: It is calculated as follows:
Bad debts/Sales
This ratio reflects the efficiency of credit control procedures.
(c) Creditors:
(i) Creditors payment period: It is calculated as follows:
(Average creditors/Purchase)× 365
This ratio measures the average time taken to pay for goods and services purchased by the company. In general, longer the period better it is, because the operations of the firms are financed interest free by suppliers. An unduly long period would indicate liquidity problem on one hand and may also influence the credit rating of the firm.
(ii) Creditors turnover ratio: It is calculated as follows:
Credit purchase/Average creditors
(d) Assets Turnover Ratio: These ratios measure the firms ability to generate sales revenue in relation to the size of the asset investment.
(i) Fixed assets turnover ratio:
Sales/Fixed assets
This ratio measures sales per rupee of investment. This ratio measures the efficiency with which fixed assets are being employed. When the fixed assets of the firm are old and substantially depreciated, the fixed asset turnover ratio tends to the high.
(ii) Total assets turnover ratio: It is calculated as follows:
Sales/Total assets
This ratio measures how efficiently assets are employed overall.
(iii) Working capital turnover ratio: It is calculated as follows:
Sales/Capital Employed
This ratio indicates the extent of working capital turned over in achieving sales:
(iv) Sales to capital employed ratio: It is calculated as follows:
Sales/Capital employed
This ratio indicates efficiency in utilisation of capital employed in generating revenue.
Average inventory =(Opening Stock + Closing Stock)/ 2
Higher the inventory turnover ratio or lower the stock turnover period the better it is.
(b) Debtors: the three main debtors’ ratios are as follows:
(i) Debtor turnover ratio: It is calculated as follows:
Credit Sales/Average Debtors
This ratio measures the efficiency of a firm in converting debtors into cash higher ratios indicate better efficiency.
(ii) Average Collection period: It is calculated as follows:
(Average debtors/ Credit sales)× 365
This ratio measures the time it takes to collect the amount from debtors.
(iii) Bad debts: It is calculated as follows:
Bad debts/Sales
This ratio reflects the efficiency of credit control procedures.
(c) Creditors:
(i) Creditors payment period: It is calculated as follows:
(Average creditors/Purchase)× 365
This ratio measures the average time taken to pay for goods and services purchased by the company. In general, longer the period better it is, because the operations of the firms are financed interest free by suppliers. An unduly long period would indicate liquidity problem on one hand and may also influence the credit rating of the firm.
(ii) Creditors turnover ratio: It is calculated as follows:
Credit purchase/Average creditors
(d) Assets Turnover Ratio: These ratios measure the firms ability to generate sales revenue in relation to the size of the asset investment.
(i) Fixed assets turnover ratio:
Sales/Fixed assets
This ratio measures sales per rupee of investment. This ratio measures the efficiency with which fixed assets are being employed. When the fixed assets of the firm are old and substantially depreciated, the fixed asset turnover ratio tends to the high.
(ii) Total assets turnover ratio: It is calculated as follows:
Sales/Total assets
This ratio measures how efficiently assets are employed overall.
(iii) Working capital turnover ratio: It is calculated as follows:
Sales/Capital Employed
This ratio indicates the extent of working capital turned over in achieving sales:
(iv) Sales to capital employed ratio: It is calculated as follows:
Sales/Capital employed
This ratio indicates efficiency in utilisation of capital employed in generating revenue.
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