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Q. 82. The following figures have been obtained from the books of Pawan Roading Ltd:

\begin{tabular}{|c|c|c|}
\hline & 2022 & 2023 \\
\hline \begin{tabular}{l}
Revenue from Operations (Sales) \\
(at Gross Profit of 25\%)
\end{tabular} & [tex]$36,00,000$[/tex] & [tex]$60,00,000$[/tex] \\
\hline Trade Receivables on 1st January & [tex]$5,40,000$[/tex] & \\
\hline Trade Receivables on 31st December & [tex]$6,60,000$[/tex] & [tex]$9,40,000$[/tex] \\
\hline Inventory on 1st January & [tex]$6,50,000$[/tex] & \\
\hline Inventory on 31st December & [tex]$7,00,000$[/tex] & [tex]$10,00,000$[/tex] \\
\hline
\end{tabular}

Calculate the Trade Receivables Turnover Ratio. Also, calculate the Inventory Turnover Ratio. Give necessary comments.



Answer :

GinnyAnswer
To solve the given problem, we need to calculate the Trade Receivables Turnover Ratio and the Inventory Turnover Ratio for the years 2022 and 2023. Here is the step-by-step solution:

### Trade Receivables Turnover Ratio
The Trade Receivables Turnover Ratio is calculated using the formula:
[tex]\[ \text{Trade Receivables Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Trade Receivables}} \][/tex]
Given data:
- Sales (Revenue from Operations) in 2022: [tex]\(36,00,000\)[/tex]
- Sales (Revenue from Operations) in 2023: [tex]\(60,00,000\)[/tex]
- Trade Receivables on 1st January 2022: [tex]\(5,40,000\)[/tex]
- Trade Receivables on 31st December 2022: [tex]\(6,60,000\)[/tex]
- Trade Receivables on 31st December 2023: [tex]\(9,40,000\)[/tex]

#### For 2022:
1. Calculate the average trade receivables for 2022:
[tex]\[ \text{Average Trade Receivables for 2022} = \frac{5,40,000 + 6,60,000}{2} = 6,00,000 \][/tex]

2. Calculate the Trade Receivables Turnover Ratio for 2022:
[tex]\[ \text{Trade Receivables Turnover Ratio for 2022} = \frac{36,00,000}{6,00,000} = 6.0 \][/tex]

#### For 2023:
1. Calculate the average trade receivables for 2023:
[tex]\[ \text{Average Trade Receivables for 2023} = \frac{6,60,000 + 9,40,000}{2} = 8,00,000 \][/tex]

2. Calculate the Trade Receivables Turnover Ratio for 2023:
[tex]\[ \text{Trade Receivables Turnover Ratio for 2023} = \frac{60,00,000}{8,00,000} = 7.5 \][/tex]

### Inventory Turnover Ratio
The Inventory Turnover Ratio is calculated using the formula:
[tex]\[ \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} \][/tex]
Given:
- Cost of Goods Sold (COGS) is calculated as Sales minus Gross Profit. Given that Gross Profit is 25%, COGS will be 75% of Sales.
- Sales in 2022: [tex]\(36,00,000\)[/tex]
- Sales in 2023: [tex]\(60,00,000\)[/tex]
- Inventory on 1st January 2022: [tex]\(6,50,000\)[/tex]
- Inventory on 31st December 2022: [tex]\(7,00,000\)[/tex]
- Inventory on 31st December 2023: [tex]\(10,00,000\)[/tex]

#### For 2022:
1. Calculate the COGS for 2022:
[tex]\[ \text{COGS for 2022} = 0.75 \times 36,00,000 = 27,00,000 \][/tex]

2. Calculate the average inventory for 2022:
[tex]\[ \text{Average Inventory for 2022} = \frac{6,50,000 + 7,00,000}{2} = 6,75,000 \][/tex]

3. Calculate Inventory Turnover Ratio for 2022:
[tex]\[ \text{Inventory Turnover Ratio for 2022} = \frac{27,00,000}{6,75,000} = 4.0 \][/tex]

#### For 2023:
1. Calculate the COGS for 2023:
[tex]\[ \text{COGS for 2023} = 0.75 \times 60,00,000 = 45,00,000 \][/tex]

2. Calculate the average inventory for 2023:
[tex]\[ \text{Average Inventory for 2023} = \frac{7,00,000 + 10,00,000}{2} = 8,50,000 \][/tex]

3. Calculate Inventory Turnover Ratio for 2023:
[tex]\[ \text{Inventory Turnover Ratio for 2023} = \frac{45,00,000}{8,50,000} \approx 5.29 \][/tex]

### Summary of Results
- Trade Receivables Turnover Ratio for 2022: [tex]\(6.0\)[/tex]
- Trade Receivables Turnover Ratio for 2023: [tex]\(7.5\)[/tex]
- Inventory Turnover Ratio for 2022: [tex]\(4.0\)[/tex]
- Inventory Turnover Ratio for 2023: [tex]\(5.29\)[/tex]

### Comments
- The Trade Receivables Turnover Ratio has improved from 2022 to 2023, indicating that the company is collecting its receivables faster.
- The Inventory Turnover Ratio has also improved from 2022 to 2023, indicating better inventory management and faster turnover of goods. This suggests increased operational efficiency in handling inventory.

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