Page 28 - A Level Business Studies - Financial Analysis Tasks

Return of Inventory Turnover

Efficiency Ratios;
Rate of Inventory Turnover
Measures the length of time inventory is held. Inventory is said to "turnover" when it has been sold
and replaced with new inventory. When inventory turns over, it means that profits are made.

Rate of inventory turnover is expressed as a number followed by the word times. For example, if
the rate of inventory turnover was 6 times per year, this would mean that the inventory had been
sold every 2 months.

The acceptable rate of inventory turnover varies between businesses. For example, a supermarket
will be looking to turnover their average inventory about 24 times per year, whereas a jeweler selling
high price items may be happy with an inventory turnover of 4 - 6 times per year.

Cost of Sales
Average Inventory

Task 2.a
Look at the trading section of the Income Statement and calculate the Rate of Inventory
Turnover.

Income Statement - Trading Account Rate of
£ £ Inventory times

Sales Revenue 10,000 Turnover

Less Cost of Sales

Opening Inventory (Stock) 1,000

Add Purchases 10,000
11,000

Less Closing Inventory (Stock) 3,000 8,000
Gross Profit 2,000

Task 2.b
Look at the trading section of the Income Statement and calculate the Rate of Inventory
Turnover.

Income Statement - Trading Account Rate of
£ £ Inventory times
Sales Revenue 60,000 Turnover

Less Cost of Sales
Opening Inventory (Stock) 2,000

Add Purchases 20,000
22,000
Less Closing Inventory (Stock) 4,000 18,000
Gross Profit 42,000
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