The average age of inventory is viewed as the average length of time inventory is held by the firm or as the average number of days’ sales in inventory. Why?
Inventory Turnover Ratio: This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period. It is expressed in number of times. Stock turnover ratio/inventory turnover ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm isable to manage its inventory. The formula for calculating inventory turnover ratio is as follows:
Inventory Turnover Ratio = Cost of goods sold
Average Inventory at Cost
Cost of goods sold = Opening Stock + Purchase + Direct Expenses - Closing Stock
Alternatively cost of goods sold = Net Sales - Gross Profit
Average Inventory = Opening Stock + Closing Stock
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From the above formula, it is clear that this ratio reveals the average length of
time for which the inventory is held by the firm.
How will you disclose the following items in the Balance Sheet of a company;
(i) Loose tools
(ii) Uncalled liability on partly paid-up shares
(iii) Debentures redemption reserve
(iv) Mastheads and publishing titles (v) 10% debentures
(vi) Proposed dividend
(vii) Share forfeited account
(viii) Capital redemtion reserve
(ix) Mining rights
(x) Work-in-progress
The current ratio provides a better measure of overall liquidity only when a
firm’s inventory cannot easily be converted into cash. If inventory is liquid, the
quick ratio is a preferred measure of overall liquidity. Explain.
Explain the usefulness of trend percentages in interpretation of financial performance of a company.
The liquidity of a business firm is measured by its ability to satisfy itslong-
term obligations as they become due. What are the ratios used forthis purpose?
What relationships will be established to study?
(a) Inventory Turnover (b) Debtor Turnover
(c) Payables Turnover (d) Working Capital Turnover
What do you understand by analysis and interpretation of financial statements? Discuss its importance.
State the importance of financial statements to
(i) shareholders
(ii) creditors
(iii) government
(iv) investors
What are liquidity ratios? Discuss the importance of current and liquid ratio.
What is the importance of comparative statements? Illustrate youranswer with particular reference to comparative income statement.
What do you mean by Ratio Analysis?
The liquidity of a business firm is measured by its ability to satisfy itslong-
term obligations as they become due. What are the ratios used forthis purpose?
How will you disclose the following items in the Balance Sheet of a company;
(i) Loose tools
(ii) Uncalled liability on partly paid-up shares
(iii) Debentures redemption reserve
(iv) Mastheads and publishing titles (v) 10% debentures
(vi) Proposed dividend
(vii) Share forfeited account
(viii) Capital redemtion reserve
(ix) Mining rights
(x) Work-in-progress
Describe the different techniques of financial analysis and explain the limitations of financial analysis.
The current ratio provides a better measure of overall liquidity only when a
firm’s inventory cannot easily be converted into cash. If inventory is liquid, the
quick ratio is a preferred measure of overall liquidity. Explain.
State the importance of Financial Analysis?
State the importance of financial statements to
(i) shareholders
(ii) creditors
(iii) government
(iv) investors
Explain how common size statements are prepared giving an example.
What relationships will be established to study?
(a) Inventory Turnover (b) Debtor Turnover
(c) Payables Turnover (d) Working Capital Turnover
State the meaning of financial statement analysis?
What are various types of ratios?