Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

Activity or Turnover Ratios for CA Inter Financial Management

Updated 4 October 2026 · Fact-checked

Activity or turnover ratios show how efficiently a business uses its assets and credit. Each divides sales or cost of goods sold by an average balance, such as stock, debtors or creditors. Divide 365 (or 360) by the turnover to get the period in days. Higher turnover usually means better efficiency.

Understand Activity or Turnover Ratios

Activity ratios (also called turnover ratios or efficiency ratios) measure how fast a firm converts its assets and liabilities into sales or cash. The idea is simple. If a firm uses ₹1 of stock or debtors to generate more sales, it is using money well.

Every turnover ratio has the same shape: a flow figure (sales or cost of goods sold) divided by a stock figure (inventory, debtors, creditors, assets). The flow comes from the profit and loss account. The stock comes from the balance sheet. That is why you should use the average balance when opening and closing figures are given.

Each ratio also has a days version. Inventory holding period, average collection period and average payment period tell you how many days money is locked in stock, in debtors, or how long you take to pay suppliers. Shorter holding and collection periods are good. A longer payment period gives free credit, but too long can hurt supplier relations.

Match the numerator to the denominator. Debtors come from credit sales, so use credit sales. Stock is carried at cost, so use cost of goods sold. Creditors arise from credit purchases, so use credit purchases. Fixed assets and total assets generate sales, so use sales.

Read the result in context. A very high stock turnover may mean stock-outs. A very low one may mean slow-moving or obsolete stock. Always compare with past years or industry norms.

Key rules to remember

Inventory (stock) turnover ratio: Cost of goods sold ÷ Average inventory; Average inventory = (Opening + Closing) ÷ 2. If cost of goods sold is not given, sales may be used only when the question says so.
Inventory holding period: Days in year ÷ Inventory turnover ratio; Use 365 days unless the question says 360 or another figure.
Debtors turnover ratio: Credit sales ÷ Average trade debtors (including bills receivable); If credit sales are not given, use total sales and state your assumption.
Average collection period: Days in year ÷ Debtors turnover ratio, or (Average debtors ÷ Credit sales) × Days; Compare it with the credit period allowed to customers.
Creditors turnover ratio: Credit purchases ÷ Average trade creditors (including bills payable); Credit purchases = Cost of goods sold + Closing stock − Opening stock, less cash purchases, if not given.
Average payment period: Days in year ÷ Creditors turnover ratio, or (Average creditors ÷ Credit purchases) × Days; A longer period means more supplier credit.
Fixed asset turnover ratio: Sales ÷ Average net fixed assets; Use net block, that is, after depreciation, unless told otherwise.
Total asset turnover ratio: Sales ÷ Average total assets; Shows sales generated per rupee of total assets.
Working capital turnover ratio: Sales ÷ Net working capital; Net working capital = Current assets − Current liabilities. Use average if given.

How to solve Activity or Turnover Ratios questions

Use this order for any turnover ratio question so that you pick the right figures and earn step marks.

1Read which ratio is asked and write its formula first.
2Pick the numerator: credit sales for debtors, cost of goods sold for stock, credit purchases for creditors, sales for assets and working capital.
3Find the denominator. Take the average of opening and closing balances if both are given. Otherwise use the closing balance and say so.
4Derive any missing figure, such as cost of goods sold from sales and gross profit, or purchases from stock movement.
5Calculate the turnover ratio, then convert to days by dividing the days in the year by the ratio.
6Round sensibly (two decimals for ratios, whole days) and show the unit: times or days.
7Add one line of interpretation comparing with the credit terms, a previous year or the industry.

Quickest way: Fast route for turnover ratio problems

When to use it: Use this for MCQs and for short parts of a written ratio question when time is tight.

Memorise the pairing: stock with cost of goods sold, debtors with credit sales, creditors with credit purchases.
For days, go straight to (Balance ÷ Flow) × 365. It saves one step.
In MCQs, check whether options differ by using average versus closing balance. Check what the question gave.
If gross profit margin is given, get cost of goods sold as Sales × (1 − margin) before anything else.
In written answers, show formula, substitution and result on separate lines, then one line of comment. This earns step marks even if a number slips.

Common mistakes in Activity or Turnover Ratios

Using total sales for debtors turnover when credit sales are given.
Students grab the first sales figure they see.
Fix: Underline 'credit' in the question. Use credit sales for debtors and credit purchases for creditors.
Dividing sales by inventory instead of cost of goods sold.
Sales is the most familiar figure.
Fix: Stock is valued at cost, so match it with cost of goods sold unless the question tells you to use sales.
Ignoring opening balances and using only the closing balance.
Students rush and skip the average step.
Fix: If both opening and closing are given, always average them.
Mixing 360 and 365 days.
Students use the habit of one year length for every question.
Fix: Use the number of days the question states. If none is stated, use 365 and mention it.
Forgetting to convert the ratio into days or reading days the wrong way.
Students stop at the turnover figure.
Fix: Check whether the question asks for times or days. A shorter collection period is good, a longer one is bad.
Leaving out bills receivable or bills payable.
Only the debtors and creditors lines are picked up.
Fix: Include bills receivable with debtors and bills payable with creditors, unless the question says otherwise.

Worked examples

Example 1

A firm has sales of ₹12,00,000 and a gross profit margin of 25% on sales. Opening stock is ₹90,000 and closing stock is ₹1,10,000. Calculate the inventory turnover ratio and the inventory holding period (365 days).

Show the solution

Gross profit = 25% of ₹12,00,000 = ₹3,00,000.
Cost of goods sold = ₹12,00,000 − ₹3,00,000 = ₹9,00,000.
Average inventory = (₹90,000 + ₹1,10,000) ÷ 2 = ₹1,00,000.
Inventory turnover = ₹9,00,000 ÷ ₹1,00,000 = 9 times.
Holding period = 365 ÷ 9 = 40.56 days, about 41 days.

Answer: Inventory turnover is 9 times and the holding period is about 41 days.

Example 2

A company reports the following for the year: credit sales ₹18,00,000; credit purchases ₹10,95,000; opening debtors ₹2,00,000; closing debtors ₹2,50,000; opening creditors ₹1,20,000; closing creditors ₹1,80,000. Find the debtors turnover, average collection period, creditors turnover and average payment period (365 days).

Show the solution

Average debtors = (₹2,00,000 + ₹2,50,000) ÷ 2 = ₹2,25,000.
Debtors turnover = ₹18,00,000 ÷ ₹2,25,000 = 8 times.
Average collection period = 365 ÷ 8 = 45.63 days, about 46 days.
Average creditors = (₹1,20,000 + ₹1,80,000) ÷ 2 = ₹1,50,000.
Creditors turnover = ₹10,95,000 ÷ ₹1,50,000 = 7.3 times.
Average payment period = 365 ÷ 7.3 = 50 days.
Interpretation: the firm pays suppliers in 50 days but collects from customers in about 46 days, so supplier credit funds its receivables.

Answer: Debtors turnover 8 times; collection period about 46 days; creditors turnover 7.3 times; payment period 50 days.

Exam tips

Read the question for the words 'credit', 'average' and the number of days before you touch a calculator.
State assumptions in one line, such as 'all sales are credit sales', when the data is missing. ICAI gives credit for a clear assumption.
Always add a short interpretation when the question says 'comment' or 'analyse'. Mention good, bad and a reason.
In MCQs, watch for options that come from using closing balance instead of average, or 360 instead of 365.
Practise linking these ratios with the operating cycle. The holding period plus collection period less payment period gives the cash conversion cycle.

Practice questions from Financial Analysis and Planning - Ratio Analysis

Activity or Turnover Ratios in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Activity or Turnover Ratios: frequently asked questions

What is the difference between debtors turnover and average collection period?

Debtors turnover tells you how many times debtors are collected in a year. Average collection period converts that into days by dividing the days in the year by the turnover. Both measure the same speed in different units.

Should I use 360 or 365 days?

Use the number given in the question. If nothing is stated, use 365 days and write that assumption in your answer.

Which sales figure do I use if credit sales are not given?

Use total sales and state that you assume all sales are on credit. Do this only when credit sales are truly missing.

Is a high inventory turnover always good?

Not always. A high figure shows quick movement of stock, but it may also mean stock-outs and lost sales. Judge it against the industry and past years.