Financial Management and Business Data Analytics · Financial Ratio Analysis

Activity and Turnover Ratios for CMA Intermediate

Updated 10 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 inventory, debtors or creditors. Divide 365 days by the turnover to get the holding, collection or payment period. Pick the correct numerator and denominator first.

Understand Activity and Turnover Ratios

Activity ratios measure how fast a business converts its assets and liabilities into sales, cash or payments. A higher turnover generally means the same asset supports more sales. That is why these ratios are called efficiency ratios.

Every turnover ratio has the same shape: a flow divided by a stock. The flow comes from the Statement of Profit and Loss (sales or cost of goods sold). The stock comes from the Balance Sheet (inventory, debtors, creditors, assets). The stock is usually taken as an average of opening and closing balances, because the flow happens over a whole year.

Match the flow to the stock. Inventory is held at cost, so use cost of goods sold. Debtors are recorded at the selling price on credit, so use credit sales. Creditors arise from credit purchases, so use credit purchases. Fixed assets and total assets support sales, so use net sales.

A turnover can be turned into days. Divide 365 (or the number of days the question gives) by the turnover. This gives the inventory holding period, debtors collection period and creditors payment period. Combining them gives the operating cycle: inventory days plus debtors days is the time from buying stock to collecting cash. Subtracting creditors days gives the cash conversion cycle.

Interpretation matters. A high inventory turnover can mean good stock control, or it can mean stock-outs. A long collection period can mean weak credit control. A long payment period helps cash but may harm supplier relations. Always compare with the industry or the earlier year.

Key rules to remember

Inventory turnover ratio: Cost of goods sold ÷ Average inventory; Average inventory = (Opening + Closing) ÷ 2. If cost of goods sold is not given, some questions use sales; follow the question's data and state your basis.
Inventory holding period: 365 ÷ Inventory turnover ratio, or Average inventory ÷ COGS × 365; Answer in days.
Debtors turnover ratio: Net credit sales ÷ Average trade receivables; Include bills receivable with debtors. Use total sales only if credit sales are not separately given.
Average collection period: 365 ÷ Debtors turnover ratio, or Average debtors ÷ Credit sales × 365; Compare with the credit period allowed to customers.
Creditors turnover ratio: Net credit purchases ÷ Average trade payables; Include bills payable with creditors.
Average payment period: 365 ÷ Creditors turnover ratio, or Average creditors ÷ Credit purchases × 365; Purchases = COGS + Closing inventory − Opening inventory, when not given.
Fixed asset turnover ratio: Net sales ÷ Average net fixed assets; Net fixed assets means after depreciation.
Total asset turnover ratio: Net sales ÷ Average total assets; Use the same basis, average or closing, for all assets.
Working capital turnover ratio: Net sales ÷ Net working capital; Net working capital = Current assets − Current liabilities.
Operating cycle and cash conversion cycle: Operating cycle = Inventory days + Debtors days; Cash conversion cycle = Operating cycle − Creditors days; Add other conversion stages only if the question's cycle includes them.

How to solve Activity and Turnover Ratios questions

Use this order for any turnover or cycle question. It keeps the numerator and denominator matched and avoids rework.

1Write the required ratio and its formula before touching the numbers.
2Pick the flow: COGS for inventory, credit sales for debtors, credit purchases for creditors, net sales for asset and working capital ratios.
3Find any missing flow, for example purchases = COGS + closing inventory − opening inventory, or credit sales = total sales − cash sales.
4Compute the average balance as (opening + closing) ÷ 2. If only one balance is given, use it and say so.
5Calculate the ratio, then convert to days using 365 (or the days stated in the question).
6Combine the days into the operating cycle and cash conversion cycle if asked.
7Write one line of interpretation: better or worse, and the likely reason.
8 Show each working clearly so step marks are secured even if the final figure slips.

Quickest way: Days-first shortcut

When to use it: Use this when a question asks directly for days or the cycle and gives balances plus a flow.

Compute days directly: average balance ÷ flow × 365.
Do inventory days, debtors days and creditors days in one line each.
Operating cycle = inventory days + debtors days; subtract creditors days for the cash conversion cycle.
Cross-check: higher turnover must give fewer days.
Round only at the end, to one or two decimals.

Common mistakes in Activity and Turnover Ratios

Using total sales for debtors turnover when credit sales are given.
Students grab the first sales figure they see.
Fix: Read the data for cash sales or credit sales, and use credit sales for debtors.
Using sales instead of cost of goods sold for inventory turnover.
Sales is the most familiar figure.
Fix: Inventory is at cost, so use COGS. Use sales only if COGS cannot be found, and state it.
Using the closing balance when opening is also given.
It saves time.
Fix: Take the average of opening and closing whenever both are available.
Using sales for the creditors ratio instead of credit purchases.
Purchases are not given directly, so students skip them.
Fix: Derive purchases = COGS + closing inventory − opening inventory, then adjust for cash purchases if stated.
Deducting creditors days when computing the operating cycle.
Mixing up operating cycle and cash conversion cycle.
Fix: Operating cycle excludes creditors days. Deduct them only for the cash conversion cycle.
Writing days without interpretation.
Students stop after the calculation.
Fix: Add a line comparing with the credit terms, industry or previous year, and give the likely reason.

Worked examples

Example 1

Gaurav Traders has the following data for the year: Net sales ₹12,00,000 (all on credit); Cost of goods sold ₹8,40,000; Opening inventory ₹90,000; Closing inventory ₹1,20,000; Opening debtors ₹1,00,000; Closing debtors ₹1,40,000. Compute the inventory turnover ratio, inventory holding period, debtors turnover ratio and average collection period. Use 365 days.

Show the solution

Average inventory = (90,000 + 1,20,000) ÷ 2 = ₹1,05,000.
Inventory turnover = 8,40,000 ÷ 1,05,000 = 8 times.
Inventory holding period = 365 ÷ 8 = 45.625 days, about 45.6 days.
Average debtors = (1,00,000 + 1,40,000) ÷ 2 = ₹1,20,000.
Debtors turnover = 12,00,000 ÷ 1,20,000 = 10 times.
Average collection period = 365 ÷ 10 = 36.5 days.

Answer: Inventory turnover 8 times (about 45.6 days); debtors turnover 10 times (36.5 days). Stock is held for about 45.6 days and customers pay in about 36.5 days.

Example 2

Meera Industries provides: Cost of goods sold ₹6,00,000; Opening inventory ₹50,000; Closing inventory ₹70,000; Credit sales ₹9,00,000; Average debtors ₹1,00,000; Average creditors ₹80,000; Net sales ₹9,00,000; Current assets ₹3,00,000; Current liabilities ₹1,00,000. All purchases are on credit. Compute the creditors payment period, the cash conversion cycle and the working capital turnover ratio. Use 360 days.

Show the solution

Purchases = COGS + Closing inventory − Opening inventory = 6,00,000 + 70,000 − 50,000 = ₹6,20,000.
Creditors payment period = 80,000 ÷ 6,20,000 × 360 = 46.45 days.
Average inventory = (50,000 + 70,000) ÷ 2 = ₹60,000.
Inventory days = 60,000 ÷ 6,00,000 × 360 = 36 days.
Debtors days = 1,00,000 ÷ 9,00,000 × 360 = 40 days.
Operating cycle = 36 + 40 = 76 days.
Cash conversion cycle = 76 − 46.45 = 29.55 days.
Net working capital = 3,00,000 − 1,00,000 = ₹2,00,000.
Working capital turnover = 9,00,000 ÷ 2,00,000 = 4.5 times.

Answer: Payment period about 46.45 days; cash conversion cycle about 29.55 days; working capital turnover 4.5 times. Cash is tied up for about 30 days after suppliers are paid.

Exam tips

Read the data for cash and credit split before choosing the sales figure. Examiners often hide this in a note.
Check whether the question says 360 or 365 days, and use the same figure throughout.
If purchases are missing, derive them from COGS and inventory change. This is a favourite twist.
In MCQs, check whether the answer is asked in times or in days. Wrong units are a common trap.
In written answers, show formula, working, result and a one-line comment. Each earns step marks.

Practice questions from Financial Ratio Analysis

Activity and 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 and Turnover Ratios: frequently asked questions

How do I calculate the debtors collection period?

Divide average trade receivables by net credit sales and multiply by 365 (or 360 if stated). You can also divide 365 by the debtors turnover ratio. Compare the result with the credit period you allow.

What is the creditors payment period formula?

Average creditors ÷ Credit purchases × 365. Credit purchases are often derived as COGS plus closing inventory minus opening inventory. Include bills payable with creditors.

Should I use average or closing balances?

Use the average of opening and closing balances when both are given. If only the closing balance is given, use it and state this assumption in your answer.

What is the working capital turnover ratio?

It is net sales divided by net working capital, where net working capital is current assets minus current liabilities. It shows how many times working capital is used to generate sales in a year.