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

A firm's cost of goods sold is Rs 24,00,000, opening inventory Rs 3,00,000 and closing inventory Rs 5,00,000. Taking 360 days in a year, what is the inventory holding period?

The inventory holding period is 60 days. Average inventory is Rs 4,00,000, so turnover on cost of goods sold of Rs 24,00,000 is 6 times, and 360 divided by 6 gives 60 days. Using closing inventory instead of the average would wrongly give 75 days.

  1. A60 daysCorrect
  2. B75 days
  3. C50 days
  4. D120 days

Explanation

Average inventory = (3,00,000 + 5,00,000)/2 = 4,00,000. Inventory turnover = 24,00,000/4,00,000 = 6 times. Holding period = 360/6 = 60 days. 75 days would arise from using closing inventory of 5,00,000 as the base (turnover 4.8 times).

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