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CA Final · Financial Reporting · Analysis of Financial Statements

Kaveri Textiles Ltd reports: Sales Rs 12,00,000; Cost of goods sold Rs 7,20,000; Operating expenses Rs 2,40,000. Average inventory is Rs 1,20,000. What is the inventory turnover ratio and the gross profit margin?

Inventory turnover is 6 times and gross margin is 40%. Turnover is cost of goods sold divided by average inventory, 7,20,000 over 1,20,000. Gross profit is sales less cost of goods sold, 4,80,000, which is 40% of sales of 12,00,000.

  1. A6 times and 40%Correct
  2. B10 times and 40%
  3. C6 times and 20%
  4. D10 times and 60%

Explanation

Inventory turnover = COGS / average inventory = 7,20,000 / 1,20,000 = 6 times. Gross profit = 12,00,000 - 7,20,000 = 4,80,000, which is 40% of sales. The option showing 10 times uses sales instead of COGS as the numerator (12,00,000/1,20,000), and 20% uses operating profit (2,40,000) rather than gross profit.

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