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

Verma Ltd has sales of Rs 24,00,000, a gross profit margin of 25%, and average inventory of Rs 3,00,000. Its inventory holding period, taking 360 days in a year and inventory turnover on cost of goods sold, is:

The inventory holding period is 60 days. Cost of goods sold is Rs 18,00,000 after deducting 25% gross profit from sales of Rs 24,00,000. Dividing by average inventory of Rs 3,00,000 gives six turns a year, and 360 divided by 6 equals 60 days.

  1. A45 days
  2. B60 daysCorrect
  3. C90 days
  4. D120 days

Explanation

Gross profit = 25% of 24,00,000 = 6,00,000, so COGS = 18,00,000. Inventory turnover = 18,00,000/3,00,000 = 6 times. Holding period = 360/6 = 60 days. Using sales instead of COGS gives turnover 8 and 45 days, which is wrong.

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