![]() ![]() Current Assets = Inventory + Debtors + Cash and bankĥ.As any business leader knows, one of the primary keys to success is effective asset turnover. Net Assets or Capital employed = Equity Share Capital + Preference Share Capital + General reserve + Profit + 12% Debentures + 10% Bank Loan Fixed Assets = Building + Machinery + Office furniture + Motor van Total Assets = Building + Machinery + Office furniture + Motor van + Inventory + Debtors + Cash and bank.Working Capital Turnover Ratio = Sales or Cost of Goods sold/Working Capital.Current Assets Turnover Ratio = Sales or Cost of Goods sold/Current Assets.Capital Turnover Ratio = Sales or Cost of Goods sold/Net Assets.Fixed Asset Turnover Ratio = Sales or Cost of goods sold/Fixed Assets.Total Asset Turnover Ratio = Sales or Cost of goods sold/Total Assets.Where Average daily credit purchases =Credit Purchases/360 days Solved Example For Youįrom the following information calculate Total Asset Turnover Ratio, Fixed Asset Turnover Ratio, Capital Turnover Ratio, Current Assets Turnover Ratio, and Working Capital Turnover Ratio. = 12 months or 52 weeks or 360 days/Creditors Turnover Ratio Where Average Creditors = (Opening Creditors + Closing Creditors)/2Ĭreditors or Payables Velocity: It calculates the average payment period directly.Ĭreditors or Payables Velocity = Average Creditors/Average Daily credit sales Thus,Ĭreditors or Payables Turnover Ratio = Annual net Credit Purchases/Average Creditors Creditors or Payables Turnover Ratio: It indicates the efficiency with which a firm manages its creditors or accounts payable. Where, Average daily credit sales = Credit Sales/360 daysģ. = 12 months or 52 weeks or 360 days/Debtors Turnover Ratio Where, Average Debtors = Opening Debtors + Closing Debtors/2ĭebtors or Receivables Velocity: It calculates the average collection period directly.ĭebtors or Receivables Velocity = Average Debtors/Average Daily credit sales Hence,ĭebtors or Receivables Turnover Ratio = Credit Sales/Average Debtors This ratio reflects the collection and credit policies of an entity. It realizes the number of such sales in cash on a later date. When a firm sells goods on credit it creates debtors. It indicates the efficiency with which a firm manages its debtors or accounts receivables. (ii) Raw-material Turnover Ratio = Raw-material consumed/Average Raw-material Stock 2. Where Average Inventory = Opening Stock + Closing Stock/2 (i) Inventory Turnover Ratio = Sales or Cost of Goods sold/Average Inventory A high ratio is good as it indicates more liquidity and vice versa. It is also an indicator of how fast the stock is sold or used. Thus, it is also called Stock Turnover Ratio. In other words, it indicates the efficiency with which it manages its stock. It studies the relationship between the cost of goods sold during the year and average inventory held during the year by a firm. However, we usually segregate the Working Capital Turnover into various ratios, namely: 1. Working Capital Turnover Ratio = Sales or Cost of Goods sold/Working Capital It measures the efficiency with which a firm is using its working capital. Therefore,Ĭurrent Assets Turnover Ratio = Sales or Cost of Goods sold/Current Assets It assesses the efficiency with which the entity uses its current assets. Net Current Assets = Current Assets – Current Liabilities. Net Assets or Capital employed = Net Fixed Assets + Net Current Assets Thus,Ĭapital Turnover Ratio = Sales or Cost of Goods sold/Net Assets ![]() A higher ratio indicates better utilization of long-term funds of owners and the lenders. It measures the entity’s ability to generate sales or cost of goods sold per rupee of long-term investment. Capital Turnover Ratio or Net Assets Turnover Ratio: Thus,įixed Asset Turnover Ratio = Sales or Cost of goods sold/Fixed Assets 3. A higher ratio shows the efficient utilization of fixed assets to generate sales. It indicates the efficiency with which a business utilizes its fixed assets. ![]() Total Asset Turnover Ratio = Sales or Cost of goods sold/Total Assets 2. It indicates the efficiency with which a business utilizes its total assets. Meaning, Objectives, Advantages and Limitations of Ratio Analysis.Browse more Topics under Accounting Ratios It also measures the frequency of sales with respect to capital assets, working capital or average inventory. Hence, we also call these Asset management ratios. These ratios assess the efficiency with which the business manages and uses its assets. Thus, these are also called Efficiency or Performance Ratios. The turnover or Acidity Ratios measure the efficiency of operations of a firm on the basis of effective utilization of resources. ![]()
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