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Cornerstones of Financial Accounti...
Solutions
Cornerstones of Financial Accounti...
What do the gross profit and inventory turnover ratios tell company management about inventory?
Concept introduction:
Gross Profit ratio:
Gross profit ratio is calculated by dividing the gross profit by sales. The formula to calculate the gross profit ration is as follows:
Inventory Turnover Ratio:
Inventory Turnover Ratio measures the efficiency of the company in converting its inventory into sales. It is calculated by dividing the Cost of goods sold by Average inventory. The formula of the Inventory Turnover Ratio is as follows:
Note: Average inventory is calculated with the help of following formula:
To indicate:
The meaning of Gross Profit and inventory turnover ratio.
Gross Profit ratio:
Gross profit ratio is calculated by dividing the gross profit by sales. The formula to calculate the gross profit ration is as follows:
Inventory Turnover Ratio:
Inventory Turnover Ratio measures the efficiency of the company in converting its inventory into sales. It is calculated by dividing the Cost of goods sold by Average inventory
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