Question

From the following information, calculate opening and closing inventory: 
Gross Profit Ratio - 25% 
Revenue from operations - Rs 8,00,000 
Inventory turnover ratio - 4 times 
Opening inventory was 2 times of the closing inventory. 

Hint:

Steps for ITR problems: 1. Find Cost of Revenue from Operations (COGS) = Revenue - Gross Profit. 2. Find Average Inventory = COGS / ITR. 3. Use the relationship between Opening and Closing Inventory and Average Inventory formula: Avg Inv = (Opening Inv + Closing Inv) / 2.

Answer 1

This outlines the calculation for opening and closing inventory:

1. Calculate Cost of Revenue (COGS):
- Gross Profit = Revenue from Operations * Gross Profit Ratio
- Gross Profit = Rs. 8,00,000 * 25% = Rs. 2,00,000
- Cost of Revenue (COGS) = Revenue from Operations - Gross Profit
- COGS = Rs. 8,00,000 - Rs. 2,00,000 = Rs. 6,00,000

2. Calculate Average Inventory:
- Inventory Turnover Ratio = Cost of Revenue / Average Inventory
- 4 = Rs. 6,00,000 / Average Inventory
- Average Inventory = Rs. 6,00,000 / 4 = Rs. 1,50,000

3. Establish Equations for Opening and Closing Inventory:
Let:
- Closing Inventory = X
- Opening Inventory = 2X (Given: Opening inventory is double the closing inventory)

Equation:
- Average Inventory = (Opening Inventory + Closing Inventory)/2

Substitution:
Rs. 1,50,000 = (2X + X)/2
Rs. 1,50,000 = 3X/2
3X = Rs. 1,50,000 * 2
X = Rs. 3,00,000 / 3
X = Rs. 1,00,000

4. Determine Opening and Closing Inventory:
- Closing Inventory (X) = Rs. 1,00,000
- Opening Inventory (2X) = 2 * Rs. 1,00,000 = Rs. 2,00,000

Result:
- Opening Inventory: Rs. 2,00,000
- Closing Inventory: Rs. 1,00,000