Question Bank - Accountancy

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A firm has inventory turnover of 3 and cost of goods sold is Rs. 2,70,000. With better inventory management, the inventory turnover is increased to 5. This would result in

A.
Increase in inventory by Rs. 54,000
B.
Decrease in inventory by Rs. 36,000
C.
Increase in cost of goods sold by Rs. 20,000
D.
Decrease in inventory by Rs. 90,000

Solution:

Inventory Turnover Ratio = Cost Of Goods Sold / Average Inventory. ? 3 = 270000 / Average Inventory? Average Inventory = 270000/3 = Rs. 90,000. If The Inventory Turnover Ratio Is Increased To 5 then,5 = 270000 / Average Inventory? Average Inventory =270000/5 = Rs. 54,000. ? Increase in inventory turnover ratio = Rs 90,000 - Rs. 54,000 = Rs. 36,000Therefore, by increase in inventory turnover ratio, average inventory of the firm will decrease by Rs. 36,000.

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