ABC Ltd has an average inventory of Rs. 20,000 at cost. If the Inventory Turnover Ratio is 8 times and the firm sells goods at a gross profit of 20% on sales. Calculate the gross profit of ABC Ltd.
Answer & explanation
Correct answer: option 3
Correct answer: Option (3) → Rs.40,000
Concept: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory; Gross Profit = Gross Profit Rate × Sales – per Accounting Ratios.
Cost of Goods Sold = ITR × Average Inventory = 8 × 20,000 = Rs 1,60,000.
Gross profit is 20% on sales, so COGS = 80% of sales → Sales = 1,60,000 / 0.80 = Rs 2,00,000.
Gross Profit = 20% × 2,00,000 = Rs 40,000.