The document discusses stock turnover ratio, which measures how quickly a firm's stock is sold. It defines stock turnover ratio as the number of times per year that stock is turned into sales. A higher stock turnover ratio means stock is being sold more frequently and it takes less time, on average, to turn purchases of stock into sales. The document provides an example calculation of stock turnover ratio using cost of goods sold and average stock level data from two years. It finds the example company's stock turnover ratio is 2.0, meaning stock turns over twice per year on average, and it takes 183 days on average to sell stock purchases.

1. 20.1
STOCK TURNOVER RATIO

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 It is important that stock purchased is turned into sales and
therefore cash in as shorter time as possible
20.1 STOCK TURNOVER RATIO
Supplier Business Customer
How many days does it take to
turn purchases of stock into
sales?
1. Buy stock from
suppliers (creditors)
2. Sell stock to
customers

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 We can measure how long it takes for a firm to sell its stock
with the Stock Turnover Ratio.
 This ratio tells us:
1. The number of times stock has been turned into sales during
the period
2. The average numbers of days it takes to turn purchases of
stock into sales
Supplier Business Customer
How many days does it take to turn
purchases of stock into sales?
20.1 STOCK TURNOVER RATIO

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Stock Turnover Ratio can be expressed as:
 The number of times per year stock is turned over, i.e. turned into sales
 The average number of days it takes to turn purchases of stock into sales
Stock Turnover Ratio =
Average Stock Level
Cost of Goods Sold
Stock Turnover
in Days =
Cost of Goods Sold
Average Stock x
365
OR…
Stock Turnover
in Days =
365
Stock Turnover Ratio
20.1 STOCK TURNOVER RATIO

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Example: a business had the following end-of-year data from 2014 to 2015:
 What is the Stock Turnover Ratio for 2015?
2014 2015
Cost of goods sold 40000
Balance of Stock Control 18000 22000
Stock Turnover Ratio =
Average Stock Level
Cost of Goods Sold
Stock Turnover
in Days
=
Cost of Goods Sold
Average Stock x 365
=
20000
40000
= 2.0
=
40000
20000 x 365
= 183
days
20.1 STOCK TURNOVER RATIO

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
In-class Homework
SQ5 X