Rate Of Turnover Of Inventories

Meaning Of Turnover And Rate Of Turnover

Turnover of a business can be defined as the total net sales of the business during a particular period which is usually one year. Turnover is the value of the total sales of a business organization during an accounting period. It is explained with the formula: Sales less returns inward.

Rate of turnover of inventories is the number of times a business sold it's average stock during a period. Rate of stock turnover is used to investigate on how successful a firm's output is the market. We should also note that the rate of turnover varies from one product to another. Expensive goods usually have a slow rate of turnover while perishable goods have a fast turnover rate. We will looks at some factors affecting the turnover of a firm later in this article.

Rate of turnover of inventories can be expressed with this formula:

Cost of goods sold ÷ Average stock.

Average stock = (Opening stock + Closing stock) ÷ 2

A large scale retail business had the following balance in its books of account as at 31st December, 2000.
Opening stock       8000
Purchases             85,000
Sales                     120,000
Closing stock           7000
Selling expenses  10,000

Note: N means the Nigerian Naira

You are required to solve for the following:
(a) Cost of goods sold
(b) Net profit
(c) Rate of stock turnover.

(a) Cost of goods sold = Opening stock + purchases - closing stock.
= N8000+N85000-N7000 = N86000

(b) Net profit = Gross profit - Expenses.
Gross profit = Sales - Cost of goods sold.
Gross profit = N120000-N86000 = N34000.
Net profit = N34000-N10000 = N24000.

(c) Rate of Average turnover = Cost of goods sold ÷ Average stock
Average stock = (Opening stock + Closing stock) ÷ 2
= (N8000+N7000)÷2 = N7500
Rate of stock turnover = N8600÷N7500 = 11.46 times


1. Reduction in prices of goods:
Expensive goods will have low sales while low prices products will have high sales.

2. Goodwill and reputation of the seller: When the saler of a particular product is well known for selling good products, there will be high patronage of his products which will increase turnover.

3. The nature of goods:
Products like foodstuff will have a high turnover when compared with electronics because people eat everyday and will have to buy foodstuffs everyday. But people don't buy electronics everyday. Example: I have been using my television for the past two years, but I buy foodstuffs everyday to cook and eat because I must survive.

4. Advertising, publicity and sales promotion: When goods are advertised, the rate of sales will increase and there will be awareness of that product unlike when the goods are not advertised.

5. Nearness of the business to consumers: There will be a high rate of turnover when a particular business is located close to the consumers. Most consumers prefer to buy products from a nearby shop instead of shops where they will spend money on transportation which is another cost altogether.

6. Constant availability of goods: 
A Business where there are goods available to customers on their demand will have more turnover compared to another Business where there products are always finished or not available. The business might even lose its customers to the business where there is availability of goods.

7. Credit facilities:
A business with credit facilities for customers will have a high rate of turnover more than the business without credit facilities.

8. Increase in the quantity of goods

9. The variety of goods sold by the seller: 
A seller that sells variety of goods will have a high rate of turnover.

I hope you find this article very educative. For any questions, suggest and contribution, you are free to use the comments section.

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