Table of Contents
Working Capital Turnover Ratio
Working Capital Turnover Ratio
Working Capital Turnover Ratio-
The working capital turnover ratio establishes a relationship between Revenue from Operations or Turnover and Working Capital. The working capital turnover ratio indicates the speed at which the working capital is utilized for business operations.
Key Points of working capital turnover ratio
- This ratio measures the efficiency at which the working capital is being used by a Business Enterprise.
- A higher working capital turnover ratio shows efficient use of working capital.
- A low working capital turnover ratio indicates the underutilization of working capital.
- A very high working capital turnover ratio is also dangerous, as it is a sign of overtrading.
- A very low working capital turnover ratio may be a sign of under-trading comparison to working capital.
Formula For Calculating Working Capital Turnover Ratio
Working Capital = Current Assets – Current Liabilities
Current Assets = Current Investments + Inventories (Excluding Spare Parts and Loose Tools) + Trade Receivables + Cash and Cash Equivalents +Short Term Loans and Advances + Other Current Assets.
Or
Current Assets = Total Assets- Non current Assets
Current Liabilities= Short-Term Borrowings +Trade Payables +Other Current Liabilities+ Short-term Provisions.
Or
Current Liabilities= Total Liabilities-Non Current Liabilities-Shareholders fund
Golden Rules Of Accounting MCQs with solved answers
Working Capital Turnover Ratio
1. Example-
Calculate Working capital turnover ratio:
Revenue from Operations = 48,00,000
Working Capital =8,00,000
Solution:
Working capital turnover ratio=48,00,000/8,00,000
Working capital turnover ratio= 6 Times
Working Capital Turnover Ratio
2. Example-
Calculate Working capital turnover ratio:
Revenue from Operations = 48,00,000
Current Assets =18,00,000
Current Liabilities=6,00,000
Solution:
Working Capital = Current Assets – Current Liabilities
Working Capital =18,00,000-6,00,000
Working Capital =12,00,000
Working capital turnover ratio=48,00,000/12,00,000
Working capital turnover ratio= 4 Times
Working Capital Turnover Ratio
3. Example-
Calculate Working capital turnover ratio:
Sundry debtors 4,00,000
Inventories 1,60,000
Marketable securities 80,000
Cash 1,20,000
Prepaid expenses 40,000
Bills payables 80,000
Sundry creditors 2,60,000
Debentures 2,00,000
Outstanding Expenses 60,000
“Revenue from Operations” 20,00,000
Solution:
Working Capital = Current Assets – Current Liabilities
Current Assets = Sundry debtors+Inventories +Marketable securities+Cash + Prepaid expenses
Current Assets =4,00,000+1,60,000+80,000+1,20,000+40,000
Current Assets =8,00,000
Current Liabilities= Bills payables+Sundry creditors +Outstanding Expenses
Current Liabilities=80,000+2,60,000+60,000
Current Liabilities =4,00,000
Working Capital = 8,00,000 – 4,00,000
Working Capital = 4,00,000
Working capital turnover ratio=20,00,000/4,00,000
Working capital turnover ratio= 5 Times
Working Capital Turnover Ratio
4. Example-
Calculate Working capital turnover ratio:
Total Assets= 85,00,000
Non-current Assets= 40,00,000
Non-Current Liabilities=26,00,000
Shareholders fund=24,00,000
Revenue from Operations=90,00,000
Current Assets = Total Assets- Non current Assets
Current Assets = 85,00,000 – 40,00,000
Current Assets =45,00,000
Current Liabilities= Total Liabilities-Non Current Liabilities-Shareholders fund
Current Liabilities= 85,00,000-26,00,000-24,00,000
Current Liabilities= 35,00,000
Working Capital = Current Assets – Current Liabilities
Working Capital = 45,00,000 – 35,00,000
Working Capital = 10,00,000
Working capital turnover ratio=90,00,000/10,00,000
Working capital turnover ratio= 9 Times