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**