Calculating Cost of Goods Sold with Inventory Turnover Ratio and Average Stock at Cost

Inventory Turnover Ratio
Inventory turnover ratio is a financial metric used to evaluate how efficiently a company manages its inventory. It is calculated as the cost of goods sold divided by the average inventory value.

Given Information
Inventory Turnover Ratio = 5 times
Average Stock at Cost = Rs 75000

Calculating Cost of Goods Sold
To calculate the cost of goods sold, we can use the formula:
Cost of Goods Sold = Average Inventory Value / Inventory Turnover Ratio

Substituting the given values, we get:
Cost of Goods Sold = Rs 75000 / 5
Cost of Goods Sold = Rs 15000

Therefore, the cost of goods sold is Rs 15000.

Explanation
Inventory turnover ratio is a key metric used by businesses to evaluate their inventory management efficiency. A high inventory turnover ratio indicates that the company is selling its inventory quickly, which translates to higher profits and better cash flow. On the other hand, a low inventory turnover ratio implies that the company is not selling its inventory quickly enough, which can lead to losses and cash flow problems.

The cost of goods sold is a crucial component of a company's income statement. It represents the cost of producing or acquiring the goods that were sold during a particular period. By knowing the cost of goods sold, businesses can calculate their gross profit margin, which is the difference between sales revenue and the cost of goods sold.

In this question, we were given the inventory turnover ratio and the average stock at cost. Using these values, we were able to calculate the cost of goods sold. By knowing the cost of goods sold, businesses can make informed decisions about pricing, inventory management, and profitability.