AccountancyCBSE Class 12 · Accounting Ratios

Activity (Turnover) Ratios Class 12: Formulas, Working Back and Solved Questions

Updated 15 October 2026 · Fact-checked

Activity or turnover ratios show how efficiently a firm uses its resources. Inventory turnover = cost of revenue from operations ÷ average inventory; trade receivables turnover = credit revenue ÷ average trade receivables; trade payables turnover = net credit purchases ÷ average trade payables; fixed asset, net asset and working capital turnover divide revenue from operations by those bases.

Understand Activity (Turnover) Ratios

Idea. Activity ratios measure speed: how many times in a year an asset is converted into sales (or a liability is paid). They are expressed in times.

1. Inventory Turnover Ratio = Cost of Revenue from Operations ÷ Average Inventory.

Cost of revenue from operations (COGS) = Opening inventory + Net purchases + Direct expenses − Closing inventory, or Revenue from operations − Gross profit.
Average inventory = (Opening + Closing) ÷ 2. Inventory is at cost, so the numerator is at cost too.
If gross profit is given 'on cost' (say 25%), COGS = Revenue × 100/125; 'on revenue' (say 20%), COGS = Revenue × 80%.

2. Trade Receivables Turnover Ratio = Net Credit Revenue from Operations ÷ Average Trade Receivables.

Trade receivables = debtors + bills receivable (before deducting provision, as NCERT does).
Average collection period = 12 months (or 365 days) ÷ ratio.

3. Trade Payables Turnover Ratio = Net Credit Purchases ÷ Average Trade Payables.

Trade payables = creditors + bills payable. Average payment period = 12 months ÷ ratio.

4. Fixed Asset Turnover Ratio = Revenue from Operations ÷ Net Fixed Assets.

5. Net Asset (Capital Employed) Turnover Ratio = Revenue from Operations ÷ Capital Employed (non-current assets + working capital, or shareholders' funds + non-current liabilities).

6. Working Capital Turnover Ratio = Revenue from Operations ÷ Working Capital.

Reading them. A higher inventory turnover usually means faster-moving stock and lower holding cost, but an extreme value may mean stock-outs. A higher receivables turnover means quicker collection; a higher payables turnover means quicker payment to suppliers (less credit used). Turnover of fixed assets, net assets and working capital shows how hard each rupee invested is working.

Activity (Turnover) Ratios: key facts

Inventory turnover: Cost of revenue from operations ÷ Average inventory; Average = (opening + closing) ÷ 2.
Cost of revenue from operations: Opening inventory + Net purchases + Direct expenses − Closing inventory = Revenue from operations − Gross profit
Trade receivables turnover: Net credit revenue from operations ÷ Average trade receivables; Collection period = 12 months ÷ ratio.
Trade payables turnover: Net credit purchases ÷ Average trade payables; Payment period = 12 months ÷ ratio.
Fixed asset turnover: Revenue from operations ÷ Net fixed assets
Net asset turnover: Revenue from operations ÷ Capital employed
Working capital turnover: Revenue from operations ÷ Working capital

How to answer Activity (Turnover) Ratios questions

Activity ratios need the right numerator (cost or revenue, credit or total) and an average denominator.

1Decide the numerator: COGS for inventory; credit revenue for receivables; credit purchases for payables; revenue from operations for the rest.
2Convert gross profit to COGS carefully ('on cost' or 'on revenue').
3Average the opening and closing balances; include bills with debtors and creditors.
4Divide and express in times, rounded to two decimals.
5Convert to days or months if asked: 365 ÷ ratio or 12 ÷ ratio.
6For missing figures, reverse the formula and use the given relationship between opening and closing.

Activity (Turnover) Ratios in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Inventory turnover as speed of stock

Suppose a grocery store has cost of goods sold of ₹12,00,000 a year and keeps average stock of ₹1,00,000. A rival store of similar size turns its stock only 6 times a year.

Compute the first store's inventory turnover and how long its stock sits on the shelf, compared with the rival.

Try it first, then show the solutionSolution

Inventory turnover = 12,00,000 ÷ 1,00,000 = 12 times.
Stock is held for 12 months ÷ 12 = 1 month.
Rival: 12 ÷ 6 = 2 months.

Answer: The first store turns its stock 12 times a year, so items sit about one month against two months at the rival: fresher stock, less money locked up and lower spoilage.

Memory hook: Turnover counts laps; more laps, less waiting.

Tricks to remember Activity (Turnover) Ratios

Short memory aids. Say each one aloud once, then use it on a question the same day.

Cost for inventory, revenue for the rest
Inventory is at cost, so use COGS; every other turnover ratio uses revenue from operations (credit revenue for receivables).
Use it when: Choosing the numerator.
125 on cost, 80 on revenue
GP 25% on cost → COGS = revenue × 100/125; GP 20% on revenue → COGS = revenue × 80/100.
Use it when: Converting gross profit.
12 over ratio
Period in months = 12 ÷ turnover; in days = 365 ÷ turnover.
Use it when: Collection and payment periods.

Activity (Turnover) Ratios: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Inventory turnover · 1 mark · MCQBoard level

Cost of revenue from operations is ₹3,00,000; opening inventory ₹40,000; closing inventory ₹60,000. The inventory turnover ratio is:
(a) 5 times
(b) 6 times
(c) 7.5 times
(d) 3 times

Try it first, then show the solutionSolution

Average inventory = 50,000.
3,00,000 ÷ 50,000 = 6 times.

Answer: (b) 6 times

Example 2: Receivables turnover and collection period · 3 marks · Short answerBoard level

Credit revenue from operations ₹6,00,000. Debtors: opening ₹80,000, closing ₹1,00,000. Bills receivable: opening ₹10,000, closing ₹10,000. Calculate the trade receivables turnover ratio and the average collection period in months. (3 marks)

Try it first, then show the solutionSolution

Trade receivables: opening 90,000, closing 1,10,000; average 1,00,000.
Turnover = 6,00,000 ÷ 1,00,000 = 6 times.
Collection period = 12 ÷ 6 = 2 months.

Answer: 6 times; average collection period 2 months.

Example 3: Gross profit on cost and opening inventory · 4 marks · Short answerHarder board level

Revenue from operations ₹8,00,000; gross profit 25% on cost; inventory turnover ratio 8 times. Closing inventory was ₹20,000 more than opening inventory. Find opening and closing inventory. (4 marks)

Try it first, then show the solutionSolution

COGS = 8,00,000 × 100/125 = ₹6,40,000.
Average inventory = 6,40,000 ÷ 8 = ₹80,000.
Opening + closing = 1,60,000 and closing − opening = 20,000: opening ₹70,000, closing ₹90,000.

Answer: Opening inventory ₹70,000; closing inventory ₹90,000.

Example 4: Three revenue-based turnovers · 3 marks · Short answerHarder board level

Revenue from operations ₹12,00,000; current assets ₹5,00,000; current liabilities ₹2,00,000; net fixed assets ₹6,00,000. Calculate working capital turnover, fixed asset turnover and net asset turnover (capital employed = net fixed assets + working capital). (3 marks)

Try it first, then show the solutionSolution

Working capital = 3,00,000; WC turnover = 4 times.
Fixed asset turnover = 12,00,000 ÷ 6,00,000 = 2 times.
Capital employed = 9,00,000; net asset turnover = 1.33 times.

Answer: Working capital turnover 4 times; fixed asset turnover 2 times; net asset turnover 1.33 times.

Example 5: Gross profit on revenue, working back · 4 marks · Short answerHOTS / competency

Inventory turnover ratio is 4 times; revenue from operations ₹6,00,000; gross profit 20% of revenue from operations. Closing inventory was ₹40,000 more than opening inventory. Calculate opening and closing inventory. (4 marks)

Try it first, then show the solutionSolution

COGS = 6,00,000 × 80% = ₹4,80,000.
Average inventory = 4,80,000 ÷ 4 = ₹1,20,000; total = 2,40,000.
Opening = (2,40,000 − 40,000) ÷ 2 = ₹1,00,000; closing = ₹1,40,000.

Answer: Opening inventory ₹1,00,000; closing inventory ₹1,40,000.

Example 6: Is higher always better? · 1 mark · Assertion-reasonHOTS / competency

Assertion (A): A higher inventory turnover ratio always indicates better inventory management.
Reason (R): A higher inventory turnover ratio indicates that inventory is sold quickly.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Try it first, then show the solutionSolution

Fast sales are good, but a very high ratio can mean stock is too low and sales are lost to stock-outs; 'always' makes A false.

Answer: (d) A is false, but R is true.

Where students lose marks in Activity (Turnover) Ratios

The slips examiners see most often, and what to write instead.

Mistake: Using revenue instead of cost in inventory turnover
Revenue is easier to find.
Wrong working
8,00,000 ÷ 80,000 = 10 times.
Right working
COGS 6,40,000 ÷ 80,000 = 8 times.
Do this: Inventory is at cost; use cost of revenue from operations.
Usually costs: 1-2 marks.
Mistake: Treating GP on cost as GP on revenue
Not reading 'on cost'.
Wrong working
COGS = 8,00,000 × 75% = 6,00,000.
Right working
COGS = 8,00,000 × 100/125 = 6,40,000.
Do this: On cost: divide by (100 + rate).
Usually costs: 1-2 marks.
Mistake: Ignoring bills receivable or bills payable
Using only debtors or creditors.
Wrong working
Average debtors only = 90,000.
Right working
Average trade receivables (debtors + B/R) = 1,00,000.
Do this: Trade receivables and trade payables include bills.
Usually costs: 1 mark.
Mistake: Using total revenue for receivables turnover
Not separating cash revenue.
Wrong working
Total revenue ÷ average receivables.
Right working
Credit revenue ÷ average receivables.
Do this: Only credit revenue creates receivables.
Usually costs: 1 mark.

Exam tips

Write each formula in words before substituting.
Give the answer with 'times', and the period with 'months' or 'days'.
If only closing balances are given, use them instead of averages and say so.
Activity ratios appear in 1-mark MCQs and 4-mark ratio questions almost every year.

Practice questions on Activity (Turnover) Ratios

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
The numerator of the inventory turnover ratio is:
(a) revenue from operations
(b) cost of revenue from operations
(c) gross profit
(d) net purchases
Hint
Inventory is at cost.
Answer
(b) cost of revenue from operations
Q2 · 1 mark · MCQBoard level
Trade payables turnover ratio is calculated using:
(a) total purchases
(b) net credit purchases
(c) cost of revenue from operations
(d) revenue from operations
Hint
Credit creates payables.
Answer
(b) net credit purchases
Q3 · 3 marks · Short answerBoard level
Net credit purchases ₹4,80,000. Creditors: opening ₹70,000, closing ₹90,000; bills payable ₹10,000 at both dates. Calculate the trade payables turnover ratio and average payment period in months. (3 marks)
Hint
Average trade payables 90,000.
Answer
Average trade payables = (80,000 + 1,00,000) ÷ 2 = 90,000; turnover = 5.33 times; payment period = 12 ÷ 5.33 = 2.25 months.
Q4 · 3 marks · Short answerHarder board level
Opening inventory ₹50,000; purchases ₹3,50,000; carriage inwards ₹10,000; closing inventory ₹60,000. Calculate the inventory turnover ratio. (3 marks)
Hint
COGS first.
Answer
COGS = 50,000 + 3,50,000 + 10,000 − 60,000 = 3,50,000; average inventory 55,000; ratio = 6.36 times.
Q5 · 3 marks · Short answerHarder board level
Total revenue from operations is ₹10,00,000; cash revenue is 25% of credit revenue. Average trade receivables are ₹1,60,000. Calculate the trade receivables turnover ratio and collection period in days (365-day year). (3 marks)
Hint
Credit = total ÷ 1.25.
Answer
Credit revenue = 10,00,000 ÷ 1.25 = 8,00,000; ratio = 5 times; collection period = 365 ÷ 5 = 73 days.
Q6 · 1 mark · Very short answerHarder board level
Revenue from operations ₹18,00,000; net fixed assets ₹6,00,000. Calculate the fixed asset turnover ratio and state what it shows. (1 mark)
Hint
Revenue ÷ net fixed assets.
Answer
3 times: each rupee of fixed assets generates ₹3 of revenue.
Q7 · 3 marks · Short answerHarder board level
Revenue from operations ₹15,00,000; current ratio 2.5 : 1; current liabilities ₹2,00,000. Calculate the working capital turnover ratio. (3 marks)
Hint
CA = 2.5 × CL.
Answer
CA = 5,00,000; working capital = 3,00,000; turnover = 15,00,000 ÷ 3,00,000 = 5 times.
Q8 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Inventory turnover is calculated with cost of revenue from operations, not revenue from operations.
Reason (R): Inventory is valued at cost, so the numerator must also be at cost.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Like with like.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q9 · 3 marks · Short answerHOTS / competency
Trade receivables turnover is 6 times. Closing trade receivables are ₹20,000 more than opening, and average trade receivables are ₹1,10,000. Find opening and closing receivables and credit revenue from operations. (3 marks)
Hint
Opening + closing = 2,20,000.
Answer
Opening ₹1,00,000; closing ₹1,20,000; credit revenue = 6 × 1,10,000 = ₹6,60,000.
Q10 · 3 marks · Short answerHOTS / competency
A firm's inventory turnover fell from 8 times to 5 times while revenue stayed the same. Give two possible reasons and one consequence. (3 marks)
Hint
Average inventory has risen.
Answer
Average inventory has risen relative to cost of sales: perhaps over-buying, or slow-moving or obsolete stock. Consequence: more money locked in stock, higher storage and spoilage costs, and pressure on liquidity.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Formula for average collection period in months?Show answer
12 ÷ trade receivables turnover ratio.
2.Revenue ₹5,00,000, GP 20% on revenue: COGS?Show answer
₹4,00,000.
3.Revenue ₹5,00,000, GP 25% on cost: COGS?Show answer
₹4,00,000.
4.What is included in trade receivables?Show answer
Debtors and bills receivable.
5.Working capital turnover formula?Show answer
Revenue from operations ÷ working capital.

Activity (Turnover) Ratios: frequently asked questions

What are activity ratios in Class 12?

Turnover ratios that measure how efficiently resources are used: inventory, trade receivables, trade payables, fixed asset, net asset and working capital turnover.

Why is cost of revenue from operations used for inventory turnover?

Inventory is valued at cost, so comparing it with cost of sales keeps both figures on the same basis.

What if only closing balances are given?

Use the closing balances in place of averages, and state the assumption.

Is a high trade payables turnover good?

It means suppliers are paid quickly; that builds goodwill but uses less supplier credit, so very high values can strain cash.