AccountsISC Class 12 · Ratio Analysis

Activity (Turnover) Ratios: ISC Class 12 Accounts Ratio Analysis

Updated 17 October 2026 · Draft, not yet fact-checked

Activity ratios show how efficiently a company uses its assets and credit. Inventory Turnover = Cost of Revenue from Operations ÷ Average Inventory; Trade Receivables Turnover = Credit Revenue from Operations ÷ Average Trade Receivables; Trade Payables Turnover = Net Credit Purchases ÷ Average Trade Payables; Working Capital Turnover = Revenue from Operations ÷ Working Capital. All are expressed in times.

Each turnover ratio is a flow (cost, credit sales, credit purchases or sales) divided by an average balance, except working capital, which uses the closing figu

Illustration drawn for QuestionBuddy.

Understand Activity Ratios: Inventory, Receivables, Payables and Working Capital Turnover

Idea. Activity ratios, also called turnover ratios, measure how many times a balance is "turned over" in a year through sales or purchases. A higher turnover usually means faster movement of stock or collections; the answer is in times.

Average figures. Average = (Opening + Closing) ÷ 2. The ISC syllabus uses averages for inventory, trade receivables and trade payables; working capital uses the closing figure.

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

Cost of Revenue from Operations = Revenue from Operations − Gross Profit; or Cost of Materials Consumed (including direct expenses) + Change in inventories of work-in-progress and finished goods; or Opening Inventory + Net Purchases + Direct Expenses − Closing Inventory.
Average Inventory = (Opening Inventory + Closing Inventory) ÷ 2.

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

Credit Revenue from Operations = Revenue from Operations − Cash Revenue from Operations.
Average Trade Receivables = (Opening + Closing) ÷ 2. The syllabus note: this ratio uses gross debtors (before the provision for doubtful debts), whereas the current ratio uses net debtors. Trade receivables include bills receivable.

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

Net Credit Purchases = Purchases (total) − Purchases Returns − Cash Purchases. Trade payables include bills payable.
Average Trade Payables = (Opening + Closing) ÷ 2.

4. Working Capital Turnover Ratio = Revenue from Operations ÷ Working Capital, where Working Capital = Current Assets − Current Liabilities (with the current asset and liability definitions of the liquidity ratios).

Reading the ratios. A rising inventory turnover means stock moves faster, but if it comes with a fall in the gross profit ratio it may be bought with price cuts. A falling receivables turnover signals slower collection. A low payables turnover means the firm takes longer to pay. A very high working capital turnover can also mean too little working capital.

Common traps. Using total sales instead of credit sales for receivables; using closing instead of average balances; using net debtors; forgetting that cost of revenue is cost of goods sold, not purchases.

Activity Ratios: Inventory, Receivables, Payables and Working Capital Turnover: key facts

Inventory Turnover: Cost of Revenue from Operations ÷ Average Inventory | in times; Cost = Revenue − Gross Profit.
Trade Receivables Turnover: Credit Revenue from Operations ÷ Average Trade Receivables | in times; Gross debtors plus bills receivable.
Trade Payables Turnover: Net Credit Purchases ÷ Average Trade Payables | in times; Trade payables include bills payable.
Working Capital Turnover: Revenue from Operations ÷ Working Capital | in times; Working capital = Current Assets − Current Liabilities.
Average balance: Opening balance + Closing balance | divided by 2; Used for inventory, receivables and payables.

How to answer Activity Ratios: Inventory, Receivables, Payables and Working Capital Turnover questions

Build numerator and denominator separately, then divide.

1Find the numerator: cost of revenue, credit revenue, net credit purchases or total revenue.
2Find the average balance from the opening and closing figures.
3Divide and write the answer in times to two decimals.
4For working capital, use the closing current assets and current liabilities.
5State one line of interpretation when asked.

Activity Ratios: Inventory, Receivables, Payables and Working Capital Turnover 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.

How fast stock sells

Suppose a bookshop starts the year with stock of ₹80,000 and ends it with ₹1,20,000. Its cost of the books sold during the year is ₹5,00,000.

What is its inventory turnover?

Try it first, then show the solutionSolution

Average inventory = (80,000 + 1,20,000) ÷ 2 = ₹1,00,000.
Inventory turnover = 5,00,000 ÷ 1,00,000 = 5 times.

Answer: 5 times: the shop turns its stock over five times a year.

Memory hook: Sold cost over average stock.

Tricks to remember Activity Ratios: Inventory, Receivables, Payables and Working Capital Turnover

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

Cost for stock, credit for debtors
Inventory uses cost of revenue; receivables use credit revenue.
Use it when: Choosing numerators.
Gross for receivables turnover
Turnover uses gross debtors; the current ratio uses net debtors.
Use it when: Syllabus limit.
Average, average, average
Inventory, receivables and payables use opening-plus-closing over two.
Use it when: Denominators.

Activity Ratios: Inventory, Receivables, Payables and Working Capital Turnover: solved examples

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

Example 1: Inventory turnover from gross profit · 1 mark · MCQBoard level

Revenue from operations is ₹8,00,000 and the gross profit is 25% of revenue. Average inventory is ₹1,00,000. The inventory turnover ratio is:
(a) 8 times
(b) 6 times
(c) 2 times
(d) 4 times

Try it first, then show the solutionSolution

Gross profit = 25% × 8,00,000 = ₹2,00,000.
Cost of revenue = 8,00,000 − 2,00,000 = ₹6,00,000.
Turnover = 6,00,000 ÷ 1,00,000 = 6 times.

Answer: (b) 6 times

Example 2: Trade payables turnover · 3 marks · Short answerBoard level

Purchases for the year were ₹6,20,000, purchases returns ₹20,000 and cash purchases ₹1,00,000. Creditors were ₹60,000 at the beginning and ₹75,000 at the end; bills payable ₹30,000 at the beginning and ₹35,000 at the end. Calculate the trade payables turnover ratio. (3 marks)

Try it first, then show the solutionSolution

Net credit purchases = 6,20,000 − 20,000 − 1,00,000 = ₹5,00,000.
Trade payables: opening 60,000 + 30,000 = 90,000; closing 75,000 + 35,000 = 1,10,000; average = ₹1,00,000.
Ratio = 5,00,000 ÷ 1,00,000 = 5 times.

Answer: 5 times.

Example 3: All four turnover ratios · 6 marks · Long answerHarder board level

Ivy Ltd. had Revenue from operations of ₹12,00,000, of which ₹2,00,000 was cash revenue, and gross profit of ₹3,00,000. Inventory was ₹1,10,000 at the start and ₹1,30,000 at the end. Gross debtors (including bills receivable) were ₹1,00,000 and ₹1,40,000. Direct expenses were ₹40,000 and cash purchases ₹1,60,000. Trade payables were ₹80,000 and ₹1,00,000. Current assets at the end were ₹5,00,000 and current liabilities ₹2,50,000. Calculate the inventory, trade receivables, trade payables and working capital turnover ratios. (6 marks)

Try it first, then show the solutionSolution

Cost of revenue = 12,00,000 − 3,00,000 = ₹9,00,000; average inventory = (1,10,000 + 1,30,000) ÷ 2 = ₹1,20,000; turnover = 9,00,000 ÷ 1,20,000 = 7.50 times.
Credit revenue = 12,00,000 − 2,00,000 = ₹10,00,000; average receivables = ₹1,20,000; turnover = 10,00,000 ÷ 1,20,000 = 8.33 times.
Net purchases = cost of revenue − opening inventory + closing inventory − direct expenses = 9,00,000 − 1,10,000 + 1,30,000 − 40,000 = ₹8,80,000; credit purchases = 8,80,000 − 1,60,000 = ₹7,20,000; average payables = ₹90,000; turnover = 8.00 times.
Working capital = 5,00,000 − 2,50,000 = ₹2,50,000; turnover = 12,00,000 ÷ 2,50,000 = 4.80 times.

Answer: Inventory turnover 7.50 times; trade receivables turnover 8.33 times; trade payables turnover 8.00 times; working capital turnover 4.80 times.

Example 4: Cost of revenue from purchases · 3 marks · Short answerHarder board level

Opening inventory ₹80,000; net purchases ₹4,60,000; direct expenses ₹40,000; closing inventory ₹1,20,000. Calculate the inventory turnover ratio. (3 marks)

Try it first, then show the solutionSolution

Cost of revenue = 80,000 + 4,60,000 + 40,000 − 1,20,000 = ₹4,60,000.
Average inventory = (80,000 + 1,20,000) ÷ 2 = ₹1,00,000.
Ratio = 4,60,000 ÷ 1,00,000 = 4.60 times.

Answer: 4.60 times.

Example 5: Faster turnover, lower margin · 3 marks · Short answerHOTS / competency

In year 1, cost of revenue was ₹5,00,000 and revenue ₹6,25,000. In year 2, cost of revenue was ₹8,00,000 and revenue ₹9,60,000. Average inventory was ₹1,00,000 in both years. Compare the inventory turnover and the gross profit ratio, and interpret. (3 marks)

Try it first, then show the solutionSolution

Turnover: 5,00,000 ÷ 1,00,000 = 5 times; 8,00,000 ÷ 1,00,000 = 8 times.
Gross profit: 1,25,000 on 6,25,000 = 20.00%; 1,60,000 on 9,60,000 = 16.67%.
Stock moved faster but each rupee of sales earned less, probably because of lower prices; total gross profit still rose from ₹1,25,000 to ₹1,60,000.

Answer: Turnover rose from 5 to 8 times, while the gross profit ratio fell from 20.00% to 16.67%. The growth came from volume at lower margins; total gross profit rose by ₹35,000.

Where students lose marks in Activity Ratios: Inventory, Receivables, Payables and Working Capital Turnover

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

Mistake: Using total revenue for receivables turnover
Ignoring cash sales.
Wrong working
12,00,000 ÷ 1,20,000 = 10
Right working
10,00,000 ÷ 1,20,000 = 8.33
Do this: Deduct cash revenue to get credit revenue.
Usually costs: 2 marks.
Mistake: Using closing inventory instead of the average
Skipping the averaging step.
Wrong working
9,00,000 ÷ 1,30,000 = 6.92
Right working
9,00,000 ÷ 1,20,000 = 7.50
Do this: Add opening and closing, then halve.
Usually costs: 1-2 marks.
Mistake: Using net debtors in the turnover ratio
Mixing the liquidity rule.
Wrong working
Average of net debtors (e.g. 1,10,000 and 1,35,000) = 1,22,500
Right working
Average of gross debtors (1,00,000 and 1,40,000) = ₹1,20,000
Do this: The syllabus says gross debtors here.
Usually costs: 1 mark.
Mistake: Dividing purchases rather than cost of revenue for inventory
Confusing purchases with cost of goods sold.
Wrong working
Purchases ÷ average stock
Right working
Cost of revenue from operations ÷ average stock
Do this: Adjust purchases for inventory and direct expenses.
Usually costs: 2 marks.

Exam tips

Show the average calculation as a separate line.
Write the unit as times in the final answer.
For payables turnover, include bills payable and use credit purchases only.
If the question gives gross profit percentage, find cost of revenue first.

Practice questions on Activity Ratios: Inventory, Receivables, Payables and Working Capital Turnover

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
Revenue from operations ₹9,00,000; current assets ₹4,00,000; current liabilities ₹1,00,000. The working capital turnover ratio is:
(a) 3 times
(b) 2.25 times
(c) 9 times
(d) 1.33 times
Hint
Working capital is 3,00,000.
Answer
(a) 3 times
Q2 · 3 marks · Short answerBoard level
Revenue from operations ₹10,00,000 of which cash revenue ₹2,00,000. Gross debtors were ₹80,000 at the start and ₹1,20,000 at the end. Calculate the trade receivables turnover ratio. (3 marks)
Hint
Credit revenue first.
Answer
Credit revenue = ₹8,00,000; average debtors = ₹1,00,000; ratio = 8 times.
Q3 · 3 marks · Short answerHarder board level
The inventory turnover ratio is 6 times, cost of revenue from operations is ₹7,20,000 and opening inventory is ₹1,00,000. Find the closing inventory. (3 marks)
Hint
Average inventory = 7,20,000 ÷ 6.
Answer
Average inventory = ₹1,20,000; closing = 2 × 1,20,000 − 1,00,000 = ₹1,40,000.
Q4 · 6 marks · Long answerHarder board level
Revenue from operations ₹20,00,000 (cash revenue ₹4,00,000); gross profit ₹5,00,000. Inventory ₹1,50,000 at the start and ₹2,50,000 at the end. Gross debtors ₹1,60,000 and ₹2,40,000. Net credit purchases ₹12,00,000; trade payables ₹1,20,000 and ₹1,80,000. Current assets ₹8,00,000; current liabilities ₹5,00,000. Calculate the four turnover ratios. (6 marks)
Hint
Cost of revenue = 15,00,000.
Answer
Inventory turnover 15,00,000 ÷ 2,00,000 = 7.50 times; receivables turnover 16,00,000 ÷ 2,00,000 = 8.00 times; payables turnover 12,00,000 ÷ 1,50,000 = 8.00 times; working capital turnover 20,00,000 ÷ 3,00,000 = 6.67 times.
Q5 · 3 marks · Short answerHOTS / competency
A firm has a trade receivables turnover of 4 times and a trade payables turnover of 8 times. Taking a year as 12 months, find the average months of credit it gives and takes, and say what it implies for the firm's cash. (3 marks)
Hint
12 ÷ turnover.
Answer
Credit given = 12 ÷ 4 = 3 months; credit taken = 12 ÷ 8 = 1.5 months. The firm pays suppliers 1.5 months before it collects from customers, so it must fund the gap, which strains cash.

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.Cost of revenue from operations?Show answer
Revenue from operations − Gross profit.
2.Average inventory?Show answer
(Opening + Closing) ÷ 2.
3.Which debtors for receivables turnover?Show answer
Gross debtors, including bills receivable.
4.Net credit purchases?Show answer
Purchases − Returns − Cash purchases.
5.Working capital?Show answer
Current assets − Current liabilities.

Activity Ratios: Inventory, Receivables, Payables and Working Capital Turnover: frequently asked questions

Is the answer in days or times?

The syllabus ratios are in times.

Do trade payables include bills payable?

Yes, creditors and bills payable together.

What if only the closing balance is given?

Use it as the average only if the question says opening and closing are the same or gives no opening figure.

Which working capital is used?

Current assets minus current liabilities, with the syllabus definitions.