Computation of ratios

Closing stock alone is to be considered

The above ratio is to include only closing stock as ‘stock in trade’. The 

term `stock-in-trade' used there in does not include stores and spare 

parts or loose tools.  

Only finished goods to be included, raw material and work in 

progress to be ignored for this calculation.  

There are some organizations which calculate the stock in trade by 

taking the average finished goods [opening stock +  closing stock of finished goods]/2. It is also seen in some of the organization that a 

annual average is taken to calculate this ratio. This is done with sole 

aim of removing the anomalies of abnormal closing stock at the year 

end. The necessary disclosure needs to be made to indicate the 

calculation adopted. The method followed also needs to be 

consistently followed. 

It should also be seen that the numerator and denominator are 

consistent and comparable. The turnover and the stock in trade both 

should be either inclusive of taxes or exclusive of taxes. The ratio 

would give a distorted result if either the numerator or the 

denominator is inclusive or exclusive of taxes and the other is not.  

It also needs to be noted that with the implementation of section 

145A the stock and the turnover need to be inclusive of the vat, 

excise, service tax.  Alternatively the auditor is  required to prepare 

and present the adjusted statement of trading account in clauses 

22(a)