Using the information provided in its income statement (income statement 1 and income statement 2 combined), a business can:
1. Calculate and analyse its rate of stock turnover. 2. Calculate and analyse its profitability.
Rate of Stock Turnover
The income statement can be used to calculate the rate of a business’s stock turnover. This shows how many times a business’s stock has been sold and replaced during the year.
Before a business can work out its stock turnover, it must first calculate its average stock. This is done by adding the values of the stock at the beginning and end of the year together and dividing by two.
Average stock = opening stock + closing stock ÷ 2
Stock turnover is then calculated by dividing the cost of sales by the average stock. Stock turnover =
Cost of sales Average stock held
The rate of stock turnover will vary from business to business. For example, a large supermarket chain will have a much higher stock turnover than a jewellery shop or a car dealership.
i
Stock turnover describes the number of times a business’s stock has been sold and replaced during a trading period.
Action Plan
When a business calculates its stock turnover figure, the information can be used in the following ways:
• To implement and manage an efficient stock control system.
• To make decisions about how much money it has tied up in stock.
• To research current trends to establish changes in customer tastes and potential peaks and troughs.
