COGS/Inventory Under TEMPORAL

S

sam.cfa

New member
Joined
May 14, 2009
Messages
0
Reaction score
0
Which of the following statements is most accurate with respect to accounting for inventory and cost of goods sold (COGS) using last-in first out (LIFO) under the temporal method?
A) Inventory is translated at the historical rate, and COGS is translated at the average rate.
B) Inventory is translated at the average rate while COGS is translated at the historical rate.
C) Inventory is translated at the historical rate, and COGS is translated at the historical rate.
Your answer: A was incorrect. The correct answer was C) Inventory is translated at the historical rate, and COGS is translated at the historical rate.
If using LIFO, units sold during the year are the ones purchased during the year. Under the temporal method, COGS and inventory would be translated at the historical rate.
Schweser Notes: Pg 191 says:
Under LIFO…Inventory…old exchange rates…..LIFO COGS…..recent exchange rates….
What am i missing?
 
just remember this-
COGS and inventory would be translated at the historical rate
 
cfaboston28 Wrote:
——————————————————-
> just remember this-
>
> COGS and inventory would be translated at the
> historical rate
That’s what I thought, but now I am confused. How does LIFO / FIFO affect this again?
 
Not always the case - depending upon the LIFO/FIFO Inventory cost flow assumption.
But for this one - it’s C
 
wait, so inventory and COGS both won’t be revalued at the historical rate if FIFO is being used for both?
 
This is an important concept….here..look at this question: (Shortened it)
Foreign subsidiary’s local currency has appreciated against the U.S. dollar. In addition, the foreign firm accounts for inventories using FIFO inventory cost-flow assumption. The gross profit margin as computed under the current rate method would most likely be:
A) higher than the gross profit margin as computed under the temporal method.
B) equal to the gross profit margin as computed under the temporal method.
C) lower than the gross profit margin as computed under the temporal method.
Your answer: C was correct!
The average rate is used to convert sales under both the temporal method and the current rate method. Hence, the only difference between the two computations is on cost of goods sold (COGS). Since the firm uses FIFO, older materials are flowing into COGS and an older exchange rate applies. Since in the past the foreign currency bought fewer dollars, the gross profit under the temporal method will be higher than that of the current rate method.
 
In this case - LIFO - The “historical rate” they talk about for COGS is actually the current rate inherently.
 
So COGS for Current-Rate-Method is always average rate?
For Temporal, we figure out when the inventory was acquired and use THAT historical rate?
 
Yea, no talks about FIFO/LIFO for COGS in All Current - always Average Rate
The real mess happens in Temporal method.
 
The key here is to understand that, in temporal method “Historical” means the date at which the transaction took place.
If the transaction happened , recently the historic rate = current rate.
If transaction happened evenly through the year historic rate = Avg rate.
If it happened at begining of the year use historic rate = Beg of Year rate.
In current rate method it is simple , always Average.
 
here’s how i understand it, and i thought the following applies no matter whether FIFO or LIFO is being used. i doubt im wrong so let me know if yes.
All-Current
COGS: Avg
Inventory: Current
Temporal
COGS: Historical
Inventory: Historical
 
you are correct, but you have to dig one level more. The “Historical” in temporal method is a misnomer.
Read Charu’s reply on this. That’s the final say on this one.
 
hmmk
for temporal COGS / Inventory, i have been using either the beginning of the period rate or the special rate given for these two items.
 
You must log in or register to reply here.
Back
Top