Reading 18, Q7 excerpts:
[question removed by moderator]
My Question : It seems like CFAI is contradicting themselves as they state that if FIFO is used the inventory should be translated at relatively recent FX rates. Since we are using the temporal method the historical rates should be used. Can anyone help clarify?
FIFO means that the inventory which was acquired first will be sold first. This means that the remaining inventory was likely purchased LATER in the year. If you are using LIFO, then the inventory that you have left was likely purchased EARLIER in the year.
That being said, the valuation of FIFO inventory uses a rate that is more current RELATIVE to LIFO inventory. Even though the historic rates are used for both, the rates for the LIFO inventory are a little bit more historic relative to the rate you would use for the FIFO inventories.
Hope that helps.
Not exactly.
It means that the costs for the inventory that was acquired first will be charged to COGS first.
You sell whatever inventory you sell: it may be the first units, the last units, or any other units.
FIFO is a costing method, not an inventory control method.
Thank you for the correction.
Other than that, did I answer his question correctly?
Yup.
I do understand what FIFO is; however, I am confused about the translation method. The temporal method requires us to use historical FX rates to translate the carrying value of inventory but the answer states that because FIFO is used as cost method, the average rate is most appropriate for translation. Is it because you cannot apply “older” (historical) FX rate to inventory that is technically gone since we’re using FIFO as a cost method? Appreciate your responses.
If you see this in a problem: “purchases of C$300 million and the sell-through of that inventory _ occurred evenly _ throughout 20X2”, you should use the average rate. If you are given historical rates for each purchase, you should use those, but some problems won’t give you that information.
That makes sense. Thank you both