A little confused on COGS and Inventory under the temporal method… In the first question below, it says that an older (historical) rate applies to FIFO COGS. I agree with this. In the second question, it says that an average rate is used for FIFO COGS. Neither question alludes to inventory being sold evenly throughout the year (which I know automatically is a signal to use the avg rate), yet the second question alludes to this and makes this the reason that avg rate rather than an older (historic) rate is used. Can anyone please help out here? Thanks. Hann Company is a U.S. multinational firm with operations in several foreign countries. Hann has a 100% stake in a French subsidiary. The foreign subsidiary’s local currency has appreciated against the U.S. dollar over the latest financial statement reporting period. In addition, the French firm accounts for inventories using the first in, first out (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) lower than the gross profit margin as computed under the temporal method. C) equal to the gross profit margin as computed under the temporal method. Your answer: B 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. ------------------------- Which of the following statements is most accurate concerning foreign currency translation? A) The receivables turnover ratio is identical under both the temporal method and the current rate method. B) In the case of an appreciating currency, the fixed asset turnover will be lower under the temporal method, as compared to the current rate method. C) In the case in which a firm uses first in, first out (FIFO) inventory valuation, if the local currency appreciates the cost of good sold under the temporal method is less than the cost of goods sold using the current rate method. Your answer: A was correct! The receivables turnover (sales / receivables) is unaffected because both methods translate sales at the average rate and accounts receivable at the current rate. When using FIFO and the temporal method we assume that inventory is bought and sold evenly throughout the year and thus the appropriate historical rate to use for cost of goods sold (COGS) is the average rate which is also the rate used for COGS with the current rate method. With an appreciating currency the fixed asset turnover ratio (sales / fixed assets) will be higher using the temporal method because the temporal method uses the historical rate for fixed assets whereas the current rate method uses the current rate. They both use the same average rate for sales.
2nd question said average rate for SALES.
cpk, where does it say that? the statement in the second questtion’s explanation im alluding to is “When using FIFO and the temporal method we assume that inventory is bought and sold evenly throughout the year and thus the appropriate historical rate to use for cost of goods sold (COGS) is the average rate which is also the rate used for COGS with the current rate method. " this conflicts with the explanation in the first question, which says 'Since the firm uses FIFO, older materials are flowing into COGS and an older exchange rate applies.”
i read the last para where it alluded to average sales. not sure - unless stated in the problem why FIFO would mean evenly bought and sold thro’ the year. FIFO COGS would be historic rate - since the oldest item bought would go into the COGS. possibly there was something in the body of the problem that told you that the COGS was evenly bought and sold thro’ the year - in which case average rate would apply. But this is not true, unless the above was stated.
yea youre right and i agree with you. this wasnt a problem set, just an individual question so tehres nothing more to it. i relaly think that the answer explanation for the second Q is incorrect (although it doesnt impact the answer) since no allusion to inventory bought and solid evenly means that you look at if its fifo or lifo.