Hi, For FIFO /LIFO - do we use different exchange rates, to convert inventory(& COGS) into reporting currency, than normally used? Normally - A) All current method - i) COGS are converted @ Avg. Rate. ii) Inv. is converted @ Current Rate. B) Temporal Method - i) COGS are converted @ Historical Rate. ii) Inv. is converted @ Historical Rate. What rate should be used for above four scenarios in LIFO /FIFO inventory method? Thanks, AG
I could be wrong, but I thought the exchange rate was determined by the relationship between the parent and subsidiary’s presentation and functional currencies. LIFO/FIFO has no effect on whether to use Temporal or All-Current. Can someone else confirm or deny this?
You are correct about choice of All current v/s Temporal method . Then based on selection of method - we choose the exchange rate. My question is that once we decide on the method (AC/Temporral) - does FIFO/LIFO affect which exchange rate to use? Thanks, AG
it does - but don’t ask me how yet, I haven’t nailed this one down yet.
very good question. was about to post the same. it’s not 100% clear to me either. maybe cpk can shed some light on this. Giant Company is a U.S. firm that produces parts for nuclear reactors. Giant Company has a subsidiary, Grande, Inc., that operates in Mexico and is responsible for designing and manufacturing connection fittings that are vital for the proper operation of its parent company’s reactors. - Giant Company considers the U.S. dollar to be the functional currency of Grande, Inc. - Grande, Inc., began operations January 1, 2001. - Common Stock and Fixed Assets were acquired January 1, 2000. - Inventory is accounted for under the last in, first out (LIFO) cost flow assumption, with a slow rate of turnover. - The inventory in the January 1, 2001, Balance Sheet was acquired on January 1, 2001. Exchange Rates were: January 1, 2000 $0.14/M peso January 1, 2001 $0.12/M peso June 30, 2001 $0.11/M peso (this is the 2001 average rate) December 31, 2001 $0.10/M peso Grande, Inc. Balance Sheet (in M Pesos) Jan. 1, 2001 Dec. 31, 2001 Cash 5,000,000 20,000,000 Accounts Receivable 20,000,000 35,000,000 Inventory 15,000,000 15,000,000 Fixed Assets (net) 70,000,000 60,000,000 Accounts Payable 10,000,000 10,000,000 Long Term Debt 40,000,000 35,000,000 Common Stock 80,000,000 80,000,000 Retained Earnings 5,000,000 2001 Income Statement (in M Pesos) Sales 60,000,000 Cost of Goods Sold (45,000,000) Depreciation (10,000,000) Net Income 5,000,000 ________________________________________ The Cost of Goods Sold for Grande, Inc., for the year ended December 31, 2001, expressed in U.S. dollars is: A) $4,950,000. B) $5,400,000. C) $5,250,000.
- inventory is slowly turning over, and was acquired on Jan 1st 2. Functional Currency = USD, Local Currency = Mexican Peso --> hence temporal method and COGS should be measured at historical rate. Historical rate - corresponds to rate as of Jan 1, 2001 = 0.12$/MPeso. So 45M * .12 = 5.4M ==> Ans B?
Wouldn’t you use Temporal on the basis that the functional currency = presentation currency?
That is what I meant to say – that Functional Currency was different from the Local Currency, Missed saying (Functional = Presentation).
first, i owe you the answer from the qbank cpk Your answer: B was incorrect. The correct answer was A) $4,950,000. Both the beginning and ending inventory under LIFO cost flow assumptions and a slow inventory turnover are translated at the $0.12 rate as of the date the original inventory was acquired, January 1, 2001. Because beginning and ending inventories expressed in Mexican pesos are equal, the purchases for the year will equal the Cost of Goods Sold, which is remeasured at the average cost of acquiring the goods during the year: $0.11. (45,000,000 * $0.11) = $4,950,000. --------------------------------------------------------------------------------------- second, mumu and taz pointed it out last year: Re: Temporal and Inventory/COGS Posted by: mumukada (IP Logged) [hide posts from this user] Date: May 23, 2008 05:49AM as Nib said…it’ll depend when you bought the inventory - whether it’s LIFO or FIFO, for temporal. for all current it’s ALWAYS average… example if you bought the inventory at the beginning of the period, and you use FIFO, for calculating COGS and Inventory - under temporal you will use the beg of period exchange rate if you bought it throughout the period, it’s irrelevant whether you use LIFO or FIFO, the cogs will be determined using the period’s average rate… hope that helps. Re: Temporal and Inventory/COGS Posted by: taz722 (IP Logged) [hide posts from this user] Date: May 23, 2008 09:53AM Temporal = Historical price for all non-monetary assets (i.e. use the exchange rate in effect when you bought those assets) LIFO: The COGS is the “new” inventory since it was the last one purchased while the inventory on the BS is the “old” inventory. Hence , use average rate for COGS and historical for Inventory: COGS: Average Inventory:Historical FIFO: COGS is the “old” inventory since it was purchased earlier and is the first one to go out.Use historical for COGS and since the inventory on the BS are the items that you purchased recently, use Average COGS:Historical Inventory:Average Hope this helps.