text book Volume2.page325 , page 18. when using temporary method, gross margin will be distorted due to using FIFO method. the answer keep explaining that inventory 's value use relatively recent rate. but what impact gross margin is COGS, which should use relative hitorical rate, is it? I am confused about the answer . anybody have any advice? Thanks.
- It is Temporal method… not temporary method - which gives it a completely different meaning. 2. COGS - FIFO - Temporal - Use Historical Rate --> FIFO - First in Item - goes out first. So Historical Rate to be used for COGS is the actual Historic Rate. Since the Inventory left behind is the most current item - that is what will be used for the Ending Inventory. So using the OLD (actual Historic rate) would distort COGS, and hence the Gross Profit margin.
I understand how it is calculated. But I don’t understand it is “distorted”
it is distorted because of the exchange rate… you have to use a different rate from end of the year rate to account for that piece. So if the rate has changed - something changes - which is distortion.