Hello, I’m a little confused about accounting for inventory under the temporal method. Although Reading 24 starts out by saying that inventory is accounted with the historical rate, page 191 in Schweser says that there can be different historical rates. More specifically, it gives these guidelines: FIFO EI: most recent (current) FIFI COGS: older (historical) LIFO EI: older (historic) LIFO COGS: most recent (current) This makes sense to me. But then it says that if inventory purchases occur evenly throughout the year, the historical (actual) rate used to remeasure FIFO EI is the same as the average rate. Why are they now saying that FIFO EI is average rate? Should I just look out in questions to see key words like “purchased evenly throughout the year” and then use this as a sign to use average instead of historical? Also, if FIFO EI is average, then I assume that FIFO COGS is average as well, correct? Lastly, will LIFO EI be impacted in the same manner (i.e. have to use average rate) if purchases are made evenly throughout the year? Thank you!
any thoughts on this?
I have the same question! I don’t understand how the FIFO inventory rates should be dealt under the Temporal method. While doing practice questions in CFAI, Q18 on page 201 solution says “If FIFO is used, ending inventory is assumed to be composed of the most recently acquired items and thus inventory will be translated at relatively recent exchange rates. To the extent that the average weight used to translate sales differs from the historical rate used to translate inventories, the gross margin will be distorted when translated into US dollars” So exactly which is used? Historical? or Current? or Average?? Then in Q24 on page 203, for FIFO inventory, the solution to the question is “the weighted average rate when inventory was acquired should be used if company translated its statement under temporal method” EXCEPT in Q23 for the same scenario, the solution says “Under the temporal method inventory and fixed assets would be translated using historic rates” I AM SOO CONFUSED SOME ONE PLEASE HELP!!!
No, under temporal it will always be the historical rate. Inventory levels for companies can be large, and the companies buy inventories of whatever they have a lot sometimes. So basically, if a company bought inventory 47 times over a quarter their quarterly statement under the temporal method would technically have 47 different currency rates into the calculation… MESSY! So, think of it this, that just so happens to be the pattern of buying over the term period that would yield the average rate.
infinite sum, does this mean that in the problem they would have to tell u if the company buys inventory evenly throughout the year (for which you use average rate) or the company bought inventory on one single date (current rates for FIFO COGS, historical rates for FIFO EI)? also, is lifo treated the same way? Thanks.
Well, consider question 16 on pg 201 cfai text They give you that FIFO method is used and they ask what the inventory balance should be in $ they also give you historical information on when inventory was purchased, the average and other numbers you end up not needing. the answer is that you use the current rate method-all assets are translated at current rate I would focus on remembering that COGS Current rate is current and temporal is historical.
Yeah, they and most likely would have to (I’m assuming) give you an indication of the how the company purchased the inventory so that you can calc the historic weight to apply, which in the circumstance we described above, happily equals the average rate over the period. I took one practice test recently and the question outright gave you the price for the inventory. But if they said they only bought inventory once ever, it just be the historic rate. Make sense? to sum: always historic rate, just so happens that in some circumstances the historic rate for a series of purchases under LIFO equals the average rate.
infinitesum, i see what you mean, but schweser pg 191 contradicts you (and themselves)
try this one on for size… ACC uses FIFO… Owns Redline and method of reporting is unknown The Dollar has weakend from 2006 to Dec 31 2007 ACC’s consolidated gross profit margin for 2007 would be highest if ACC accounted for inventory using: a) FIFO and its functional currency were the b) LIFO and its functional currency were the c) FIFO and its functional currency were the Foreign Currency
A
AC: S - COGS = AR - CR TM(FIFO)) = S - COGS = AR - HR HR
Things have gotten pretty wild on this topic in the past: http://www.analystforum.com/phorums/read.php?12,923167,924307 http://www.analystforum.com/phorums/read.php?12,923576
I change my answer to C. Would be lower using the all current method, I think… Tough question and I can def see this type on June 6th
“Because the US Dollar has weakened against the foreign currency, COGS will be lower and gross profit will be higher when an earlier exchange rate is used to translate inventory compared to using current exchange rates.” This part makes sense… if 1996- rate .75$ per 1 CAD, 1997 rate is $.90 to 1 CAD so at the earlier rate in 1996- with 100CAD- COGS ends up being $75 at the current rate in 1997- with 100 CAD- COGS is $90 so “COGS is lower and gross profit is higher = example above” “If the Foreign Currency is the Functional currency, current rates would be used. Therefore, the combination of the US Dollar (temporal method) and FIFO results in the highest gross profit margin” LIFO would result in higher COGS than FIFO since the current rate of .90 is higher than .75 which is what FIFO would use? Is that correct? Im having trouble grasping this concept. CP? Anyone? Anyways. answer was A.
When I was doing qbank questions, it seemed to me that when a currency depreciated, you would use the “lower number” in the calculation. For example, since the currency goes from .75 to .90, this is a depreciation, so the COGS under the current rate is smaller than the historical amount (even though the numerical rate we see is higher). I know it sounds strange but this is how I thought of it on qbank questions and got them right. I think there may be something going on here with having to take the inverse of rates???
i think schweser screws us up on this topic because i am looking at different q bank questions which are done completely differently. kind of giving up hope on this one now