Totally confused here:
When local currency is DEPRECIATING. Are FIFO COGS higher or lower when translated into the presentation currency (under either methods)?
My thinking: earlier exchange rate was higher than later exchange rate (meaning the local ccy was worth more earlier than now due to the depreciation). Consequently FIFO COGS should be HIGHER than LIFO.
And yet a CFAI example, and also my own notes from earlier tell the opposite.
What am I missing? Pls help!
I think my mistake was that in one of the examples the local currency was inflationary and this leads to FIFO accounting resulting in lower COGS not the depreciation of the currency.
Still I wonder, can the inflation and the depreciation of the local currency result in contradictory outcomes regarding inventory accounting method?
In the current rate method, no matter what is being used LIFO or FIFO, COGS is recognised at average rate and Inventory at current rate.
In the temporal method, it is a little confusing. Temporal method recognises Inventory (non monetary asset) at historical rates and COGS are also recognised at historical rates.
Now under LIFO, inventory is of old goods and hence its value is still calculated using historical rates. However, the COGS consists of recent items and hence a combination of recent exchange rates and historical exchange rates are taken.
Similarly in FIFO, COGS are calculated using historical rate and Inventory is calculated using a combination of historical and recent exchange rates.
So, you are right, in case of depreciating local currency, FIFO COGS is higher than LIFO COGS
Thx, this was helpful.