Going through some old questions from a friend. Can someone please explain the following??? : Which of the following statements is correct with respect to accounting for inventory and cost of goods sold (COGS) using last-in first out (LIFO) under the temporal method? ANS : Inventory is translated at the historical rate, and COGS is translated at the historical rate. If using LIFO, units sold during the year are the ones purchased during the year. Under the temporal method, COGS and inventory would be translated at the historical rate. I understand how the units sold are are the ones purchased. However, shouldn’t inventory be translated at the historic rate (as it is the old stuff sitting on the books) but the COGS translated at more of an average rate as it should reflect the cost of inventory throughout the year?
Both are translated at RESPECTIVE Historic Rates. LIFO = refers principally to COGS. So items purchased last are in COGS. Given that items purchased last, were the most recent purchases - Historic rate as it pertains to LIFO COGS would be the Current rate. Inventory -> Would have the oldest items left in. So Historic Rate as it pertains to Ending Inventory would be the OLDEST Purchase Price - which is the real Historic rate of purchase.
I was actually instructed to use the average rate for COGS, assuming LIFO and using the temporal method. We know the end value of inventory and we know how much was sold. Usually, they will tell us when they acquired the inventory so we can derive beginning inventory. The problem is, we don’t know exactly when the inventory was sold.