Temporal/current – inventory / CoGS

How does the temporal or current method affect the gross profit margin?

From Q#21 EoC 19.

Domestic = US, foreign = Singapore

Inflationary period

avg rate when inventory was acquired 0.654 USD/SGD, period ending rate 0.671 USD/SGD

Do I only have to worry about CoGS? Just multply CoGS by 0.654 when using the temporal method and 0.671 when using the current method? I’m having a hard time picturing this because inventory and CoGS are inverses of each other. So if one goes down, the other goes up. But when translating currency, both are multiplied by the same rates.

Also when using the temporal method, it says you can multiply inventory at the current rate and historical rate when measured at current value and at historical cost, respectively. How do you decide which on to use?

I’m not quite sure what you mean by this. There are certainly issues with COGS and ending inventory.

The rate you use for COGS with the temporal method depends on what inventory method you’re using.

  • FIFO: use an historical (old) exchange rate for COGS, and a new (current) rate for ending inventory
  • Weighted average cost: use average cost for COGS and ending inventory
  • LIFO: use a new (current) rate for COGS and an historical (old) rate for ending inventory.

The going up/going down part is handled by the values for COGS and ending inventory _ in the local currency _; it has nothing to do with the exchange rates that are employed. You use an appropriate rate for COGS depending on which method you use and an appropriate rate for ending inventory depending on which method you use.

They’ll have to tell you whether inventory is carried at historical cost or current value.

Well that just made it 10 times more confusing in terms of rote memorization. I must have missed this in the curriculum.

Think of it this way: it’s the “historical” rate: old stuff has an old historical rate, new stuff has a new historical rate, and average stuff has an average historical rate:

  • FIFO: you sell the old stuff and keep the new stuff; COGS uses an old (historical) rate and ending inventory uses a new (historical) rate.
  • Weighted average cost: you sell average stuff and keep average stuff; COGS uses an average (historical) rate and ending inventory uses an average (historical) rate.
  • LIFO: you sell the new stuff and keep the old stuff; COGS uses a new (historical) rate and ending inventory uses an old (historical) rate.