Under Temporal Method, while remeasuring Inventory why do we use Average rate? Please refer Page 82 Schweser Book2. Inventory is a part of Non Monetary Asset, hence we must use Historical rate isn’t it? All-Current method uses current rate for Inventory - same as Non Monetary Assets/Liabilities. Schweser must have either used Average rate for both Current-Rate and Temporal or it should have followed the rate used for Non-Monetary Assets/Liabilities. I don’t understand this discrepancy. Can someone explain? TIA
You are confusing me… For current method I use current rate for all Asst & Liab for Temporal, I use current rate for monetary asst & liab and historical for all other non monetary asst & liab which inventories is one…does it get more complicated than that?
don’t have the book to hand, but my guess is the text will tell you that inventory was purchased evenly throughout the year, hence the historical rate would be the average
I am quite sure that under the all current method , inventory is converted based on the current rate. All assets and liabilities under the all current method are converted at the current rate except owners equity Under the temporal method, I believe inventory and fixed assets are converted at the rate on the purchase date( historical rate). They are both non monetary assets.
It doesnt say whether the invenory was bought evenly throughout the year… and if it was then they should have used average rate for both the methods. I think Schweser is wrong there. CFAI uses Historical for Temporal and Current rate under All Current. @ perdition : You are correct, I think its a Schweser issue. CFAI is clear and uses what you mentioned.
“It doesnt say whether the invenory was bought evenly throughout the year… and if it was then they should have used average rate for both the methods.” not for current method.
I think you are correct. All current should be current rates always. Thanks for correcting Show.
Inventory and COGS always confuse me in temporal method. I know that inventory is historic and COGS is average, but there is always the question of what is that actual historic or average rate based on the posssible language they can use (i.e. all bought in beginning of year, bought throughout the year, bought on the last day of the year, company uses FIFO or LIFO or weighted average method, etc.). I think this is something that we should definitley all review and get down pat on the forum in late May. This is a sure exam topic–nothing on this topic last year.
Inventory rates we use for Current rate method is always current rate irrespective of the language and data provided. See Pbm 16 on Reading 23 Page 217 CFAI… this question proves that All Current always use current rate for Inventory. For Temporal, I am yet to conclude. If someone can point to any example /question to conclude the inventory rate for Temporal then it would help all… BTW, Gross Profit margin is a ratio I can bet on… it WILL be there… almost every question set on CFAI has that.
Temporal method is still not clear. See soln 23 and 24 page 222/223 CFAI… In 23 it says Inventory translation is done using historical rates and in 24 it says the wtd average rate when inv was acquired will be used under Temporal… I have no idea now… which one to use…
Aha… its all clear now… Under Temporal method - The Inventory measurement and accounting decides the rates to be used. If the Inventory is measured under lower of mkt or cost then there are two possibilities: 1) mkt val > cost - use historical rate 2) mkt val < cost - use current rate ( yes current under temporal) Now which historical rate to use: If FIFO inv accounting is used then recent rates represent inventory cost hence current rate If LIFO accounting is used then historical rates represent inventory cose, hence use historical rate. If nothing is provided and only wtd average is provided use that rate. The objective is to get the correct inventory cost so use all the details provided. Phew… that’s complex for sure. if someone feels that there’s any flaw in my understanding then please discuss/guide/explain… Thanks.
agree on the fifo/lifo part. where in the text did you get the first part on lower of cost or market, i havent seen that. also i have to dig them up but there are quesitons that have conflicting info. for exmaple itll say company uses fifo (so im thinking ok inventory is current and cogs is historical) but then it says that inventory is bought and sold evenly throughout the year (which implies use average for both).
Theres a Chart given in CFAI text at page 177… if you read it carefully… you’ll be clear about inventories in Temporal method… Company uses FIFO… but if inventories were bought throughout the year then average rate is what applies… If company uses FIFO and bought inventory once in beginning period and next at end… then using current rate makes sense… if they bought only once during beginning of period then using historical rate makes more sense. You’ll have to understand when the inventory was bought and how close you can get to the actual cost… use the rate that gets the closest cost.