# Temporal Method - Purchases and Inventory

When calculating Purchases and Ending Inventory, do we use the average rate or historical rate under the temporal method?? This question appears to use the historical rate for Beginning inv and average rate for purchases and ending - can someone explain this please?

Ending inventory on B/S = 100

COGS = 700

The exchange rate at the beginning of 2005 was 0.3333 Chad/US\$. The exchange rate at the end of 2005 was 0.25 Chad/US\$. The average rate for 2005 is 0.3125 Chad/US\$. Beginning inventory is 90 Chad. Acer Tool & Die uses FIFO inventory valuation and depreciates fixed assets using the straight-line method. Assume that retained earnings at year end 2004 were zero, the historical exchange rate for depreciation is 0.333, and no dividends were paid during 2005.

Q: What is the COGS in USD using the temporal method?

Ans:

Beginning Inv: 90 Chad converted to USD\$ 270 (using historical rate of .333)

Purchases: Calculated as 100+700-90 = 710 Chad. Converted to USD \$2272. (using av. rate of .3125)

Ending Inv: 100. Converted to USD \$320 (using av. rate of .3125)

COGS : 270 + 2272 + 320 = \$2222

They’re assuming that the purchases were made evenly throughout the year so in this case they use average as opposed to historical.

I can’t offer advice on when to use average or historical, but my guess is that if they want you to use average they’ll give you an indication… something like “Purchases were made evenly throughout the year”. This question doesn’t really do that so either it’s poorly written or I’m in for a big surpise

Also, for completness, I think you meant to subtract ending inventory from your COGS equation to calculate \$2222

You use the historical rate.

Usually, they’ll tell you that purchases were made evenly throughout the year, so the historical and average rates are (nearly) the same.

If not, remember that for ending inventory, historical means a recent rate for FIFO and an old rate for LIFO, and for COGS, historical means an old rate for FIFO and a recent rate for FIFO.

Could be the conference call I’m on right now that I can’t fully understand this, but can you explain this a bit further… assuming a historical rate for ending inventory with a company that uses FIFO (which would indicate higher inventory levels relative to LIFO), how exactly does this mean a recent rate?

Sorry I’m just not following

The historical rate for ending inventory is the rate applicable when you made the purchases.

Under FIFO, the most recent items are assumed to be in inventory, so the rate you use is the one applicable to the most recent purchases: those purchases still (assumed to be) in inventory.

So, if a company is using FIFO and I’m asked to remeasure ending inventory using the temporal method, and I am given the historical rate and the current rate; I’d still use the historical rate, but this rate would have been more recent if they had used LIFO?

Under FIFO you’d likely use the current rate for inventory and the historical rate for COGS.

They’d have to be very specific.

Under LIFO, you’d likely use the current rate for COGS, and an historical rate (possibly a _ very old _ historical rate) for ending inventory.

I always wondered this: Do you think you’d get a perfect score if you re-took the tests?

Thanks as always

Not without a lot of review.

(When I answer questions, I have the advantage of getting to look at the books when I need to.)

And I’m immensely that I don’t have to retake the exams!

You’re welcome.