# Temporal method Q

Assume that Scud Co. is a Swiss subsidiary of the U.S. firm Patriot, Inc. On December 31, 2001 the /SF exchange rate was 0.77. (Each Swiss Franc buys 77 cents). One year later the Swiss Franc had appreciated to 0.85 /SF. Scud Co. pays no dividends. The average exchange rate for the year was 0.80 \$/SF. Scud pays no taxes. Assume that inventory is accounted for using the LIFO inventory assumption and was bought and sold evenly throughout the year. Income Statement (in SF thousands) December 31, 2002 In SF Sales 7,000 COGS (6,800) Depreciation (100) Translation Gain/Loss – Net Income 100 Assume that the functional currency is the U.S. dollar when answering the following questions. Q Net income would be: A) \$96. B) \$305. C) \$101. Answer: Your answer: B was incorrect. The correct answer was C) \$101. Substitute the previously calculated value for the translation gain into the income statement to arrive at the correct net income. Income Statement (in SF thousands) December 31, 2002 Sales 7,000 × 0.80 = \$5,600 COGS (6,800) × 0.80 = \$5,440 Depreciation (100) × 0.77 = \$77 Translation Gain/Loss Plug = \$18 Net Income \$101 Just ignoring the answer for the moment - why do they calculate COGS as (6,800) times 0.80 - which is the average rate. I’m sure COGS should be calculated at the historical rate (which should be 0.77)

COGS is remeasured at the average rate because the cost assumption is LIFO and the question says that the inventory was bought and sold throughout the year evenly, hence average. Also, as it is LIFO cost assumption, we know that the inventory that was bought the most recently, in 2002, was the inventory that was sold this year to produce the revenue.

Ah, I think it is because they are using LIFO, so therefore you need to remeasure COGS on the average rate?

newsuper, are you sure you posted the entire question? don’t we need a balance sheet to answer the translation loss / gain part of the answer?

it is because they say the inventory was bought and sold evenly that you use the average rate. If that had not been specified, you would calculate using the Historic rate.

Thanks guys, found this post which is along the same lines: http://www.analystforum.com/phorums/read.php?12,923167 I didn’t post the full question as it was just about the rate they used for COGS

I think I’ve seen this question. I believe they remeasured the COGS at the average rate (as shown above in the answer) and Inventory at the historic rate. Let’s say FIFO was used instead. Then would Inventory be remeasured at average rate and COGS be measured at historic? Sorry, the link above was actually started by me. I feel that I have a better grip of the concept, but get a little confused when doing the problems. Thanks.

Any of you know how to get translation gain, \$101

xsw05 Wrote: ------------------------------------------------------- > Any of you know how to get translation gain, \$101 It was prievously calculated - don’t bother to do the question, I only posted part of it to illustrate my question about the COGS classification. There was a heap of other stuff I didn’t copy and paste.