# Temporal Method

In the Qbank, there is a question on translating COGS using the temporal method (fyi Inventory in this example remained the same in the two periods). I was under the impression that you use the historical rate, however, the answer below seems to indicate that you want to use the average rate because inventory was unchanged? I’m a little confused… Both the beginning and ending inventory under LIFO cost flow assumptions are translated at the \$0.12 (historical) rate as of the date the original inventory was acquired, January 1, 2001. Because beginning and ending inventories expressed in Mexican pesos are equal, the purchases for the year will equal the Cost of Goods Sold, which is remeasured at the average cost of acquiring the goods during the year: \$0.11. (45,000,000 × \$0.11) = \$4,950,000. The average rate is the best estimate of the historical rate because the inventory that was sold was purchased evenly through the year.

I think that last sentence is your answer…“purchased evenly throughout the year” means you use average rate. Think about it- if you buy inventory on every day of the year, what rate do you exchange it at? You couldn’t just pick one historical rate and call it a day. You also wouldn’t want to value each of those transactions at 365 different rates. So take the average.

AndrewUNH is right. This was a trick question to see if you understand BI and EI under LIFO. Yes its historical. However, BI and EI are the same, under LIFO the same value, the same units are assumed to be sitting there. So all COGS came from purchased. If the purchased were bought evenly over the year, it would equal the “average” rate.