Translation of Cost of Good Sold (reading 25, Foreign Currencies)

Assume the temporal method, where non-monetary assets (including inventory) are translated at historical rates. The text says that COGS are also translated at historical rates. Seems logical. But from a practical standpoint, with thousands of individual purchases and other components making up the COGS section of the income statement, how can each individual item (or each day’s worth of items) be translated? Anyone?

usually this is not day to day translation… remember it is a parent / subsidiary that are trying to combine and present their financials at year end. you have the year end financials present - which you are trying to translate. Depends on FIFO/LIFO Under FIFO Cost flow assumptions - what is in COGS are the oldest items - so Historic cost = Old cost. (so translate at actual historic rate) Under LIFO = Most current items are in COGS - so Historic Cost = Most recent Cost (so translate at the most recent rate). If they give you are average cost assumption - then translate at the weighted avg currency rate.

That explains the inventory components in the COGS calculation. But what about the purchases during the course of the reporting period?

where do purchases show up in any of the financial statements? COGS - comes on the Income statement (and treatment is as above). Purchases = are built into the ending inventory on the Balance sheet - and there again you have the rate figuring into the mix… as appropriate. For Ending Inventory: FIFO - would mean the latest pieces are in Ending inventory. So Current Rate translation. LIFO - earliest pieces in Ending Inventory - So Historic rate translation. If Weighted average - use Weighted Average Rate for calculation.

So assume LIFO inventory, beginning and ending, has a value of EU 1000, translated at historical rate is USD 1200. However, COGS is EU 7,000. What method is used to translate COGS?

use the recent rate for USD to EU Conversion - and use that 7000* that rate.

Recent, meaning average for the reporting period?

no - recent, end of year… end of year is not average. LIFO - ending pieces get used in the COGS - so use the end of year price.

If COGS is 7k, and beginning and ending is 1k, purchases must be 7k. Using LIFO, everything that was purchased was sold. If the reporting period is one year, you’re saying that end of year prices should be used for COGS/purchases?

you do not go back and calculate it based on Purchases. It is a LIFO system after all. So be consistent. Since it is LIFO - the first in pieces are used in the COGS - so the LIFO COGS would be valued at the end of year period rate.

CP, don’t you mean most recent purchase are used for COGS? (Last In, First Out)

cpk123, you taking L3 this June?

Purchase is never used. READ THE BOOK Folks. It is all there laid out quite nicely. It is the end of year Rate used to convert the COGS Balance. damil - yes I am taking L3 this June.

You’re not understanding the accounting dilemma I’m presenting. If COGS is 8k, of which only 1k is explained by LIFO inventory that was acquired in a different accounting period, how can you convert COGS by an exchange rate applicable to the LIFO inventory? cpk123 Wrote: ------------------------------------------------------- > you do not go back and calculate it based on > Purchases. It is a LIFO system after all. So be > consistent. > > Since it is LIFO - the first in pieces are used in > the COGS - so the LIFO COGS would be valued at the > end of year period rate.

Not so. Book says historical rates, not current rates (page 285, column two). So, how do you do it in practice? cpk123 Wrote: ------------------------------------------------------- > Purchase is never used. READ THE BOOK Folks. It is > all there laid out quite nicely. > > It is the end of year Rate used to convert the > COGS Balance. > > damil - yes I am taking L3 this June.

Last in first out, use current Roberto Duran

>>> Not so. Book says historical rates, not current rates (page 285, column two). Robert – Is this Exhibit 4 you’re referring to? If so go one page before that (at least it was so in the 2010 material) Pg 175 in 2010 material – passage starts with "The historical rates used to translate inventory (and cost of goods sold) under the temporal method will differ… read that passage thro. Tables do say “Historic” but you need the context of Historic which this table does not provide, but the passage in the text does.

Yes, it is the same exhibit, and I see the same paragraph on the preceding page. This is what prompted my original post. Paraphrasing the paragraph… EI is translated at the rate that existed when the inventory was acquired based on LIFO or FI (i.e., historical cost, no problem there). – further down – COGS is translated using rates that existed when inventory items assumed to have been sold were acquired. So, if the net change in inventory is only a minor component in overall COGS, what is this passage saying?

why are you worrying about change in inventory? Only flow of inventory matters here. Not which piece went where - which was the focus in Level I Inventory chapter. Here you have a running breathing company - acquires inventory, builds goods. In the overall picture of things it is part of a bigger company - with whose financials you need to merge and produce a combined financial statement. (for valuing that bigger company). valuation is the key - and there - you have point in time statements. So when the inventory was acquired does not matter. what does is - what is left at the end of the year, and how that needs to be used to combine the two company’s financial statements. Here let’s go with the LIFO assumption: LIFO - means COGS uses the latest pieces. Uniform flow of material means the latest pieces at the end of the year is what went into the COGS pieces. If they wanted you to use any other approach - they would tell you that the inventory was bought and sold evenly through the year - which is your cue to use the weighted average assumption. In the absence of that statement - you end of year purchase (last in) is what is in your COGS (First out) - so your end of year rate applies. End of Year rate is your Historic Rate. With FIFO - First in piece is First out. So your Historic Rate is your beginning of year rate.

I get the rule, but I don’t get the reasoning behind it. I’m still stuck on idea that the conversion rate for inventory, which is a rate that may be wholly inappropriate for the reporting period, is going to be used for the COGS account. For example, if LIFO inventory uses a historical rate of 1.00 because it was acquired long ago, and today the average rate is closer to 1.20, how are we converting COGS?