Problem 23 EOC Q. If I remember correctly if FIFO is used current rate for Inv. is used. So why is using the CR in this problem for Inv. incorrect? I didn’t see anything about evenly purchased throughout the year.
Sorry CFAI text. Chap. 23
Temporal Method + FIFO FIFO COGS - means Item that came in first is in COGS -> so Historic Rate for COGS would mean the real Historic Rate for COGS. Now Inventory left is actually the Latest purchased pieces - so you would use Current rate under Temporal method for FIFO Inventory.
^CPK this is what I meant to say. Sorry, I wrote my original post a little frustrated and left out some key details. The problem quotes the Inv. using the current rate under the temporal method, but this is not the correct answer. It makes sense why the answer itself to the question is valid, but why is A an invalid choice???
i have the same problem, i am talking about question 18. page 217. i would really appreciate if somebody can give a good answer here. augustus is using temporal method and FIFO. so since invetory is valued at actual cost, COGS will be valued at historical cost, , lets say when inventory was acquired. (rate 1.49 USD/EUR) the 2008 average rate is 1.54. so now we don’t have any numbers for augustus but we can make up some to test if this answer in the book is correct. gross margin: sales- cogs/sales so if we in EUR had sales of 1000, cogs of 600. our gross profit margin would be 400/1000= 40% in local currency in USD we translate sales of 1000USD at average rate 1.54 and cogs with our inventory rate (because cogs from old inventory). this would equal: 1540 (sales) - 894 (cogs) = 646/1540 = 41.9% so now can somebody explain why margin is distorted???
Q 18 has no issues. Read this as Romulus parent - already has consolidated the other company Julius at CR -> so COGS would be at the Wt. Avg rate. Now if Augustus were also using CR method - they would use Wt. avg rate - so there would not be any distortion of the margin. Parent and subs would all be one happy family. But if Augustus used Temporal - the difference between the average rate and the different rate to be used for COGS under temporal - would cause COGS on child’s fin. statements to be different from the parent (and all other subs, Julius included). Q 23 - based on the fact that they said in Exhibit 2 - that “here’s the weighted average rate at which inventory was acquired” - I believe they are expecting you to use the average rate for Inventory.
The margin is distorted because you are using an average exchange rate for your sales, but a “weighted average inventory cost” for COGS. Two different translation ratios = distorted results. I could be wrong, but here is my explanation… Current Rate (CR) method: - Translate inventory @ CR - Translate Revenues & COGS @ average rate Temporal Method: - Translate Revenues @ average rate - If FIFO, the COGS are the oldest stuff, and the inventory is the newer stuff, therefore translate COGS @ your historical inventory cost, and B.S. inventory at a more recent cost (current rate if you just bought all of your inventory in stock for example). - If LIFO, opposite. If the foreign currency is appreciating, you will translate your COGS at a lower value in FIFO than weighted cost, therefore you will increase your translated gross profit margin (provided you didn’t buy all of your COGS in a lump at the end of the year). Someone please correct me if I am wrong as then I would need to review!
calgary, thats exactley how i understand it. so just one more last question. distorted in this question doesnt’ necessarly mean worse, it just means the calcuation is “messed up”. thanks!
Yes that is true. Depending on which way the foreign currency is moving, it would distort your ratios beneficially or against you. It also distorts various financial ratios in different directions.
thank you and good luck! hope i won’t have any language issues!
cpk123 Wrote: ------------------------------------------------------- > Q 18 has no issues. > Read this as Romulus parent - already has > consolidated the other company Julius at CR -> so > COGS would be at the Wt. Avg rate. > > Now if Augustus were also using CR method - they > would use Wt. avg rate - so there would not be any > distortion of the margin. Parent and subs would > all be one happy family. But if Augustus used > Temporal - the difference between the average rate > and the different rate to be used for COGS under > temporal - would cause COGS on child’s fin. > statements to be different from the parent (and > all other subs, Julius included). > > Q 23 - based on the fact that they said in Exhibit > 2 - that “here’s the weighted average rate at > which inventory was acquired” - I believe they are > expecting you to use the average rate for > Inventory. Thats what I figured, but its still annoyingly detailed and requires a decent inference here. Thanks for pointing that out.