CFAI Reading 23 Question 21 therefore, instead, higher

JonnyKay

Shouldn’t it be LIFO temporal, instead of FIFO temporal? We are looking for higher gross profit, therefore for lowest cogs. Since dollar is weakening, wouldn’t be appropriate to use historical (lower) rate for COGS? And correspondingly LIFO instead of FIFO?

ogoluwa

Beginning of period: 0.649 USD/SGD
End of Period: 0.671 USD/SGD
SGD is the Local Currency - and USD is the Parent Presentation Currency.
USD has depreciated, and SGD has appreciated.
Under FIFO method - Oldest items are in COGS, latest items are in Ending Inventory.
If Functional Currency were US Dollar - which is the Presentation Currency - Temporal Method. COGS would be at Historical Rate.
Under FIFO - oldest rate @ 0.649 USD would be used to convert COGS - 1000 SGD (assumed) COGS would convert to 649 USD.
LIFO - Current rate @ 0.671 USD would be used to convert COGS - 1000 SGD (assumed) COGS would convert to 671 USD.
If SGD were the Functional Currency - this would be current rate method. So 0.671 would be used - convert to 671 USD.
For Highest gross profit margin - need lowest COGS - so FIFO @ USD (Choice A) is your answer.

Colum

Your right krnyc2008, the focus is on ending inventory.
EI COGS*
FIFO Current FX Rate Older or Avg Rate
LIFO Older FX Rate Newer or Avg Rate
*COGS is usually done with avg along with the entire I/S, the only question potentially affected by this would be Days of Payable = COGS/Avg Inventory
Hope this helps

kseniaru

That’s where I am confused. I thought we need to use current rate for FIFO inventories (which is higher rate in this case) and historical rate fo LIFO inventories. At least that’s how Stalla is explaining it. Is it wrong?

zephyranalyst

(disclaimer: I do not have the text in front of me) FIFO = your inventory is being purchased at the lower price (lower exchange rate) So your Sales-COGS would give you a greater Gross Profit and a higher numerator than buying the inventory at the higher rates giving you a lower Gross profit and lower numerator.