Is “purchases” under balance sheet or income statement?

@vincentt – I think we all agree that your assessment of quick ratio and inventory turnover is correct. Inventory turnover will be different here, hence the obvious answer.

On payables turnover ratio, average payables is a monetary liability, hence I believe they are both current rate under all current and temporal methods.

@vincentt, I think average payables should be current rate for both methods.

In fact, you’d mentioned this before in your earlier post far above:

Payable – current rate for both

@vincentt, I suspect there’s more info to your question that I may have missed. Would you paste the whole lot?

“Purchases are made evenly over the year and held in inventory for 3 months.”

@vincentt – therein lies the keyword. For payables turnover ratio, use the COGS/Avg Payables definition (it seems CFA uses this as an approximation vs. normal accounting methods).

Explanation as follows:

Under temporal method, historical price is used for for non-monetary assets (i.e. use the exchange rate in effect when you bought those assets). If purchases are made evenly throughout the year, this is in effect an average rate, if you think about it.

Therefore, in this particular case, it’s irrelevant whether LIFO or FIFO is used (ignore my earlier speculations), COGS will be determined using the period’s average rate under temporal method, and hence the same as all current method (COGS= avg rate, avg payables = current rate).

I hope this make sense. Meanwhile I can do some mini victory dance as I can sleep in peace now :))

@vincentt, I think this is an excellent question, shows that you think deeply about the question!

Purchases is a figure you have to derive from starting and ending stock levels, as well as COGS.

Purchases = COGS + Ending inventory – Starting inventory

So it has I/S elements in it, and therefore you can proceed to interpret the effect on the ratios accordingly.

@vincentt, is the question multiple choice, asking which ratio would be differ between the 2 methods?

Because as it stands my assessment is similar to yours, even if payables ratio is in some case defined as COGS/avg payable, as COGS are treated differently in both methods, where the denominator (payables) as you said are both the same for payables.

I wonder if there is more info in the question? Can you share it with us?

Based on my understanding of the question (which of the 3 ratios is affected in all current vs. temporal), the only thing I can justify the answer is that there is a sub-case for payables turnover (using the COGS/avg payables definition) where it’s the same for both methods.

It’s where you use LIFO method for inventory, then COGS uses average rate under temporal.

Ahhhh, you can see I’m getting frustrated too! ~X(

I think we need to see the question!

@vincentt – I think we all agree that your assessment of quick ratio and inventory turnover is correct. Inventory turnover will be different here, hence the obvious answer.

On payables turnover ratio, average payables is a monetary liability, hence I believe they are both current rate under all current and temporal methods.

As mentioned previously, the only way I could justify the answer is that there is a sub-case for payables turnover (using the COGS/avg payables definition) where it’s the same for both methods.

It’s where you use LIFO method for inventory, then COGS uses average rate under temporal, same as COGS’ treatment under all current method.

Regardless the LIFO or FIFO inventory method, the inventory turnover ratio is still different for both methods.

Anyone else care to share some light here, my brain may have gone rusty here. @Diya, @MattJuniper, @AjFinance?

@vincentt FYI sharing individual questions for discussion should be fine under fair use so don’t worry. If we get complaints we’ll take it down, but I doubt we will.

No problemo @vincentt, we’re always here to help! Good luck with the revision and keep me updated on your progress then!