Current ratio and the current rate exchange method

CFA Level II
#1

Hi all

CFAI online mock B morning session Q 29 states:

“All assets and liabilities are translated at the closing rate. Therefore, all ratios involving only asset and liability numbers, such as the current ratio, will be unaffected by translation.”

This makes sense.

However Schweser is saying that Current Rate will be higher under current rate when the local currency is appreciating (they have a table with a list of all movements).

Can anyone clarify? Thanks!!

#2

I think you misunderstood Schweser.

the CR will gave same current ratio.

#3

There is inventory in current ratio calculation which is translated using historical exchange rate when translated under temporal method. It results to differences between translated CRs.

#4

No inventory on balance sheet = current rate method will give SAME result when translated

Inventory on balance sheet = current rate method will give DIFFERENT result when translated

Is this correct?

#5

Not always.

Translation methods may result to the same inventory amount in case exchange rate at the reporting date is equal to the historic exchange rate of inventory. This is coincidence, like a solar eclipse.

#6

Current rate method uses the current rate for all assets and liabilities excluding common stock. Inventory is translated at the current rate. Current ratio would be the same since it’s a pure ratio. You would translate the numerator and denominator with the same rate and their effect would get negated.

#7

Bezad_D

Current ratio = Current assets / Current liabilities

Current assets = Cash + Marketable securities + Accounts receivable + Inventory + maybe some other items.

Current assets include inventory, translation of which results to different amounts in different translation methods.

#8

You’re right when you’re comparing the two translation methods. From the question I could deduce that he was talking about current rate method as a standalone.

#9

Oh, I see. If we are comparing 1) current ratio computed from original (before translation) currency figures with 2) current ratio computed from presentation (after translation) currency figures, then the results are the same.