Cogs using Temp vs Current with LC depreciating
Can someone elaborate on this for me? I got it right, but I am still confused. In particular can you highlight the differences on the inputs for the temporal vs. all current methods.
Fronttalk Company is a U.S. multinational firm with operations in several foreign countries. It has a 100% stake in a German subsidiary. The foreign subsidiary’s local currency has depreciated against the U.S. dollar over the latest financial statement reporting period. In addition, the German firm accounts for inventories using the last in, first out (LIFO) inventory cost-flow assumption and all purchases were made toward the end of the year. The gross profit margin as computed under the temporal method would most likely be:
A) lower than the same ratio computed under the current rate method.
B) higher than the same ratio computed under the current rate method.
C) equal to the same ratio computed under the current rate method.
D) indeterminate relative to the same ratio computed under the current rate method.
Your answer: B was correct!
The foreign company uses LIFO so new purchases are flowing to cost of goods sold (COGS) and most purchases occurred toward the end of the year, so the current rate of exchange is our best guess for the COGS account. Since the local currency is depreciating, it is taking more foreign currency units to buy a dollar in the more recent periods and as a result, COGS as measured in U.S. dollars is lower and the gross profit margin is higher under the temporal method.