Hann Company is a U.S. multinational firm with operations in several foreign countries. Hann has a 100 percent stake in a French subsidiary. The foreign subsidiary’s local currency has appreciated against the U.S. dollar over the latest financial statement reporting period. In addition, the French firm accounts for inventories using the FIFO inventory cost-flow assumption. The net profit margin as computed under the current rate method would most likely be: A) lower than the same ratio computed under the temporal method. B) either higher or lower than the same ratio computed under the temporal method. C) higher than the same ratio computed under the temporal method.
A. lower than the same ratio computed under the temporal method. consider this scenario: beg rate = $1/1FC current rate=2/1FC -- so FC appreciated depreciated Revenue =100 FC cogs=50 FC Ignoring taxes and others Under temporal the ratio is = 100*1.5 - 50*1 / 100*1.5 = 100/150=0.67 Under current method = 50/100 =0.5
i had the same answer (A) - and its wrong. The correct answer is “B”. Its asking about NET profit margin, not GROSS profit margin. On the temporal method, the impact of f/x measurement is charged to the income statement. Therefore, to answer the question we would need to know what the total P&L charge is. Very tricky!
Yeah…, don’t really think such a question will be on the exam. But then again, this is my first and only time taking LII. Next after this will be LIII. Let’s get it!
I fell for the GPM/NPM trick, damnit.