So are the effects on gross profit margin between the two methods the same depending on a LC appreciation/depreciation REGARDLESS of whether the firm uses FIFO or LIFO? I can’t get my brain around why. Anyone know?
hi sterling, just come back from the beach down here in Aus - L2 coming up Sunday… lets assume: US parent, Aussie sub. Currency: 2008 av exchange rate = 0.90USD/FC 2007 av exchange rate 0.95USD/FC (so FC is depreciating against USD - you wish!) assume old inventory purchased in 2007 Inventory: new inv purchased 2008 @ av price FC200 old inv purchased 2007 @ av price FC100 (so inventory price is rising) if sub uses FIFO in its accounts: In sub books All Current Temporal Sales FC1000 @ 0.90 = USD900 @ 0.90 = USD900 COGS FC 100 (old) @ 0.90 = USD 90 @ 0.95 = USD 95 GP FC900 USD 810 USD 805 BUT if sub uses LIFO in its accounts: In sub books All Current Temporal Sales FC1000 @ 0.90 = USD900 @ 0.90 = USD900 COGS FC 200 (new) @ 0.90 = USD 180 @ 0.95 = USD 190 GP FC 800 USD 720 USD 710 so you get 4 different GP results for the 4 combinations of LIFO/FIFO and translation methods. But still the normal outcomes apply - ie higher GP under FIFO (with rising prices), and higher Income statement results under All Current (with depreciating FC). hope this helps…(now back to SWAPS!) cheers
wow… this is really helpful! thank you much and enjoy those swaps (and the beach)!