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) equal to the same ratio computed under the current rate method. B) higher than the same ratio computed under the current rate method. C) lower than the same ratio computed under the current rate method.
LIFO, all purchases towards end of the year. LIFO COGS for Temporal - would be at Historical Rate - which in this case would be the Current Rate. Since the local currenc has depreciated wrt. US Dollar - COGS would be lower in Temporal method. Current Rate method would be using the Average rate - which would be higher than the rate which the temporal method uses. So Temporal Gross Profit Margin would be higher… B?
A?
C Sales would be calculated using average rate in both methods. Temporal - COGS would be translated using the current rate as the purchases were made towards EOY and the LIFO cost assumption was used. All Current - COGS would be translated using the average rate.
Gross Profit = Sales - COGS/ Sales Sales is average in both cases So boils downs to COGS which is average in case of current rate and ‘same as inventory’ in case of temporal. Since its LIFO, the later rates will be considered. since foreign currency is depreciating, you get more for a dollar (or parent currency) now then you were earlier. So later rates would give more dollars or COGS would be more than when average is applied. or GP will be more in case of temporal. So should be B
BlueCollarHero Wrote: ------------------------------------------------------- > C > > Sales would be calculated using average rate in > both methods. > > Temporal - COGS would be translated using the > current rate as the purchases were made towards > EOY and the LIFO cost assumption was used. > > All Current - COGS would be translated using the > average rate. my method above is right but answer is wrong…it should be B…like I said…CPK makes me feel super duper dumb 
CPK makes me feel super duper dumb too. I wanted to say B, but typed A in haste.
CPK is 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.