Which of the following statements is CORRECT concerning foreign currency translation? A) In the case in which a firm uses FIFO inventory valuation, if the local currency appreciates the cost of good sold under the temporal method is less than the cost of goods sold using the current rate method. B) The receivables turnover ratio is identical under both the temporal method and the current rate method. C) Profit margins are identical under both the temporal method and the current rate method. D) In the case of an appreciating currency, the fixed asset turnover will be lower under the temporal method, as compared to the current rate method. arent there 2 correct answers here?
I’ll go with D. For appreciating currency and understated COGS due to FIFO, fixed assets will be higher therefor fixed asset turnover will be lower.
B… but not sure why A isn’t right.
dwight, fixed assets are lower under temporal w/ an appreciating currency, regardless of LIFO or FIFO … right??
Yeah you’re right. Got too caught up in the FIFO aspect.
B…A is not right because if the local currency is appreciating, then the Historical COGS > than Current COGS. Temporal uses historical COGS
Talking a quick shot at it. COGS -temporal - HR COGS - All Curr - CR LC appreciates -> HR < AR < CR COGS(AC) > COGS(T) A???
deep2002 Wrote: ------------------------------------------------------- if the local currency is appreciating, then the Historical COGS > than Current COGS. Temporal uses historical COGS not correct,IMO
RTO = S/AR Tempo S = AR AR = CR All Curr S = AR AR = CR Gotta be B?
Yes, Answer is B. My question is: why not A. schweser qbank has this explanation.i dont buy it. “When using FIFO and the temporal method we assume that inventory is bought and sold evenly throughout the year and thus the appropriate historical rate to use for COGS is the average rate which is also the rate used for COGS with the current rate method.”
Yah I agree Dinesh. In more plain English, under the current method and the temporal method, sales are calculated at the average rate. Also, under the current method and the temporal method, average receivables are calculated at the current rate. The FIFO info might be just to distract (and it worked for me). Since the receivables turnover equals sales over average receivables, it is equal under both methods. So B?
I’m going to go with B over D because if I recall correctly, under the temporal method functional currency is the reporting currency rather than the local currency.
Dsylexic Wrote: ------------------------------------------------------- > Yes, Answer is B. > > “When using FIFO and the temporal method we assume > that inventory is bought and sold evenly > throughout the year and thus the appropriate > historical rate to use for COGS is the average > rate which is also the rate used for COGS with the > current rate method.” This is not happening. They have to give this (even-consistent-buying) information in the question itself.
I’m fucked.
B is right. Under FIFO, purchase goes to COGS, so you calculate ending inventory with ending exchange rate, which is equal to the current exchange rate. Therefore, under FIFO temporal, COGS might be the same with the one you ll get under all-current, if purchase is in general caled @ average rate…
Wrong. Under LIFO , purchase goes to COGS, COGS is @ average rate. right? consider you had 100 unit, and you bought another 100 unit. and sold 100 unit. ending inv. =100 unit. Under LIFO, COGS is the purchase, should be caled @ average rate, which is equal to the one you ll get under all-current… Under FIFO, the COGS is the beginning inv. and therefore should be @ historical rate…which is lower than the one you ll get under all-current… I think I am messed up here.
I think your over-thinking it naivejoe. Look at it individually, the FIFO comment is there to throw you off. The main question is looking at the difference between Temporal and All current method. I looked at it from that perspective, whether its LIFO or FIFO is not relevant because the adjustments you would make would be the same since your adjusting between Temporal and All current NOT between LIFO and FIFO.
i also picked B. COGS can be lower or higher when temporal method is used vs all-current method. someone posted a question about comparing LIFO COGS when most purchases were made at the end of the year and we had a discussion about it two weeks ago.
deep2002, schweser has table in the FSA book where it compares different I/S items for Temporal vs all current. and for apreciating LC, the table summarizes the result as COGS Temporal < Cogs all current. so what gives?
I don’t know about the table. I use mostly the secret sauce and I don’t have that table summary. I think the question is asking terms of the local currency is not the reporting currency. If you look at the local currency only, then yes in an appreciating LC the COGS temporal < COGS all current. In the reporting currency, that would be reversed so the COGS temporal > COGS all current. So I think this is the case of the LC not being the same as the reporting currency. been a while since I looked over this material.