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. Your answer: A was incorrect. The correct answer was B) higher than the same ratio computed under the current rate method. Can someone please help explain this? Doesn’t Current Rate and Temporal both use historical rates for COGS or is there an adjustment because of LIFO?
LIFO only affects temporal methods. For COGS, you use the more recent rate since you sold your most recently purchased inventories. For all-current method, you use average rate for income statement items regardless of what inventory rule being used.
Great. Thanks for your help.
temporal uses historical method for COGS along with Depreciation.
+1