A German company owns a subsidiary in the U.S. Assume you believe that the EUR will appreciate vs. USD. The gross profit margin will be highest if you account for the US subsidiary’s inventory using: A) fifo and the temporal method B) weighted avg. and using the temporal method C) weighted avg. and using the current rate method D) lifo and the temporal method E) fifo and the all current method Explain.
FIFO + Temporal Historic COGS - since it is FIFO - this is the earliest inventory. So Historic Purchase Rate. Historic Purchase Rate would be higher since USD has depreciated against the $. So High COGS - low GPM. LIFO and Temporal Historic COGS in this case would mean the latest Purchase Rate would be in COGS. So the Lowest Prices would be in COGS. So Low COGS - high GPM. Between the two above - LIFO + Temporal wins. FIFO and Current Rate: Weighted Average and Temporal Weighted Average and Current Rate: All these are the same analysis. Average Rate for COGS. Average Rate would be higher that the Current Rate. So it would be a higher COGS. So answer is LIFO + Temporal.
I’ll pick D COGS will use the most recent current rate which is a lower USD vs the Euro Therefore COGS is lowest (in USD terms) so GP margin is highest
fyi, i added options D) & E. the question is from #197,V2, problem #2.
? so D is not a real option?
if D and E were real options I would have chosen D. otherwise, I choose C.
niraj_a Wrote: ------------------------------------------------------- > if D and E were real options I would have chosen > D. > > otherwise, I choose C. agree, C is next in line after the imaginary answer D
niraj and newsuper why would there be any difference between Weighted average in LIFO or with FIFO? Wouldn’t you be using the same Average Rate?
hmm…true, there is no difference between B and C
c is correct if you leave out the added options of D and E. i’m just trying to see your line of thought because this is one thing in the reading of multinational operations that i always seem to mess up. note. sorry, did not check this one … Study Session 6, Reading 24: In problem 2 (p. 197), change option C to read “FIFO and the current rate method.” In solution 2 (p. A-10), replace the third and fourth sentences with the following: “… against the UAH and expects some inflation in the Ukraine. In an inflationary environment, FIFO will generate a higher gross profit than weighted average cost. For either inventory choice, the current rate method will give higher gross profit to the parent company if the subsidiary’s currency is depreciating. Thus, using FIFO and translating using the current rate method will generate a higher gross profit for the parent company, Eurexim SA, than any other combination of choices.” In Exhibit 2 of the Practice Problems (p. 199), the heading should be US$/Canadian$ instead of the reverse.
so lets try it again… A German company owns a subsidiary in the U.S. Assume you believe that the EUR will appreciate vs. USD. The gross profit margin will be highest if you account for the US subsidiary’s inventory using: A) fifo and the temporal method B) weighted avg. and using the temporal method C) fifo and using the current rate method Explain. note. usa is currently not in a hyperinflationary environement, but you assume that this might change…
You want a low COGS in order for you GPM to be high. So A is definitely out because the COGS in A are the oldest inventory, when the functional currency was higher, which would make COGS high. But I don’t really see the difference between B and C. Both will result in an average rate for COGS. I don’t think CFAI would be this vague on an exam. ANyone agree?
damnit i see it now. FIFO is what we need. this is because FIFO in USD means older more expensive items will comprise COGS. BUT, when you convert these older items to EUR (which is what needs to be done since the PM is being asked for the parent), the older EUR numbers are lower. this will lead to lower EUR COGS in the end and thus higher PM.
It was my impression that under the current method, COGS is always average rate, as is the rest of the income statement. Is that wrong??