When comparing different accounting methods, and the use of LIFO vs FIFO to figure out which alternative that will give the highest gross profit I often get confused. This is my thought process. For an example where the subsidiaries currency is depreciating.
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I first look at the choice of accounting method, this is the dominant factor. E.g. If a subsidiaries currency is depreciating the Curren Rate Method will give higher net profit because we are converting COGS at a lower rate (the current rate). This means that regardless of LIFO or FIFO the current rate method will will give a higher gross profit than the temporal rate method. Correct?
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I then look at the effect of LIFO vs FIFO for the various methods. I compare Current Rate Method FIFO with Current Rate Method LIFO, and Temporal rate method FIFO with Temporal Rate Method LIFO. LIFO will be using the Latest COGS (i.e. the one at the lower rate), resulting in a higher profit than FIFO (which used the old rate). A Weighted Average cost would be somewhere in the middle.
Based on these two steps I can ranking it like this in terms of highest gross profit when the subsidiaries currency is depreciating.
- Current Rate Method LIFO
- Current Rate Method - Weighted Average Cost.
- Current Rate FIFO
- Temporal Rate LIFO
- Temporal Rate - Weighted Average Cost.
- Temporal Rate FIFO.
Is this the correct way of thinking of it? Any help and input is much appreciated as this is a topic that often tends to confuse me.
I am also unsure if my statement regarding FIFO and LIFO is correct,e for LIFO the latest rte (newest rate) will be used for COGS and for FIFO the oldest rate will be used for COGS. Is this correct?