Hello Everyone, I got confused here, need ur help to find out the correct one. A foreign subsidiary is operating in a country where the local currency is depreciating relative to parent’s presentation currency. Assuming the subsidiary is a FIFO firm, which accounting method will result in highest gross profit margin reported in parent’s consolidated income statement ? A. Current method. B. Temporal method. C. The current and temporal method will results in the same COGS. Schweser says A is the Answer…can u please elaborate it. thanks!
The current rate method theoretically uses the historical exchange rate for each transaction on the income statement; in practice, it uses the average rate. The temporal method uses the historical rate. Thus, under FIFO, we expect that the historical rate (when the inventory was purchased) is higher than the average rate because the local currency is depreciating versus the presentation currency. That would lead to higher COGS in the presentation currency, and lower gross profits in the presentation currency.
To keep it simple,
Current Rate Method uses Average Rate for COGS
Temporal Methods uses Historical Rates.
Since local currency is deprceiating ,COGS become less when we use Avg rate compared to historical rate.
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Great! that was really helpful.
thankyou!
My pleasure.