I get the first part about using FIFO, but i am not getting the 2nd part about how current rate method will be used to increase gross profit?
Current rate method uses the Average Rate to convert all income statement accounts, while the temporal method uses the historical rate for the conversion of expenses related to non-monetary assets (COGS).
The problem talks about the lack on information, but we do know that UAH300 of inventories were purchased, and that the Euro is expected to appreciate against the Hryvnia.
If the Hryvnia is expected to depreciate over the time, the average rate will be lower than the historic rate that was prevailing when the UAH300 in inventories were purchased.
This means that under the CR Method, we would convert the COGS at a lower rate than we would under the T method, giving us a higher gross profit.
Hope this helps.
The question states that subsidiary’s functional currency isn’t determined, so should we use the criteria of functional currency given in the reading
Doesn’t matter if you know the functional currency or not. The current rate method will still give you a higher gross profit than the temporal method. If the subsidiary’s currency is depreciating it will always be higher than temporal.
Edit: In this particular problem the FC does not matter. In other problems you would need to know it in order to decide what method to use.