Multinational operations was my most comfortable area in FSA, and now somehow I am messing up on even the easiest stuff Could one of you help me in the following: 1) Gross profit margin seems to be higher under Temporal if the foreign currency is appreciating, and higher under all-current method if FC is depreciating. Doesnt intuition say the opposite (using historical rates under temporal would mean using older rates before the FC gained) ?? 2) Does FIFO always lead to higher gross profit margin regardless of the translation method ?
- It depends on what the inventory cost flow assumption is. If the firm is using FIFO and the currency is appreciating, their COGS will be lower. Why? They are using historical rates to expense inventory as opposed to the current rate method which uses the average rate. If they were using LIFO, COGS would be higher. Again, this is assuming an appreciating currency. 2. No. If the foreign currency is depreciating and the firm uses LIFO, COGS will be translated at a lower rate assuming the temporal method is used. The current rate method will translate goods at the higher, average rate.
Appreciate the help I just figured out inflation has a role to play as well in FIFO providing higher profit margin.
BPdulog, I just got confused , point 1, if the firm is using FIFO and the currency is appreciating, COGS will be lower? i still dont understand, point 2 makes sense.
oldest (historical) pieces are in COGS. so they will be valued at the OLD lower currency rate. (since the currency is appreciating).
Ok i guess i am confusing domestic vs foreign ,i didnt know which one they were referring to
watch out. Using the temporal method, COGS is measured at historical prices, regardless of the currency exchange rate. So, it is not correct to say tat COGS will be lower or higher. Gross profit will be higher due to the higher sales (due to the high average exchange rate).