query - FSA schweser pro

Which of the following statements is CORRECT concerning foreign currency translation? A) The receivables turnover ratio is identical under both the temporal method and the current rate method. B) In the case in which a firm uses FIFO inventory valuation, if the local currency appreciates the cost of good sold under the temporal method is less than the cost of goods sold using the current rate method. C) Profit margins are identical under both the temporal method and the current rate method. D) In the case of an appreciating currency, the fixed asset turnover will be lower under the temporal method, as compared to the current rate method. my doubt - is the explanation given below for the current and temporal method rite? there is another question in schwesre pro which gives an exactly opposite methodology for the same type of question… Your answer: B was incorrect. The correct answer was A) The receivables turnover ratio is identical under both the temporal method and the current rate method. The receivables turnover (sales / receivables) is unaffected because both methods translate sales at the average rate and accounts receivable at the current rate. When using FIFO and the temporal method we assume that inventory is bought and sold evenly throughout the year and thus the appropriate historical rate to use for COGS is the average rate which is also the rate used for COGS with the current rate method.

Well, A is correct. But I would have also thought B was correct as well. So they are saying the avg rate IS the historical rate for COGS?

yes… and thts why I am confused :slight_smile: there is another question with the opposite explanation… here it goes… Hann Company is a U.S. multinational firm with operations in several foreign countries. Hann has a 100% stake in a French subsidiary. The foreign subsidiary’s local currency has appreciated against the U.S. dollar over the latest financial statement reporting period. In addition, the French firm accounts for inventories using the FIFO inventory cost-flow assumption. The gross profit margin as computed under the current rate method would most likely be: A) higher than the gross profit margin as computed under the temporal method. B) equal to the gross profit margin as computed under the temporal method. C) lower than the gross profit margin as computed under the temporal method. D) a comparison of the ratio between the two methodologies is not possible. Your answer: A was incorrect. The correct answer was C) lower than the gross profit margin as computed under the temporal method. The average rate is used to convert sales under both the temporal method and the current rate method. Hence, the only difference between the two computations is on COGS. Since the firm uses FIFO, older materials are flowing into COGS and an older exchange rate applies. Since in the past the foreign currency bought fewer dollars, the gross profit under the temporal method will be higher than that of the current rate method.