Fronttalk Company is a U.S. multinational firm with operations in several foreign countries. It has a 100% stake in a German subsidiary. The foreign subsidiary’s local currency has depreciated against the U.S. dollar over the latest financial statement reporting period. In addition, the German firm accounts for inventories using the last in, first out (LIFO) inventory cost-flow assumption and all purchases were made toward the end of the year. The gross profit margin as computed under the temporal method would most likely be: A) lower than the same ratio computed under the current rate method. B) equal to the same ratio computed under the current rate method. C) higher than the same ratio computed under the current rate method. D) indeterminate relative to the same ratio computed under the current rate method.
gross profit = revs - COGS/revs. revs the same for both at ave rate. COGS temporal use historical, AC use average. currency here was depreciating, purchases towards end of year, so your inventory bought later is cheaper. for a LIFO firm then, the COGS is higher using historical than average rate. so i’m at A.
C. COGS for the all current will use the average rate which will be higher than the temporal using historical (purchases made at the end of the year, currency still depreciating). Sales are still translated at the average rate for both methods so they are the same. COGS will translate into fewer reporting currency with the temporal method vs. the all current method. So with temporal reporting a lower COGS in the reporting currency = higher gross profit margin. This took me awhile to walk it through my head, I hope its right.
Gross Profit Margin = Gross Profit/Net Sales i.e (Sales-COGS/Net Sales) Under Temporal or All current : sales is translated using Average Rt Under temporal method (LIFO) : COGS * Historical Rt Under All Current method (LIFO) : COGS * Avg Rt When LC depreciates : historical rt > average rt > current rt (all expressed in $/LC) So, GPM is smaller under Temporal than under All Current. Ans: A Please let me know what the correct answer is? where are you solving the questions from?
I thought pure I/S and B/S ratios were the same under either method… Im sure I got this wrong…
I tried working it out with numbers. My example is using the yen/ Average = 140yen/ End of Year = 150yen/$ (yen depreciated) Sales (yen) = 10,000 COGS (yen) = 5,000 Sales translated at average rate for both methods = $71.43 COGS transleated at average rate for all current = $35.72 COGS translated at ending rate (historical) for temporal = $33.33 Gross Profit Margin All Current = (71.43-35.72)/71.43 = .49993 Gross Profit Margin Temporal = (71.43-33.33)/71.43 = .53339
Niblita75 Wrote: ------------------------------------------------------- > C. > > COGS for the all current will use the average rate > which will be higher than the temporal using > historical (purchases made at the end of the year, > currency still depreciating). Sales are still > translated at the average rate for both methods so > they are the same. COGS will translate into fewer > reporting currency with the temporal method vs. > the all current method. So with temporal reporting > a lower COGS in the reporting currency = higher > gross profit margin. > > This took me awhile to walk it through my head, I > hope its right. good job, Niblita. You are correct!
but you use end of year. historical would be beginning of year, no? so say that’s at 130. then ave is 140, end is 150. using the beg rate, $38.46 and your margin is .4615 am i wrong and confused about historical?
chadtap Wrote: ------------------------------------------------------- > I thought pure I/S and B/S ratios were the same > under either method… Im sure I got this wrong… For the most part it is true. The only items you have to be careful of are ratios including inventory/COGS under the temporal method because historical cost is used. Historical cost can vary for either item on the income statement or balance sheet depending on whether LIFO or FIFO is used.
It said purchases were made at the end of the year after the currency had depreciated. Historical is whatever the rate is when the inventory was purchased. Inventory purchased 1 year from now will have whatever the rate is one year from now, but its still historical. I don’t know if that last statement made any sense.
*click* sneaky little question. so “historical” for inventory is when you purchase it- here you purchased it late and cheap, so historical does wind up being the cheaper vs average. historical then does NOT equal beginning rate like it does with pretty much every other number you translate at historical. wow, and i thought this was one of my better areas. i need to lock it up. good post, thx for walking through that. inventory, you are a sneaky little f**ker.
where did i go wrong?
I think i got it… "When LC depreciates : historical rt > average rt > current rt (all expressed in $/LC) " is wrong to assume in all cases…here since the purchase is towards the end of the yr, the historical rt
Niblita75 Wrote: ------------------------------------------------------- > chadtap Wrote: > -------------------------------------------------- > ----- > > I thought pure I/S and B/S ratios were the same > > under either method… Im sure I got this > wrong… > > > For the most part it is true. The only items you > have to be careful of are ratios including > inventory/COGS under the temporal method because > historical cost is used. Historical cost can vary > for either item on the income statement or balance > sheet depending on whether LIFO or FIFO is used. Thanks… that makes sense…
bannisja Wrote: ------------------------------------------------------- > so “historical” for > inventory is when you purchase it- here you > purchased it late and cheap, so historical does > wind up being the cheaper vs average. historical > then does NOT equal beginning rate like it does > with pretty much every other number you translate > at historical. Agree!! > inventory, you are a sneaky little f**ker. AGREE!! nice question, I got tripped by chosing A too.
I went for C. At least now they are making sense for me.
yay…I had C too…i went through it same a Niblita steps…invetories were bought towards the end of the year, hence they were being translated at a lower rate (since LC was depreciating) so CoGS would be lower, GPM Higher under temporal… feeling good now 