Can someone explain why using the current rate method would give you the highest gross profit margin? Since the local currency depreciates against the foreign wouldn’t translating inventory at the current rate produce a loss? What am I missing? Is the goal to have the inventory translation be less vs more in order to produce a higher margin?
Current rate method : COGS = average rate Temporal method: COGS = historical rate If the foreign currency is depreciating, average rate < historical rate hence the current rate method will result in lower cogs and higher gross margin.