Hey All, Whats the best way to remeber the effects of translation methods on seleceted financial ratios? In the SS it says that when the local currency is appreciating under the temporal method the current ratio is going to be lower and under the all current the current ratio is going to be higher. The quick ratio and A/R turnover ratios will be the same under both methods. How is this possible? I get really confused with the different ratios and which method reports higher and lower etc. Does anybody have an easy way to remember this or some sort of easy to chart to understand all of this!??!? Thanks, -71 days left of hell.
just translate the fin statements a few times and get the jist, that way you can plug the numbers. trying to remember how each ratio will be affected…too much.
The is straightforward . Non-material assets are translated using a historical rate in the temporal method . When the local currency appreciates , we are using smaller excahnge rates to translate non-matrial assets and they appear lower after translation . So CA/CL is lower ( i.e. Current Ratio is lower, because Inventory coomponent of CA is translated at older , lower rates) However Quick and A/R have only cash equivalents in their denominator / numerator , so they would always translate at current rates for both denominator and numerator .