if use the temporal method, COGS uses the historical rate and US$ appreciate , so historical rate has more /FC, compared to /FC now. so COGS should be higher under temporal method? Please add some comments. Thanks
Fronttalk Company is a U.S. multinational firm with a 100% stake in a foreign subsidiary. The foreign subsidiary’s local currency has depreciated against the U.S. dollar over the latest financial statement reporting period. In addition, the subsidiary 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) higher than the same ratio computed under the current rate method. B) equal to the same ratio computed under the current rate method. C) lower than the same ratio computed under the current rate method.
Your answer: C was incorrect. The correct answer was A) higher than the same ratio computed under the current rate method.
The foreign company uses LIFO so new purchases are flowing to cost of goods sold (COGS) and most purchases occurred toward the end of the year, so the current rate of exchange is our best guess for the COGS account. Since the local currency is depreciating, it is taking more foreign currency units to buy a dollar in the more recent periods and as a result, COGS as measured in U.S. dollars is lower and the gross profit margin is higher under the temporal method.