Gross profit margin temporal vs. all-current

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yellayella

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It says that in a depreciating local currency environment, the temporal method will have a lower gross profit margin than the all-current method.
but:
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) 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.
B
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.
Depreciaton would be from 1.20 to 1.40, so it takes more of the FC to buy 1 $!
I just don’t get this, because i thought that with the temporal method you take the historical rate, so if the currency is depreciating, then with the temporal method using the historcal rate for COGS, would give us higher COGS (historcial rate) compared using the average rate.
So with higher COGS, gross income profit is lower!
So is the example above wrong?
 
Please read the book clearly states everywhere - if the statement that “items were bought and sold evenly thro’ the year” is not stated - then Historic applies.
Historic rate applicable depends on the flow for inventory assumed.
LIFO - Last in item flows to COGS, and the earlier bought item stays in Ending inventory. So they are right when they say the above. That is what Historic means with regards to COGS in the above context.
 
ok. but why is it highet? just because of the LIFO? i mean LIFO can also be used in the all-current method, so they would be the same. why do they differ in the above example?
thanks!
 
ok sorry, i just need to make this clear:
temporal method with LIFO COGS : current exchange rate
all-current method: average rate
Since depreciation of currency, COGS are lower with temporal method and therefore gross income margin higher!
right??
 
Temporal : (In this example)
Current rate for COGS
Current rate for Inventory (Given that most of the purchases were made towards end of the year)
COGS –> Lower , Gross profit –> Higher
All current
Avg rate for COGS
Current Rate for inventory
COGS –> Higher than temporal , Gross profit –> Lower
 
@charu: i am not so sure that inventory would be measured at current rate. it’s not written anywhere. i mean its old inventory, even though purchases were made at the end of the year…so i am not sure about that…
 
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 first in, first out (FIFO) inventory cost-flow assumption. The gross profit margin as computed under the current rate method would most likely be:
A) lower than the gross profit margin as computed under the temporal method.
B) higher than the gross profit margin as computed under the temporal method.
C) equal to the gross profit margin as computed under the temporal method.
Your answer: A was correct!
The basis for using the all current method is when Functional Currency is NOT the same as Parent’s Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent’s Presentation Currency.
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 cost of goods sold (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.
this may help…
 
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