Situation : Locally inflationary and LC depreciation expected , Inventory Fifo method, .
Answer Ruiz expects the FC to appreciate against the LC and expect some inflation in LC country … Inflationary envir. FIFO will generate a high Gross profit margin … For either inverntory choice, the current rate method will give higher GPM to the parent if the subsi. currency is depreciating …
It seems like Curri. book generalizes the inventory choice does not have any effect on GPM. However, what if the inventory has been stashed for LC depreciating years? In the current rate mehtod, CGS is translated at average exchange rate of the year while it is at historically acquired exchage rate in the temporal method.
Let’s say end of the x1 : 0.5 LC/FC Beg of the X2 : 0.6LC/FC Ave of the X2 0.7 LC/FC end of X2 : 0.8 LC/FC
unlike our problem, assume the subsidiary bought its inventory at the end of the X1 500uinits, and at the beg of the X2 500units and sold 1000units in end of the X2.
Under the current rate method , CGS is translated at 0.7 so it would be 1428.5 (1000/0.7)
Under the temporal, CGS is translated at .5 and at 0.6 so it would be… whatever(hahaha sorry guys)
the current rate’s GPM would be lower than temporal’s .