Gross profit margin and currency translation EOC CFAi Q21

CFA Level II FRA
#1

Questions asks: when consolidating the FS for 07’ gross profit margin is HIGHEST if: the company accounted for inventory using:

a -FIFO and its functional currency were US dollar

b- LIFOand its functional currency were US dollar

c- FIFO and it’s functional currency were Singapore dollar

My reasoning:

  • GP is highest when COGS is low! off the bat, LIFO is out of the questions
  • if FC was the US dollar considering the parent is a US comp, we would use the temporal = Historical exchange rate --> cogs at historical
  • if FC was the singapore dollar we would use the current method = inventory at current exchange rate --> cogs are current
  • Singapore dollar is appreciating – US dollar weakning
  • If the US dollar is depreciating, the historical rate is higher and therefore if i use a historical rate, i would get a higher COGS and lower GP… so i would want to use the current rate, which is used when the FC = local… So i choose © and i am WRONG!!!
  • Can someone help me figure this out please!!!
#2

Anyone??!?!?!?!?!?!?!?!?

#3

Rasec, is this the complete question? I think you’re missing currency-related information… are rates rising/falling. You’ve a lot of “if’s” in your bullets, but does the question who the parent/sub is and their related functional/presentation currencies?

#4

The question requires the entire vigentte to be posted… i was hoping one of you could look at the question in your book.

#5

Nevermind. Didn’t even read your subject line.

I think your exchange rates are mixed up. Think of this in terms of expenses. USD is depreciating and SGD is appreciating.

Current Method: You use the average (0.662) rate to go from SGD to USD, meaning you’re recording a higher COGS in terms of SGD.

Temporal Method: If you use the temporal method, inventory is marked at the historical (0.654) rate since it’s a nonmonetary asset. Since few months ago, SGD was lower, your COGS would be lower.

Revenues are recorded at average rate under both methods. So when you net things, temporal method gives your a higher GP.