I just can’t seem to understand the major differences in COGS (FIFO/LIFO) between current rate and temporal. What method would have the higher Gross profit margin if the local currency is going into the crapper? Answer is FIFO and current rate method. How do you get there? I understand FIFO has a lower COGS but that is about it…any help would be great. I know the rule “FC depreciates, pure ratios will be higher under the current rate method”…but what if they asked, what combination (LIFO or FIFO) will produce the best ratio under the temporal method?
In the temporal method you’re translating COGS at historical rates so costs will be greater if rates are depreciating producing lower margin. Cogs under current will be less due to depreciaton so higher margins.
Under Temporal: Sales - Avg COGS - Historical Under Current: Sales - Avg COGS - Avg Right off the bat you know that the ratio hasn’t changed under the current method. As jgrandtis mentioned if the local currency is depreciating then that would leave you COGS unchanged. Sales would be lower thereby reducing the gross profit margin because your COGS would be higher.