Question-Temporal Method countries, reporting, accounts, addition, currency

b_sea93

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) equal to the same ratio computed under the current rate method.
B) higher than 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 B) higher than the same ratio computed under the current rate method.
Can someone please explain this, i undertstand that cogs is lower but isn’t Revenue lower as well?

kamara5

Revenue in both Current Rate and Temporal are measured at the Average Rate.
Under the Current Rate method - COGS is measured at the Average Rate.
Temporal - Historical rate - but in this case since it is LIFO - for COGS - the last in would be in COGS - so the last inventory - so Current Rate would be used for the COGS. Since Current Rate has depreciated - this would be a lower number than the average rate - so Gross profit would be higher under the temporal method.

kkn006

Thanks CP, i forgot COGS is different between the two methods.