Multi-national Operations therefore, currency, increase, current, change

dvilayphet

If the local currency appreciates, why is the current ratio higher with the current rate method? I thought the increase in current asset and current liabilities will offset each other with this ratio, therefore no change to ratio? Please help!!

redskins44

i don't think that's correct.

Newhuman

Current Ratio will still be the same. (As both numerator and denominator are multipled by the same exchange rate).

But yes, Net Current Assets (i.e. current assets - current liabilities) would increase, with appreciating foreign currency.

ppls

yep, its the inventory that drives the ratio. QUICK ratio would be the same

smuggycfa

With the temporal method there would be a change in CA/CL.
All CL are mostly monetary - would be at the current rate on the BS.

All the below is comparing the ratio in Original BS against the ratio based on Currency change in the Parents B/S.

CA - contain Inventory - which would be at the historic rate. [LIFO use current rate, FIFO use Historic Rate, WT Avg use WT Avg rate].

If Local Currency has appreciated -
FIFO Inventory in Parent Currency would remain the same. since you use the Historic Rate. No change in Current Ratio.

LIFO Inventory - you would to use Current Rate -> so in Parent Currency - it would have reduced -> CA/CL would go down.

Wt Avg - you would use the Average rate -> which would be higher -> so it would have reduced in Parent Currency and CA/CL would go down.

If Depreciating Local Currency:
FIFO -> no change still
LIFO -> increased Current Ratio
Wt Avg -> Increased Current Ratio





So CA/CL would be different under the Temporal method - depending on the move in the currencies involved (when compared to the original Ratio or the Ratio in Current Rate Method terms). CR Method ratio would not differ from the Original Ratio.

CP

chaojimali

Inventory is translated at historical rate under temporal method so you will have less assets as opposed to translating under current method. Thus, lower assets under temporal = lower current ratio vs. current method.