Current ratio under current rate method? currency, method, current, exchange

dreampak

Current ratio = CA/CL. In my notes, it clearly says that if exchange rate goes down, currency depreciating, that CR goes down under current rate method. This does not make sense to me now...I'm thinking that it doesn't change. We are using current exchange rate for all assets and liabilities. So, if you multiply CA by $0.90 and liabilities by $0.90 (assuming this is the new exchange rate), ratio does not change. Example 10/8 = 1.25. Multiply both 10 and 8 by 0.90, you get 9/7.2 = 1.25.

President1988

Dreary Wrote:
-------------------------------------------------------
> Current ratio = CA/CL. In my notes, it clearly
> says that if exchange rate goes down, currency
> depreciating, that CR goes down under current rate
> method. This does not make sense to me now...I'm
> thinking that it doesn't change. We are using
> current exchange rate for all assets and
> liabilities. So, if you multiply CA by $0.90 and
> liabilities by $0.90 (assuming this is the new
> exchange rate), ratio does not change. Example
> 10/8 = 1.25. Multiply both 10 and 8 by 0.90, you
> get 9/7.2 = 1.25.


fix you notes then Banj got it right. Under temporal it would change

brainsX

...pretty sure the note came from Stalla and I wrote it in caps!!!

luda002

Schweser says the same thing for Current Rate:

LC Depreciation: Current Ratio lower
LC Appreciation: Current Ratio higher

It can't be right unless we're missing something about how inventory is translated? But it should be via the current rate always for the Current Rate Method unless I have missed something.

economicz

They might be thinking in terms of numbers (which is wrong).

CA/CL = 10/8 = 1.25.

If CA drop by $2 and CL drop by $2, then CA/CL = 8/6= 1.33 (in fact it increases).

chaojimali

Chuck are you looking at the Secret Sauce? I think it's either wrong on not properly worded as to what it's displaying.

P. 86 in Schweser book 2 outlines pretty clearly that Current Ratio (and all IS and BS pure ratios) are the same under Current Rate method.

The secret sauce chart on p. 64 doesn't look right either, they also show Gross Profit Margin as being different under Current Rate method when this is a pure IS ratio. I think the chart maybe showing the effects of the methods vs. each other as opposed to original ratios.

Anyone with some clarity on this?

huangxiaoxie

Dreary Wrote:
-------------------------------------------------------
> They might be thinking in terms of numbers (which
> is wrong).
>
> CA/CL = 10/8 = 1.25.
>
> If CA drop by $2 and CL drop by $2, then CA/CL =
> 8/6= 1.33 (in fact it increases).

They couldn't each fall at an absolute rate of $2. That would mean that CA and CL were translated using different rates. Assuming your currency has depreciated -20% then CA would be 8 and CL would be 6.4. 8/6.4=1.25

giants2010

For the current rate method -

CA / CL will remain the same whatever be the change in Currency.

But it will differ for the Temporal method.

Since CA includes Inventory, and the Inventory is valued differently - also depending on LIFO/FIFO/Wt Avg Flow assumption.

Using LIFO, e.g. - Newest inventory is in COGS, so older inventory in Ending Inventory.
If LC is appreciating - Older Ending Inventory would be LOWER.
So CA/CL would be lower when compared to the Current Rate method.

If LC is depreciating -> Older Ending Inv. is costlier, in the End Inv. So CA is higher, CA/CL will be higher when compared to the Current Rate method.

CP

maryli

that makes sense, but it's not clear in the Secret Sauce that they are comparing the effects to each out instead of the original ratio.

Uranus08

ro424 Wrote:
-------------------------------------------------------
> Chuck are you looking at the Secret Sauce? I think
> it's either wrong on not properly worded as to
> what it's displaying.
>
> P. 86 in Schweser book 2 outlines pretty clearly
> that Current Ratio (and all IS and BS pure ratios)
> are the same under Current Rate method.
>
> The secret sauce chart on p. 64 doesn't look right
> either, they also show Gross Profit Margin as
> being different under Current Rate method when
> this is a pure IS ratio. I think the chart maybe
> showing the effects of the methods vs. each other
> as opposed to original ratios.
>
> Anyone with some clarity on this?

Yeah, Secret Sauce. It has to be wrong or worded incorrectly relative to changes in CA/CL under the temporal method.