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Kingpin804

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tT
发表于 2013-5-3 15:17 | 只看该作者

Reading 21 Multinational Operations Question 2

why, company, current, someone
I get why the FIFO method gets a higher gross profit margin for the parent company if it subsidary is experiencing inflation, but I can not get my head around why the current rate method gives higher gross profit to the parent company if the subsidary currency is depreciating. If someone could explain that  I would appreciate it.

 

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kasinkei

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发表于 2013-5-3 15:19 | 只看该作者
If the subsidiary currency is depreciating, then the parent’s currency must be appreciating in value, hence the higher gross profit.  Simple way to think about it.

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bluejazzy

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3#
发表于 2013-5-3 15:20 | 只看该作者
That seems a little too simple to me. Just because your currency is appreciating doesn’t mean you have a better gross profit margin if you have a subsidary that has a currency that is depreciating. You may have a wider margin on the parent company side, but wouldn’t that be cancelled out by the shrinking margin for the subsidary? Or am I overthinking this?

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Makavelim3

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4#
发表于 2013-5-3 15:22 | 只看该作者
Here you go. When the current method is used for this pure ratio the average exchange rate is used for COGS which will be less than the historical rate (which is used for the temporal method) when the currency is depreciating. Lower COGS gives you a higher gross profit leading to a higher margin. Hope this helps!

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smartpants

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发表于 2013-5-3 15:23 | 只看该作者
Yep, there we go that makes sense to me now, thanks cam

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Chuckrox

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发表于 2013-5-3 15:25 | 只看该作者
Cam - good way of explaining it - I know what I was saying was essentially at the most basic level, but sometimes that’s just as effective to think about it.  
Obviously both currencies don’t move in the same exact direction, so when the current method is used, current rates apply to all assets and liabilities.  Of course, this doesnt not impact the income statement since translation adjustments are realized in the S.E. component under the current method.
However, the intuition with exchange rates still holds true from a P&L perspective as the temporal method would require the historical (stronger rate) as opposed to the average rate from the current method (assuming that there are expenses related to COGS, dep/amort.), otherwise most expenses require translation through avg. rates regardless of which method is being used.
When it comes to FRA, I believe the CFAI explains it beautifully.  I switched from Schweser notes for the mean time and found the CFAI readings to be easier on the mind since there aren’t any gaps to fill.  Concepts seem to be beaten into your head several times throughout the reading.  Just my 2 cents.

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LiquidAssets10

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7#
发表于 2013-5-3 15:26 | 只看该作者
I had the same problem with exactly the same question
I don’t wish to make this any more confusing but could you please help me understand better too
I also understand the FIFO method vs the WA and even LIFO, even though LIFO is not mentioned in this inflationary environment. The logic there is fine.
Here’s my logic for the temporal method vs the current method
Under the temporal method closing inventory as reported on the balance sheet is exchanged at the historical exchange rate, right? Yes! So if the subsidiary’s functional currency is depreciating, then it’s a higher value than under the current method using the current and lower exchange rate, right? Yes
So if we define COGS as:
+Opening inventory
+Net purchases
-Closing Inventory
Then the higher closing inventory under the temporal should lower COGS and hence improve the Gross Profit Margin. This is my logic however it is wrong because the answer to question two, is the current method.
There is no real difference between the COGS under the current method and the temporal method other than preciseness. This is because the temporal method expenses the items that are sold using  individual exchange rates for each item on the day it was purchased. The current method on the other hand, is a lot less precise because it just uses an average exchange rate for all COGS.
If anyone could help please. I have thought this through but the logic is too long winded and time consuming and most importantly I arrive at the wrong answer. Can someone please go through the step by step logic to answering a question like this, so I can get right any future questions of this sort.

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