Question #14
Reading: Reading 10 Multinational Operations
PDF File: Reading 10 Multinational Operations.pdf
Page: 8
Status: Correct
Correct Answer: A
Question
Which of the following statements is most accurate concerning foreign currency translation?
Answer Choices:
A. The receivables turnover ratio is identical under both the temporal method and the current rate method
B. In the case of an appreciating currency, the fixed asset turnover will be lower under the temporal method, as compared to the current rate method
C. In the case in which a firm uses first in, first out (FIFO) inventory valuation, if the local currency depreciates the cost of good sold under the temporal method is less than the cost of goods sold using the current rate method
Explanation
The receivables turnover (sales / receivables) is unaffected because both methods
translate sales at the average rate and accounts receivable at the current rate.
When using FIFO and the temporal method we assume that the appropriate rates to use
for cost of goods sold (COGS) are the older historical rates. The average rate is used for
COGS under the current rate method. If the local currency depreciates, COGS would be
higher under the temporal method.
With an appreciating currency the fixed asset turnover ratio (sales / fixed assets) will be
higher using the temporal method because the temporal method uses the historical rate
for fixed assets whereas the current rate method uses the current rate. They both use the
same average rate for sales.