Question #112

Under the temporal method, sales are remeasured at the average rate, and cost of goods sold is remeasured at the historical rate. Since the euro is appreciating relative to the dollar, sales will be higher when stated in dollars. Because cost of goods sold is remeasured at the historical rate, it does not reflect the appreciating euro. Therefore, appreciating sales, without a corresponding increase in cost of goods sold, will result in higher gross profit margin. Under the temporal method, exposure is defined as the firm's net monetary asset or net monetary liability position. Continental is holding net monetary assets (monetary assets exceed monetary liabilities), and the position is increasing. Holding net monetary assets when the euro is appreciating will result in the recognition of a gain in the income statement. The gain results in higher net income and, thus, higher net profit margin.