Analyse the effects of the current rate and temporal methods on financial statements and ratios
The idea
Under the current rate method every balance sheet item moves with the closing rate, so pure balance sheet ratios such as the current ratio and debt to assets keep their local currency values, and margins are preserved at the average rate. Ratios that mix the two, like return on assets or asset turnover, change because the numerator uses the average rate and the denominator the closing rate. Under the temporal method historical rates on inventory, fixed assets, cost of sales and depreciation can distort margins and turnover, and the remeasurement gain or loss makes net income volatile. The trap is expecting every ratio to be unchanged under the current rate method.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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