I’ve a series of doubts,
- Here in Step 1 we’ve written that we show all items of I/S based on avg rate but what about COGS & all the O/S dues that the co., owes/owed that has it’s effect on I/S, B/S m we show them at current rate but what about I/S?
- Why in case of Temporal Method we show CTA under I/S? Mtlb Gain/Loss due to currency fluctuations is not sustainable so why an analyst needs to make an adj for this?
Your effort would be appreciated. Thank you!
When preparing financial statements for a company that operates in multiple currencies, it is important to consider the impact of foreign exchange rates on various financial items, including revenue, expenses, and liabilities.
The income statement (I/S) reflects the company’s financial performance over a period of time, usually a fiscal year. When preparing the income statement, the revenue and expenses are usually recorded at the average exchange rate for the period. This is because revenue and expenses are recognized as they are earned or incurred, and the average exchange rate for the period provides a reasonable estimate of the exchange rate that would have been used for each transaction.
However, the cost of goods sold (COGS) is an expense item that is directly tied to inventory, which is valued at the lower of cost or net realizable value. When the company’s inventory is purchased in a foreign currency, the cost of goods sold will reflect the exchange rate that was used to purchase the inventory. This means that the cost of goods sold will be impacted by fluctuations in foreign exchange rates.
In addition, outstanding payables and receivables are usually recorded on the balance sheet at the current exchange rate. This means that any fluctuations in foreign exchange rates will impact the value of these items on the balance sheet. However, these fluctuations do not directly impact the income statement, as these items are not revenue or expense items.
Overall, the impact of foreign exchange rates on a company’s financial statements can be complex and require careful consideration. It is important to use consistent accounting policies and to disclose any significant foreign exchange rate risks in the financial statements.
2nd question answer:
Under the temporal method of accounting for foreign currency transactions, gains or losses arising from currency fluctuations are recognized in the income statement. However, these gains or losses may not be sustainable, as they are due to changes in exchange rates and not changes in the underlying business operations.
Despite this, it is still important for an analyst to make an adjustment for these gains or losses because they impact the reported financial results. If the gains or losses are not recognized, then the financial statements may not accurately reflect the performance of the company.
Furthermore, the adjustment for the currency gains or losses can provide useful information to investors and analysts. For example, if a company consistently reports significant currency gains, it may indicate that the company has a high level of foreign currency exposure or that it has implemented effective currency risk management strategies.
In summary, while gains or losses due to currency fluctuations may not be sustainable, they still impact the financial results and therefore need to be recognized and adjusted for under the temporal method of accounting.
Thanks for the detailed answer.