Company ABC, an American Company, Has a 100% Owned Foreign

Company ABC, an American company, has a 100% owned foreign subsidiary. The foreign subsidiary's local currency, functional currency and reporting currency are all different. The subsidiary accounts for inventories using the first-in, first-out (FIFO) method.

A. Assume the functional currency is appreciating relative to the reporting currency. Compare each of the following ratios for the foreign subsidiary in the reporting currency after translation to the same ratios in the functional currency before translation. Explain why the ratios do or do not differ.

i. Gross profit margin percentage
ii. Current ratio

B. Assume the local currency is appreciating relative to the functional currency. Compare each of the following ratios for the foreign subsidiary in the functional currency after remeasurement to the same ratios in the local currency before remeasurement. Explain why the ratios do or do not differ.

i. Gross profit margin percentage
ii. Operating profit margin
iii. Net profit margin