Question

. Which of the following ratios may be larger in the presentation currency versus the local currency when translated under the current rate method?

1. Current ratio.
2. Net profit margin.
3. Return on assets.

Answer 1

Which of the following ratios may be larger in the presentation currency versus the local currency when translated under the current rate method?

Ans.

When we apply current rate method all pure income statement and pure balance sheet ratios are remain unaffected.

Current Ratio is pure balancesheet ratio.

Net Profit Margin is pure income statement ratio.

Return on asset is not pure, it is mixed ratio as the Net Income is taken from income statement and translated at average rate and assets are taken from balance sheet and translated at current rate.

Both the two inputs are translated at different rates even if the exchange rate remains same during the year and hence the local currency value of ratio will change when it is translated in the reporting currency.

So the correct ans is C. Return on Assets.