Relative to the gross margins the subsidiaries report in local currency, Romulus’s consolidated gross margin most likely :

A. will not be distorted by currency translations.

B. would be distorted if Augustus were using the same translation method as Julius.

C. will be distorted because of the translation and inventory accounting methods
Augustus is using.

Romulus Corp. is a US-based company that prepares its financial statements in accordance with US GAAP. Romulus Corp. has two European subsidiaries: Julius and Augustus. Anthony Marks, CFA, is an analyst trying to forecast Romulus’s 20X2 results. Marks has prepared separate forecasts for both Julius and Augustus, as well as for Romulus’s other operations (prior to consolidating the results.) He is now considering the impact of currency translation on the results of both the subsidiaries and the parent company’s consolidated financials. His research has provided the following insights:

• The results for Julius will be translated into US dollars using the current rate method.

• The results for Augustus will be translated into US dollars using the temporal method.

• Both Julius and Augustus use the FIFO method to account for inventory.

• Julius had year-end 20X1 inventory of €340 million. Marks believes Julius will report €2,300 in sales and €1,400 in cost of sales in 20X2.

Marks also forecasts the 20X2 year-end balance sheet for Julius (Exhibit 1). Data and
forecasts related to euro/dollar exchange rates are presented in Exhibit 2.

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EXHIBIT 1 Forecasted Balance Sheet Data for Julius, 31 December 20X2 ( millions) Cash Accounts receivable Inventory Fixed assets Total assets Liabilities Common stock Retained earnings Total liabilities and shareholder equity EXHIBIT 2 Exchange Rates ($/) 31 December 20X1 31 December 20X2 20X2 average Rate when fixed assets were acquired Rate when 20X1 inventory was acquired Rate when 20X2 inventory was acquired 50 100 700 1,450 2,300 700 1,500 100 2,300 1.47 1.61 1.54 1.25 1.39 1.49