In rising prices, which inventory method yields the highest net income in the early years?

• A. LIFO
• B. Weighted Average
• C. FIFO
• D. Specific Identification

Answer: (C)

In an inflationary environment, the cost flow assumption affects both cost of goods sold and ending inventory, which in turn changes net income. FIFO uses the oldest costs for COGS, leaving newer, higher costs in ending inventory. Because those older costs are lower, COGS is lower under FIFO in the early years, so gross profit and net income are higher.

By contrast, LIFO assigns the most recent, higher costs to COGS, pushing net income down in the early years. Weighted average smooths costs between the two, producing results that fall in between FIFO and LIFO. Specific identification can vary depending on which exact items are sold, so its impact on net income is less predictable.

Therefore, FIFO yields the highest net income in the early years.