Question

Use the data and results from Exercise 5-5 to prepare comparative income statements for the month of January for the company similar to those shown in Exhibit 5.8 for the four inventory methods. Assume expenses are $1,250, and that the applicable income tax rate is 40%. (Round amounts to cents.)

Required

3. If costs were rising instead of falling, which method would yield the highest net income?

Short answer

Under rising prices,the FIFO method will generate the highest net income.

Step-by-step solution

Definition of Inflation

A situation in the economy of the business entity under which the general level of prices of goods and services reflect an increase is known as inflation.

Net income When Costs are Rising

If the merchandise cost rises, the highest net income will be generated under the FIFO method. Under this method, inventory with the lowest cost will be allocated to the cost of goods sold.