The correct option is B. First-In, First-Out (FIFO). Explanation of the Correct Answer First-In, First-Out (FIFO) is an inventory valuation method that assumes that the oldest inventory items (the first ones purchased) are sold first. This means that the costs associated with the earliest purchases are used to calculate the cost of goods sold (COGS) when items are sold. Why FIFO Results in Higher Net Income During Rising Prices

1. Cost of Goods Sold Calculation: Under FIFO, when prices are rising, the older, cheaper costs are matched against current revenues. This results in a lower COGS compared to other methods like LIFO (Last-In, First-Out), where the most recent, higher costs would be matched against revenues.
2. Impact on Net Income: Since COGS is lower under FIFO during periods of rising prices, the gross profit (Sales - COGS) is higher. Consequently, this leads to a higher net income, which is the profit after all expenses have been deducted from revenues.
3. Balance Sheet Valuation: FIFO also results in a higher ending inventory value on the balance sheet because the remaining inventory consists of the more recently purchased, higher-cost items. This can make a company appear more financially robust.

Why the Other Options Are Incorrect or Weaker A. Last-In, First-Out (LIFO): - Explanation: LIFO assumes that the most recently purchased items are sold first. In a period of rising prices, this means that the higher costs are matched against revenues, resulting in a higher COGS and, therefore, lower net income. - Conclusion: This is the opposite of what the question is asking, as LIFO would typically lead to lower net income during inflationary periods. C. Weighted Average Cost: - Explanation: This method averages the costs of all inventory items available for sale during the period. While it smooths out price fluctuations, it does not specifically favor older costs like FIFO does. - Conclusion: The net income impact is neutral compared to FIFO and LIFO, making it less effective in maximizing net income during rising prices. D. Specific Identification: - Explanation: This method tracks the actual cost of each specific item sold. It is often used for unique or high-value items (like cars or art). While it can provide accurate cost matching, it does not inherently favor older costs over newer ones. - Conclusion: This method does not consistently lead to higher net income during periods of rising prices, as it depends on the specific items sold. Summary of Key Points

• FIFO values inventory based on the earliest costs, leading to lower COGS and higher net income during rising prices.
• LIFO results in higher COGS and lower net income in inflationary periods, as it uses the most recent, higher costs first.
• Weighted Average Cost averages costs, providing a neutral impact on net income.
• Specific Identification tracks individual item costs but does not favor older costs systematically.

By understanding these concepts, you can better grasp how different inventory valuation methods impact financial statements and overall business performance.