Question

The management of Milque Corp. is considering the effects of various inventory-costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will: (a) provide the highest net income

Answer 1

Answer:

Milque Corp.

FIFO will provide the highest net income when the price of inventory is increasing.

Explanation:

The Generally Accepted Accounting Principles recognize four main methods to compute Cost of Goods Sold and Ending Inventory for a period.  They are:

First In, First Out (FIFO): This is based on the assumption that companies sell first the inventory that they bought first.

Last In, First Out (LIFO):  This method assumes that companies sell first the inventory that they bought last.

Weighted Average Cost (WAC): This inventory method assumes that companies average the costs of inventory and how much they sell over the period by dividing the cost of goods available for sale by the total physical inventory units.

Specific Identification: This method does not make any assumptions.  It directly identifies the product being sold and prepares costing calculations based on the specific inventory items.