Final answer:
FIFO (First-In, First-Out) typically leads to the highest net income during a period of rising costs because it allocates older, lower-cost inventory to COGS, resulting in a lower COGS and thus a higher gross profit.
Step-by-step explanation:
During a period of increasing costs, the inventory costing method that typically results in the highest net income is FIFO (First-In, First-Out). This is because FIFO assumes that the oldest inventory items are sold first, which would have been purchased at lower prices in the context of rising costs. Therefore, the cost of goods sold (COGS) reflected on the income statement would be based on these lower-priced inventory items, leading to a higher gross profit when compared to newer, higher-cost inventory.
By contrast, LIFO (Last-In, First-Out) would result in higher COGS and thus a lower net income, because it assumes the most recently acquired inventory (which would have been bought at higher prices during inflation) is sold first. The Weighted Average method smooths out price changes over time and the Specific Identification method assigns actual costs to the specific items sold and can vary depending on which items are sold. For financial reporting purposes, companies often choose FIFO to report higher net income during periods of increasing costs.