In a period of declining inventory costs, which method would yield higher net income?

In a period of declining inventory costs, the First-In, First-Out (FIFO) method typically results in higher net income compared to the Last-In, First-Out (LIFO) method. This is due to how each inventory valuation approach handles the cost of goods sold (COGS).

When using FIFO, the oldest inventory costs are used to calculate COGS. In a scenario where inventory costs are declining, this means that the costs assigned to the items sold will be higher, as they reflect the prices paid for inventory purchased during periods of higher prices. As a result, when you sell these older, more expensive items, your COGS is relatively lower in comparison to the sales revenue, leading to a higher net income.

On the other hand, LIFO assigns the newest inventory costs to COGS. In times of declining inventory costs, this means that the inventory sold is calculated using the latest, lower costs. This results in a higher COGS and consequently lower net income.

Thus, in a situation where costs are declining, FIFO's method of utilizing older, higher-cost inventory provides a more favorable outcome for net income, supporting the idea that FIFO would generally yield higher net income compared to LIFO.