Which accounting method would report higher net income during rising inventory costs?

The choice of FIFO (First-In, First-Out) as the accounting method that would report higher net income during rising inventory costs is based on how inventory costs are accounted for over time. Under FIFO, the earliest (and typically lower) costs of inventory are assigned to the cost of goods sold (COGS) when items are sold. This means that in an environment where prices are rising, the COGS will reflect these older, lower costs, leading to a higher gross profit and ultimately a higher net income.

In contrast, LIFO (Last-In, First-Out) would use the most recent and higher inventory costs for COGS, which would lower the gross profit during inflationary periods. The average cost method would, likewise, provide a middle ground that typically results in net income that is lower than FIFO in such circumstances because it averages out costs rather than taking the oldest lower costs or the most recent higher costs to calculate COGS.

Thus, the methodology of FIFO is what drives those higher net income figures when inventory costs rise, as it strategically allows older, cheaper inventory costs to be recognized against revenues first, resulting in larger profits on the income statement.