Final answer:
In periods of rising prices, the FIFO (First-In, First-Out) inventory method typically provides the highest net income, because it assumes the oldest, often less expensive inventory is sold first, resulting in lower cost of goods sold and thus higher profits.The correct answer is option (b).
Step-by-step explanation:
The question at hand falls under inventory accounting methods in the context of financial reporting and business decision-making. In a period of rising prices, the inventory method that generally provides the greatest amount of net income is FIFO (First-In, First-Out).
This happens because FIFO assumes that the oldest inventory items are sold first. So, when prices rise, the cost of goods sold is based on older, usually lower costs compared to recent purchase prices. As costs of goods sold are lower, the reported net income is higher under FIFO as compared to other inventory methods such as LIFO (Last-In, First-Out) or average cost method.
The specific identification method could also result in higher net income, but it is not as commonly used and works best for companies with unique, high-cost items. It is important to remember that while FIFO may report higher net income, it may also result in higher tax obligations. An alternative, the LIFO method, while providing lower net income, may offer tax benefits during inflationary periods.