Final answer:
The FIFO inventory method results in balance sheet values that are closest to current costs during periods of rising prices because it assumes older inventory is sold first, leaving the newer, costlier inventory in stock.
Step-by-step explanation:
In periods of rising prices, the inventory valuation method that reflects the most current costs on the balance sheet is the First-In, First-Out (FIFO) method. This is because FIFO assumes that the oldest items in inventory are sold first, resulting in the newer, and therefore more expensive, items remaining in inventory. Thus, during inflation, the cost of goods remaining would be closer to current prices. In contrast, the Last-In, First-Out (LIFO) method would result in older, cheaper goods remaining in inventory, and the Average Cost method would smooth out the cost over time. The Tax Method is not an inventory valuation method; it refers to strategies used for tax purposes and is unrelated to how inventory is physically managed or valued on the balance sheet.
The final answer in a two-line explanation: FIFO method is the best for reflecting current cost on the balance sheet in times of rising prices because it assumes the oldest, cheaper inventory is sold first, leaving the more expensive, recent purchases in inventory.