Final answer:
The Last-In, First-Out (LIFO) method yields higher income and higher inventory valuation when costs are declining.
Step-by-step explanation:
The cost flow assumption that yields higher income and higher inventory valuation when costs are declining is the Last-In, First-Out (LIFO) method.
In LIFO, the most recently acquired inventory is deemed to be sold first. This means that when costs are declining, the older, lower-cost inventory is left in stock and the higher-cost inventory is sold, resulting in a lower cost of goods sold and higher income. Additionally, because the older, lower-cost inventory remains in stock, the valuation of the ending inventory will be higher.
For example, if a business had inventory that cost $10 per unit at the beginning of the year and $8 per unit at the end of the year, and it sold units during the year for $9 each, LIFO would assume that the units sold were acquired at the higher cost of $10 each, resulting in a lower cost of goods sold and higher income compared to other cost flow assumptions.