Final answer:
FIFO (First-In, First-Out) is preferred in periods of inflation because it results in lower cost of goods sold, higher net income, and potentially higher earnings per share. It does not inherently increase inventory value on the balance sheet or directly increase the potential for future profit/revenue, but reflects the current financial state which can influence future financial decisions.
Step-by-step explanation:
The student's question revolves around the preference for the FIFO (First-In, First-Out) inventory valuation method over other methods. The options provided hint at the financial implications of using FIFO during periods of inflation. When prices are rising, FIFO assumes that the oldest (least expensive) inventory is sold first, which results in lower cost of goods sold (COGS), thereby reporting higher net income on the income statement. This can lead to a higher reported inventory value on the balance sheet as more recent, more expensive inventory remains unsold.
Therefore, in this context, higher net income could contribute to an increase in future profit/revenue potential, and it can also reflect higher earnings per share as net income is divided by the number of shares. However, it does not inherently make the balance sheet show higher inventory—this is a result of the cost of the remaining inventory being higher due to recent acquisitions at potentially higher prices. The potential for future profit/revenue is not directly affected by FIFO; instead, it's the reporting of the current state of inventory and related costs that may have the potential to influence future revenues and profits based on current accounting. As such, the most accurate choice is that it reflects higher earnings per share, although the way the question is framed could imply the consideration of all the effects during rising prices.