Final answer:
During times of inflation, the FIFO method yields the highest taxable income because the oldest, lower-cost inventory is used first, making COGS lower and taxable income higher compared to LIFO, Weighted Average, or Specific Identification methods.
Step-by-step explanation:
The cost method that will yield the highest taxable income during times of inflation is the FIFO (First-In, First-Out) method. When inflation occurs, prices of goods tend to rise over time. Under the FIFO method, the first items entered into inventory (which were also likely the cheapest, due to lower historical costs) are the first ones to be sold. As a result, the cost of goods sold (COGS) reflects these lower costs, while the remaining inventory is valued at higher, more recent prices. Consequently, the reported taxable income is higher because COGS is lower relative to recent sales made at inflated prices.
In contrast, the LIFO (Last-In, First-Out) method would report a higher COGS during inflation, since more recent, and typically more expensive, purchases are sold first, leading to lower taxable income. The Weighted Average method smoothens out price fluctuations by taking an average, which can result in a moderate taxable income, whereas the Specific Identification method can yield varied results depending on which specific items are sold.