The management of hoyt corp. is considering the effects of various inventory-costing methods on its financial statements and its income tax expense. assuming that the price the company pays for inventory is increasing, which method will
(a)provide the highest net income
(b) provide the highest ending inventory
(c) result in the lowest income tax expense
(d) result in the most stable earnings over a number of years

(a)Provide the highest net income

Highest net income will be provided by the FIFO(First in first out) method of inventory costing because in this case inventory bought first is cheaper and therefore using FIFO will result in lowest cost of goods sold in the income statement which will then provide the highest income.

(b) Provide the highest ending inventory

FIFO will result in highest ending inventory as the cheapest inventory bought first will be sold first and the more expensive inventory which was bought later will be shown to be left in the inventory

(c) Result in the lowest income tax expense

LIFO (Last in first out): Using the LIFO method the more expensive inventory will be used first therefore cost of goods sold will be higher and net income will be lower. As tax is a percentage of net income, a lower net income will result in a lower tax expense.

(d) Result in the most stable earnings over a number of years

Average Cost method will result in the most stable earnings over a number of years as it will always show the costs of goods sold as consistent which in turn would provide income to be consistent.

Explanation:

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