Which of these statements correctly describes the FIFO method of accounting for inventory during periods of increasing prices?

The FIFO (First-In, First-Out) method of accounting for inventory during periods of increasing prices leads to higher taxable income. This occurs because FIFO assumes that the oldest inventory costs are utilized first when calculating the cost of goods sold. As prices rise, the older inventory typically has a lower cost compared to the newer, pricier inventory. Consequently, when the cost of goods sold is calculated using FIFO, it reflects these lower costs, which results in a higher gross profit and, subsequently, a higher taxable income.

It's important to note that while this method may result in increased tax liabilities due to higher taxable income, it also reflects the current market conditions more accurately on the balance sheet by showing newer, more expensive inventory as a current asset. Understanding FIFO's impact on financial statements and tax obligations is crucial for effective tax planning and inventory management, especially in an inflationary environment.