Which of the following best explains why the three inventory costing methods (FIFO, LIFO, and Weighted Average) will normally each yield different amounts of net income?

• A. Because the methods require different physical inventory counts at year-end.
• B. Because each method assigns different costs to cost of goods sold and ending inventory, affecting net income.
• C. Because all three methods use different sales prices for revenue recognition.
• D. Because only FIFO and LIFO are accepted under generally accepted accounting principles (GAAP).

Answer: (B)

Verified step by step guidance

1. Understand the three inventory costing methods: FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average. These methods determine how inventory costs are assigned to Cost of Goods Sold (COGS) and Ending Inventory.
2. Recognize that the primary difference between these methods lies in how they allocate costs to inventory sold and inventory remaining. This allocation impacts the calculation of net income.
3. Analyze the effect of each method: FIFO assumes the oldest inventory is sold first, leading to lower COGS and higher net income in times of rising prices. LIFO assumes the newest inventory is sold first, leading to higher COGS and lower net income in the same scenario. Weighted Average smooths out cost fluctuations by averaging the cost of all inventory items.
4. Understand that the physical inventory count at year-end is the same regardless of the method used. The difference arises from the cost assigned to the inventory, not the quantity of inventory counted.
5. Conclude that the correct explanation is: 'Because each method assigns different costs to cost of goods sold and ending inventory, affecting net income.' This is due to the varying cost allocation strategies inherent in FIFO, LIFO, and Weighted Average methods.