Assuming that prices rise over time, the inventory cost flow assumption that will result in the lowest pretax income is "first in, first out" (FIFO).
FIFO stands for "first in, first out" and assumes the first items entered into your inventory are the first ones you sell. FIFO inventory costing method is used for cost flow assumption purposes.
The FIFO method assumes that the oldest products in a company's inventory have been sold first. Theus, the costs paid for those oldest products are the ones used in the calculation.
Pretax earnings is a company's income after all the operating expenses have been deducted from total sales or revenues.
Hence, the inventory cost flow assumption that results in the lowest pretax income is "first in, first out" (FIFO).
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