LIFO Liquidation

lifo liquidationLIFO liquidation means “liquidity” old inventory, which was bought at a price lesser than the current replacement price and valued using the LIFO inventory valuation method either by selling or consuming.

When a company using the LIFO (Last In, First Out) method of inventory costing liquidates their older LIFO inventory. A LIFO liquidation will occur if current sales are higher than current purchases. As a result, any inventory not sold in previous periods must be liquidated.

Due to inflation and general price rises, the amount a company pays for its inventory will usually increase with time. If a company decides to perform LIFO liquidation, the old costs will be matched with the current higher sales prices.

Thus, a cost to using the LIFO liquidation method is higher tax liability if prices have risen since LIFO was adopted. The expected tax advantage of LIFO turns into a disadvantage because older, lower costs (of older inventory) are matched with current revenues. Another cost may be lost sales.

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