LIFO Liquidation


DEFINITION of 'LIFO Liquidation'

When a company using the LIFO (Last In, First Out) method of inventory costing liquidates their older LIFO inventory. A LIFO liquidation would 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 a 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 tunrs into a disadvantage because older, lower costs (of older inventory) are matched with current revenues. Another cost may be lost sales.

  1. Inflation

    The rate at which the general level of prices for goods and services ...
  2. Voluntary Liquidation

    A corporate liquidation that has been approved by the shareholders ...
  3. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets ...
  4. Inventory

    The raw materials, work-in-process goods and completely finished ...
  5. Net Income - NI

    1. A company's total earnings (or profit). Net income is calculated ...
  6. First In, First Out - FIFO

    An asset-management and valuation method in which the assets ...
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