LIFO Liquidation

What is 'LIFO Liquidation'

LIFO liquidation is 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.

BREAKING DOWN 'LIFO Liquidation'

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.

RELATED TERMS
  1. LIFO Reserve

    The difference between the FIFO and LIFO cost of inventory for ...
  2. Dollar-Value LIFO

    An accounting method used for inventory that follows the last ...
  3. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets ...
  4. Flow Of Costs

    Refers to the manner in which costs move through a firm. Typically, ...
  5. Lot Relief Method

    A method of computing the cost basis of an asset that is sold ...
  6. Highest In, First Out - HIFO

    In accounting, an inventory distribution method in which the ...
Related Articles
  1. Investing

    Why Last In First Out Is Banned Under IFRS (XOM)

    We explain why Last-In-First-Out is banned under IFRS
  2. Investing

    When & Why Should a Company Use LIFO

    By using LIFO (last in, first out) when prices are rising, companies reduce their taxes and also better match revenues to their latest costs.
  3. Investing

    Inventory Valuation For Investors: FIFO And LIFO

    We go over these methods of calculating this component of the balance sheet, and how the choice affects the bottom line.
  4. Investing

    Inventory: FIFO, LIFO

    Whether a company chooses FIFO or LIFO has important implications for the bottom line and for tax liability.
  5. Investing

    How to Analyze a Company's Inventory

    Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory.
  6. Markets

    Build Your Small Business During Downswings

    Here we offer some cost-saving measures to strengthen your business even when the market is weak.
  7. Markets

    What You Should Know About Inflation

    Find out how this figure relates to your investment portfolio.
  8. Investing

    Days Sales of Inventory

    Days Sales of Inventory, also called Days Inventory Outstanding, is a key financial measurement of a company's performance pertaining to inventory management. In simple terms, it tells how many ...
  9. Investing

    Explaining Carrying Cost of Inventory

    The carrying cost of inventory is the cost a business pays for holding goods in stock.
  10. Markets

    Some Key Differences Between IFRS and GAAP

    The International Financial Reporting Standards and the U.S. Generally Accepted Accounting Principles have some key differences.
RELATED FAQS
  1. If during a period of rising prices, a LIFO liquidation occurs ...

    The correct answer is: b) Remember that LIFO transmits the latest prices of inventory over to cost. Therefore, what's left ... Read Answer >>
  2. What are the business consequences of using FIFO vs. LIFO accounting methods?

    Learn about the real business consequences from using a first-in, first out inventory accounting method versus a last-in, ... Read Answer >>
  3. Does US GAAP prefer FIFO or LIFO accounting?

    Investigate the use of LIFO and FIFO inventory accounting methods under U.S. GAAP, and learn why there is pressure from some ... Read Answer >>
  4. What's the difference between weighted average accounting and FIFO/LILO accounting ...

    The main difference between weighted average cost accounting, LIFO, and FIFO methods of accounting is the difference in which ... Read Answer >>
  5. How does inventory accounting differ between GAAP and IFRS?

    Learn about inventory costing differences between generally accepted accounting principles, or GAAP, and International Financial ... Read Answer >>
  6. Why should investors care about the Days Sales of Inventory (DSI)?

    Learn about days sales of inventory and what it measures; understand why an investor would want to know a company's days ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center