LIFO Liquidation
What Is a LIFO Liquidation?
A LIFO liquidation is the point at which a company sells the most recently acquired inventory first. It happens when a company that utilizes the last-in, first-out (LIFO) inventory costing method exchanges its more established LIFO inventory. A LIFO liquidation happens when current sales surpass purchases, bringing about the liquidation of any inventory not sold in a previous period.
How a LIFO Liquidation Works
The LIFO method is a financial practice wherein a company sells the latest inventory purchased first. LIFO matches the latest costs against current incomes. A few companies utilize the LIFO method during periods of inflation when the cost to purchase inventory increments over the long haul. The LIFO method gives tax benefits as the higher costs associated with new inventories apparently offset profits, bringing about a lower tax burden.
LIFO Liquidation Example
ABC Company utilizes the LIFO method of inventory accounting for its domestic stores. It purchased 1 million units of a product yearly for quite some time. The per-unit cost is $10 in year one, $12 in year two, and $14 in year three, and ABC sells every unit for $50. It sold 500,000 units of the product in every one of the initial three years, leaving a total of 1.5 million units close by. Accepting that demand will stay consistent, it just purchases 500,000 units in year four at $15 per unit.
| Year of Purchase | Cost per unit | Quantity | Total Cost |
| 1 | $10 | 1,000,000 | $10,000,000 |
| 2 | $12 | 1,000,000 | $12,000,000 |
| 3 | $14 | 1,000,000 | $14,000,000 |
| 4 | $15 | 500,000 | $7,500,000 |
| Cost Year | Quantity sold | Quantity Remaining | Cost/unit | COGS | Gross Profit (Revenues - COGS)Â |
| 4 | 500,000 | 0 | $15 | $7,500,000 | $17,500,000 |
| 3 | 500,000 | 500,000 | $14 | $7,000,000 | $18,000,000 |
| 2 | 0 | 500,000 | $12 | Â | Â |
| 1 | 0 | 500,000 | $10 | Â | Â |
