The term LIFO liquidation is associated with the accounting of the inventory of a business. As we know LIFO is a method of managing inventory that stands for Last In First Out. In this method of inventory management last purchased item is sold first. LIFO Liquidation is a method of inventory costing where the last stored item is sold first. This method of inventory accounting and costing is used when the sales are far more than the purchases made recently by the company. This method tends the business to sell the inventory that was purchased in previous financial period but was not sold yet. LIFO liquidation is mostly done when the cost of maintaining inventory increases due to inflation or due to some external reasons. LIFO Liquidation is helpful for the company as the inventory that was purchased previously at low price will be sold at current higher price.
However sometimes LIFO liquidation creates distortion in income statements showing higher profits as a result may become a reason of high tax paying liability. There are a number of reasons associated with LIFO liquidation such as shortage of new merchandise or materials to produce new products, sales of the company are far higher than its purchases, increase in demand of product in market, short of funds to purchase new inventory, urgent need to replace old inventory due to external and internal factors, shortage of space etc. in order to avoid LIFO liquidation some companies use another approach called Specific Goods Pooled LIFO Approach.
Sana Ahmed