What's LIFO liquidation?
Answers:
LIFO means Last In First Out. The inventory most recently purchased is what is sold first. Therefore, there is a buildup of older inventory that must be sold. When inventory is liquidated, it is sold for little or no profit... sometimes even at a loss, just to recover some of the cost of the items.
Think of it like this: a grocery store sells fruit. If they used the LIFO method of inventory, then the freshest fruit would always be on the shelves, and the older fruit would be in the back rotting. The store might have a LIFO liquidation to sell as much of the old fruit as possible to keep it from being a total loss.
In practical terms, most stores will not sell their own products to consumers at "liquidation" prices. If you could go to Best Buy and buy a Liquidation Sale plasma TV for $600, no one would ever buy a brand new plasma for $2500 and the value of any flat screen TV would be reduced. Same thing with clothes, furniture, or anything else. Instead, stores sell their leftover inventory to liquidation stores, who in turn sell the products at a price in between the true liquidation price and the original price. Often, stores will require the labels to be removed from the products or to mark it in some way so that the perceived value is less than that of the product they have on their shelves.
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.
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.
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