What Is a LIFO Liquidation?
A LIFO liquidation is when a company sells necessarily probably the most in recent times were given inventory first. It occurs when a company that uses the last-in, first-out (LIFO) inventory costing manner liquidates its older LIFO inventory. A LIFO liquidation occurs when provide product sales exceed purchases, resulting inside the liquidation of any inventory not presented in a previous period.Â
Key Takeaways
- A LIFO liquidation is when a company sells its newest inventory first.
- It is an accounting implies that uses the last-in, first-out (LIFO) inventory costing manner.
- LIFO fits the latest costs in opposition to provide revenues.
- Some companies use the LIFO manner in every single place periods of inflation when the associated fee to shop for inventory will building up over the years.
How a LIFO Liquidation Works
The LIFO manner is a financial practice through which a company sells the latest inventory purchased first. LIFO fits the latest costs in opposition to provide revenues. Some companies use the LIFO manner in every single place periods of inflation when the associated fee to shop for inventory will building up over the years. The LIFO manner provides tax benefits as the higher costs associated with new inventories it sounds as if offset source of revenue, resulting in a lower tax burden.
LIFO Liquidation Example
ABC Company uses the LIFO manner of inventory accounting for its house stores. It purchased 1 million gadgets of a product annually for three years. The per-unit worth is $10 in 12 months one, $12 in 12 months two, and $14 in 12 months 3, and ABC sells each unit for $50. It presented 500,000 gadgets of the product in each of the main 3 years, leaving an entire of 1.5 million gadgets readily to be had. Assuming that decision for will keep constant, it most straightforward purchases 500,000 gadgets in 12 months 4 at $15 in line with unit.Â
| 12 months of Achieve | Worth in line with unit | Quantity | Total Worth |
| 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 |
Irrespective of its forecast, consumer name for for the product better; ABC presented 1,000,000 gadgets in 12 months 4. Beneath the LIFO manner, 500,000 gadgets from 12 months 4 are liquidated, resulting in revenues of $25 million, COGS of $7.5 million, and gross source of revenue of $17.5 million; and 500,000 gadgets from 12 months 3 are liquidated, resulting in revenues of $25 million, COGS of $7 million, and gross source of revenue of $18 million.Â
| Worth 12 months | Quantity presented | Quantity Final | Worth/unit | COGS |
Gross Receive advantages (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 |
