What is LIFO liquidation?

LAST IN, FIRST OUT (LIFO) LIQUIDATION occurs when a company that uses the LIFO method for inventory valuation sells older stocks. This may happen because the company's demand exceeds the available stocks and the sales numbers are high, or because the company is trying to move old supplies to get cash or to relax space in the warehouse. There are advantages and disadvantages of the LIFO accounting method for inventory and the same applies to LIFO disposal.

In the company that uses the last method, it is assumed that the last received inventory is also the first to sell. If the company receives 50 widgets in May in May and 50 in June and sells 75 in July, for accounting purposes, all widgets obtained in June were sold together with 25 widgets purchased in May. It is important to note that LIFO refers to accounting, and in fact the company does not necessarily have to be disposed of inventory in this way.

In the case of LIFO liquidation, the company sells more than it wasIn a given period, and assumes that it sells some older goods. This may result in inflation of profits, as older supplies are usually purchased at a lower price than newer stocks due to inflation, but are sold at the current required price. As a result, LIFO disposal seems that the company has earned more money in the given period.

For tax purposes, this may be a problem. Making more money for sale results in a higher tax liability. In addition, it can also be used to make the financial situation of society look stronger than in real life. The accounting statements may show that the company has realized a great profit with LIFO liquidation, reassuring investors and other parties, but the company can still have financial problems.

To learn to read accounts Appeal reports on inventory are important for people who want to collect meaningful information from public submissions. Understanding Methods of Accounting and Inventory used by a companyIt provides important traces of what is happening between the lines. For example, in the case of LIFO liquidation, this could mean that the company is fighting and needs cash, or that it has only a month of unexpected sales volume and in fact is doing very well.