LIFO liquidation profits occur when inventory quantity declines and costs are rising.

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LIFO (last-in, first-out) method assumes that the most recent inventory purchased or produced is sold first. During periods of rising costs, older inventory with lower costs will remain unsold leading to LIFO liquidation. LIFO liquidation profits occur when the cost of goods sold is calculated using older, lower cost inventory while current replacement costs are higher. This leads to higher gross profits and taxable income in periods of inventory decline.

LIFO Liquidation Profits Occur When Inventory Quantity Declines and Costs