A LIFO inventory liquidation occurs when a company that uses the LIFO inventory costing method

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LIFO (last-in, first-out) inventory costing method assumes that the most recently acquired inventory items are sold first. Therefore, during a period of rising prices, older and cheaper inventory remains on the balance sheet as the cost of goods sold (COGS) is calculated using the current, higher prices. If a company sells more merchandise than it purchases during the accounting period, it must dip into its older, cheaper inventory to meet customer demand, resulting in a LIFO inventory liquidation. This can have a significant impact on COGS and gross profit, as the cost of goods sold is now calculated using the higher, current inventory prices instead of the cheaper, older ones.

A LIFO Inventory Liquidation Occurs When a Company That Uses