When a LIFO firm liquidates old LIFO layers,the net income number under LIFO can be seriously distorted because the older costs in the LIFO layers that are liquidated are matched against sales dollars that are stated at higher current prices.

Question

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When a LIFO firm liquidates old LIFO layers, the net income number under LIFO can be seriously distorted because the older costs in the LIFO layers that are liquidated are matched against sales dollars that are stated at higher current prices. This is because LIFO (last-in, first-out) assumes that the most recent inventory items purchased or produced are the first sold or used, which means that the oldest (and often lower-cost) inventory layers remain on the balance sheet. When these old LIFO layers are liquidated or sold, they may have a lower cost than the current market value, resulting in a higher gross profit and net income, which can be misleading for financial analysis and decision-making.

When a LIFO Firm Liquidates Old LIFO Layers,the Net Income