how a lifo liquidation works
the lifo method is a financial practice in which a company sells the most recent inventory purchased first lifo matches the most recent costs against current revenues some companies use the lifo method during periods of inflation when the cost to purchase inventory increases over time the lifo method provides tax benefits as the higher costs associated with new inventories seemingly offset profits resulting in a lower tax burden lifo liquidation exampleabc company uses the lifo method of inventory accounting for its domestic stores it purchased 1 million units of a product annually for three years the per unit cost is 10 in year one 12 in year two and 14 in year three and abc sells each unit for 50 it sold 500 000 units of the product in each of the first three years leaving a total of 1 5 million units on hand assuming that demand will remain constant it only purchases 500 000 units in year four at 15 per unit despite its forecast consumer demand for the product increased abc sold 1 000 000 units in year four under the lifo method 500 000 units from year four are liquidated resulting in revenues of 25 million cogs of 7 5 million and gross profits of 17 5 million and 500 000 units from year three are liquidated resulting in revenues of 25 million cogs of 7 million and gross profits of 18 million gross profit revenues cogs 