LIFO Liquidation
Candlefocus EditorLIFO liquidation is used as a way to take advantage of the nearly-inevitable trend of increasing prices over time. In this strategy, a company can purchase large volumes of goods in advance and then use the rising prices to generate a gain when the goods are eventually sold. During periods of inflation, the LIFO method directly incurs a higher cost of goods sold to match the most recent costs of goods purchased.
There are both advantages and disadvantages of utilizing LIFO liquidation. On the one hand, this strategy allows a company to reduce income tax liability by capitalizing on gains made through the appreciation of goods. On the other hand, too frequent usage of this strategy can result in an inaccurate picture of the true cost of goods, creating a level of investment risk for the enterprise. It is up to each company to weigh the pros and cons and decide whether to take advantage of the LIFO liquidation strategy which may involve restatement of financials in the event of an audit.
Knowing how and when to implement LIFO liquidation can be a complicated but potentially rewarding activity for companies using the LIFO inventory management system. Knowing how to expertly combine the LIFO method with current revenue and goods can result in a variety of economic and fiscal benefits when managed correctly.