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What is LIFO liquidation?

Put simply, LIFO (last-in-first-out) liquidation is when a company sells more inventory than it purchases over a period of time, assuming the company is accounting for inventory using the LIFO method.

When companies purchase inventory at different cost levels, they are required to account for each piece of inventory at that purchase price. As companies reduce overall inventory levels, older inventory costs flow to the income statement. Given the usual inflationary environment (rising prices), these pieces of older inventory will be sold at current prices (but listed at their original cost), giving the company a higher margin of profit per sale, skewing gross profit percentages.