LIFO Liquidation
When a company using the LIFO (Last In, First Out) method of inventory costing liquidates their older LIFO inventory. A LIFO liquidation would occur if current sales are higher than current purchases, as a result, any inventory not sold in previous periods must be liquidated.
Investopedia Commentary
Due to inflation and general price rises, the amount a company pays for its inventory will usually increase with time. If a company decides to perform a LIFO liquidation, the old costs will be matched with the current higher sales prices. Thus, a cost to using the LIFO liquidation method is higher tax liability if prices have risen since LIFO was adopted. The expected tax advantage of LIFO tunrs into a disadvantage because older, lower costs (of older inventory) are matched with current revenues. Another cost may be lost sales.
Related Links
Inventory Valuation For Investors: FIFO And LIFO
See also: First In, First Out - FIFO, Inflation, Inventory, Last In, First Out - LIFO, Net Income