The reduction in inventory quantities resulting in the removal of older layers of costs. With continuously higher costs, the older layers are likely to be low costs under LIFO. Removing these old, low costs will cause an increase in profits and in taxable income. Therefore, it is important to be intentionally removing low costs since this is likely to create an income tax payment that could have been avoided by not liquidating the old costs. If the liquidation of LIFO layers results in a significant increase in net income, this should be disclosed.
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For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.
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