What is a LIFO liquidation? In a period of rising costs, why is a LIFO liquidation feared?

What will be an ideal response?

Answer: A LIFO liquidation occurs when ending inventory levels decrease from one accounting period to another and a company assigns the cost of early LIFO layers to Cost of Goods Sold. Early LIFO layers have the early, low costs assigned to inventory so Cost of Goods Sold has the early, low costs. This is contrary to the reason why LIFO is used. Under LIFO, we want to have the latest costs assigned to Cost of Goods Sold because they are the highest costs available, and thus offer the highest tax advantage. With a LIFO liquidation, we lose the benefit from using LIFO. The result is an increase in net income and the taxes paid.