In periods when costs are rising, LIFO liquidations:
A) Can't occur.
B) Are used to reduce tax liabilities.
C) Are a source of off-balance-sheet financing.
D) Distort the net income.

Question

Quizplus · Accepted Answer

LIFO liquidations occur when a company's inventory levels fall below the levels of previous years, causing the sale of older, cheaper inventory. This results in a distortion of the net income as the cost of goods sold is lower than it would have been if the company had sold newer inventory. During periods of rising costs, LIFO liquidations can be particularly problematic as they can significantly distort the company's net income.

In Periods When Costs Are Rising, LIFO Liquidations