One of the disadvantages of the LIFO cost flow assumption is the impact of the liquidation of LIFO layers.
Required:
a. Explain what is meant by invent ory liquidation under the LIFO cost flow assumption.
b. Discuss why this may be a serious problem for LIFO but not for FIFO.

LIFO Layers

In the Last-In, First-Out inventory accounting method, layers of inventory purchased at different times (and prices) which can affect the cost of goods sold and ending inventory valuation.

Inventory Liquidation

The process of selling off inventory, typically at reduced prices, to generate cash or reduce excess stock.

LIFO Cost Flow Assumption

An inventory valuation method that assumes the most recently produced or acquired items are sold first, last-in, first-out.