lifo liquidation gross profit 515 2003 LIFO and FIFO produce temporary differences in accounting numbers. The LIFO liquidation overstated normal gross profit by a. $ 64,000. This increase in gross profits will occur because of the lower inventory carrying amounts of the liquidated units. Compute cost of goods sold and gross profit uning FIFO, LIFO, and average cost methods. Taxes decrease. LIFO liquidation causes distortion of net operating income and may become a reason of higher tax bill in current period. Adjusted COGS $5,022 $4,956 $5,426. 00. yPotential LIFO liquidation means old costs in LIFO layers can be drawn in to cost of goods sold. Accordingly, cost of sales in interim periods should: (a) Be determined using the gross profit method (b) Include the income effect of the LIFO liquidation (c) Include the expected cost of replacing the liquidated LIFO base Last-In, First-Out is one of the common techniques used in the valuation of inventory on hand at the end of a period and the cost of goods sold during the period. $ -0-b. The LIFO liquidation overstated normal He explained that the objective of LIFO is to permit taxpayers to properly match their current sales revenues with the current replacement costs and thereby compute--and pay taxes on--a meaningful gross profit amount. Two methods, last in, first out (LIFO), and first in, first out (FIFO), have received considerable attention recently by corporate management and the academic community. Milford then sold 700 units at a selling price of $10 each. (Round average cont per unit to the nearest cent and all other amounts to the nearest dollar. Gross Profit includes cost of goods sold, but not SG&A or advertising. When prices are rising, the ending inventory is valued lower at older costs, COGS is higher and thus gross profit and taxable income are lower. 8%! How do you calculate gross profit FIFO? For example, let’s suppose a firm’s oldest inventory cost $200, the newest cost $400, and it has sold only one unit for $1,000. Selling and administrative expenses are deducted from gross profit to get the operating income during the period Inventory cost flow methods: LIFO liquidation; ratios Cast Iron Grills, Inc. LIFO layers are used when less inventory is purchased than is sold. 20) + (200 x $1. , the last in) is assigned to cost of goods sold and matched against revenue. The COGS is an expense and will be subtracted from the Compute cost of goods sold and gross profit uning FIFO, LIFO, and average cost methods. Last In, First Out (LIFO) This is selling the most recent additions to your inventory first. ____ LIFO liquidation may artificially inflate net income. As you might guess, the IRS doesn't like LIFO valuation, because it usually results in lower profits (less taxable income). com/business/profitability-index/dollar-value-lifo-gross-profit-method-357472 Solution Preview. 202,222. For example, a company has $15,000 in sales and $10,000 in cost of goods sold. Two Simple Steps:Step 1: Figure out Gross ProfitResale - Cost = Gross Profit$12 (resale) - 7 (cost) = $5 Gross ProfitStep 2: Divide Gross Profit by Resale(and multiply times 100 to get the percentage)(Gross Profit / Resale) *100Example:$5 (Gross Profit) / $12 Resale = . LIFO cost used for matching Cash + Inventory = L + RE 80 = 80 Note: profit = $40 - 40 = - 40 EInv, yr. Gross profits are your net sales revenues minus COGS. This happens because there has been a liquidation of LIFO Layers from earlier years, and these layers are at lower cost. Some industries, like food and beverage stores, have gross profit margins in the single digits. How To Use Form 970 You must complete Parts I, II, and VI. The Cost of goods sold is simply $12,000 less the ending inventory of $5000, or $7000. The amount of phantom or illusory revenue was $forty five ($sixty five reported minus $20 measured using alternative cost). liquidation Western Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $715,000. The inventory turnover ratio will be higher when LIFO is used during periods of increasing costs. 2 billion increased $70 million, or 2. 332. Assume the same facts as in problem 6 above, but that Paula’s Parkas uses the perpetual LIFO method. The gross profit margin is not so stable after the first year for company B which uses the FIFO method because a proportion of the cost of sales reflects an older Explain that the biggest problem associated with LIFO is an inventory balance that can often show costs from years (or even decades) earlier that are totally irrelevant today. A LIFO liquidation may signal that a company is entering an extended period of decline (and needs the "profit" to show as income). Gross Profit Margin = (Revenue – Cost of Goods Sold) ÷ Revenue . gross profit: 5,000. What Is Last-In, First-Out (LIFO)? LIFO is the inventory accounting method that operates under the assumption that a business firm uses its inventory last in, first out. 15 per gallon. Advantages : yMatches current cost with current revenues. Online finance calculator assists to find the inventory cost or value of most recently sold goods using LIFO method. Where is the LIFO Method Used? The LIFO method is commonly used in the USA. LIFO accounting allows companies to sell inventory and calculate the purchase cost of that inventory -- which determines the deduction they may take -- as if the most recent product sold was the most recent bought and stored as inventory. ____ Gross profit percentage can help users determine how long it takes companies to sell inventory after they purchase it. 70 per gallon creating a normal gross profit of $0. LIFO . e. 6 million in the year-ago period. It a periodic inventory system is used, then it would be assumed that the cost of the total quantity sold or issued during the month have come from the most recent purchases. , manufactures premium gas barbecue grills. Prepare the company's LIFO liquidation disclosure note that would be included in the 2020 financial statements to report the effects of any liquidation on cost of goods sold and net income. Round gross profit rate to 1 decimal place, e. Although using the LIFO method will cut into his profit, it also means that Lee will get a tax break. The LIFO inventory valuation method is one of several methods that are commonly used, such as the first-in-first-out (FIFO) method and the weighted average cost method. During periods of rising prices, this drawdown of inventory reduces cost of goods sold because the lower cost of previously produced inventory is used, resulting in an unsustainable increase in gross profit margin. 3,000: 100%. For example, suppose a company's oldest inventory cost $200, the newest cost $400, and it has sold one unit for $1,000. So for instance, using the above example: Gross Profit Margin = ($500,000 – $350,000) ÷ $500,000 = . Last-In First-Out (LIFO) is the reverse of FIFO; the latest cost (i. Disregarding income tax, determine the LIFO liquidation profit or loss, if any, for each of the three years. LIFO accounting allows companies to sell inventory and calculate the purchase cost of that inventory -- which determines the deduction they may take -- as if the most recent product sold was the most recent bought and stored as inventory. Determine Parka’s gross profit for January. LIFO Liquidation: Erosion of the LIFO inventory under a specific-goods (unit LIFO) approach. Is a satisfactory substitute for taking a physical inventory for annual financial statements. This situation is called a “liquidation” of a LIFO reserve. LIFO LIFO results in lower net income because the cost of goods sold is higher, so there is a lower taxable income. $600. 4) million, compared to $21. 16 of 24 LIFO Liquidation Example cont During Year 5 Exto purchased 500 units from ACC 710 at Saint Leo University LIFO Method. 7-20 3. $400. By accounting for the value of the inventory, it becomes practicable to report the cost of goods sold or any inventory-related expenses on the profit and loss statement and to report the value of the inventory LIFO layers are created when more inventory is purchased than is sold. $200. "By using more recent inventory in valuation," Melwani continued, "your cost basis is Under the gross profit method, the cost of goods sold is estimated by applying the historical cost ratio (100% minus the gross profit rate) to the net sales of the current period. If you do not make sufficient purchases or produce enough new items, you will have to dip into older LIFO layers, a process called liquidation. If inventory unit costs have generally risen from year to year, this will produce an inventory-related increase in gross profits. Depending on a manager's choice, gross profit can vary wildly. ) FIFO LIFO Sales revenue $ 6,660 6,364 Cost of goods sold Gross profit $ 296 i Requirements First-in, first-out 1. Reconciliation of Changes in LIFO Reserve: Rising input costs increased LIFO cost of goods sold by $1,945,000 LIFO dipping undercharged expense and thus, reduced COGS by (2,600,000) Result: LIFO COGS is less than LIFO by $ 655,000 (=Changes in LIFO Reserve) LIFO. Ending Inventory. Use of LIFO inventory pools reduce the chance of unintentional LIFO layer _____. 4. Cast Iron’s December 31, 2016, fiscal year-end inventory consisted of the following (listed in chronological order of acquisition): Gross profit is the remaining revenue after deducting the cost of goods sold. If inventory unit costs have gone up from year to year, this will increase gross profits. If a company uses LIFO, a LIFO liquidation is problematic for a company's income taxes: December 31 86,000 Cost of goods sold 318,000 Gross profit $118,000 1 Answer to LIFO liquidation Taylor Corporation has used a periodic inventory system and the LIFO cost method since its inception in 2009. LIFO Layer: A LIFO layer is the same as a LIFO increment. However, in the case of liquidation, if for example ending inventory is That means the gross profit calculation may not reflect the actual figure. Similarly, you may ask, why would a company use LIFO? To determine taxable profit, a company must subtract costs from gross revenues. In LIFO liquidation, the costs from older LIFO layers will flow to COGS and it can be used by the management to manipulate earnings and margins. Determine Parka’s gross profit for January. But taxation is not the only benefit. 3 Return on equity 26. gross profit using the FIFO inventory costing method. But the IRS does allow businesses to use LIFO accounting, requiring an application, on Form 970. The Last in First out Method (LIFO) is one method used to determine the cost of goods sold in a business. LIFO assumes that goods which made their way to inventory (after purchase, manufacture etc. It is generally not used outside the US. 37. 75 = $2,625 Lastly, gross profit FIFO would be $20,000 – $6,625 = $13,375. Adjusted GM percentage 14. 3. To calculate gross profit, you subtract the cost of goods sold (COGS) from sales revenue. This equates to a cost of $1. It results in sale of old units that Determine Parka’s gross profit for January. However, the 1993 level using adjusted data exceeds that of 1991 by a much larger amount. If a LIFO liquidation occurs during a period of rising prices, If the toy manufacturer above was using the LIFO method and reported $350 in gross profit but then decided to change to FIFO resulting in a restated $500 gross profit, the accounting change alone has increased gross profit by 42. The “Last In, First Out” inventory method has been hotly debated at the federal level. *** The answer sheet says: FIFO cost of merchandise sold (16 × $30) + (30 × $35) + (30 × $39) = $2,700. 3. The LIFO Liquidation provides a profit for the short term and the review of the same is to be done to plan better and not failing the expectation of the consumers. LIFO accounting allows companies to sell inventory and calculate the purchase cost of that inventory -- which determines the deduction they may take -- as if the most recent product sold was the most recent bought and stored as inventory. 1 1. last-in, first-out (LIFO) inventory method described in section 472. A LIFO liquidation may signal that a company is entering an extended period of decline (and need the "profit" to show as income). Determine Parka’s gross profit for January. D. Gross profit Gross Profit Margin Ratio Calculation. In general, the LIFO inventory costing method assigns the last unit costs that come into a company (last-in) to the first units flowing out of the company (first-out). $400. The company has projected a gross profit ratio of 25%. 1 million Net income, $0. If substitute price would have been allowed and used, the gross revenue would be $20 (promoting price of $165 minus the replacement cost of $a hundred forty five). Calculate ending inventory, cost of goods sold and gross profit for each inventory method below (assuming a perpetual inventory system): FIFO; LIFO; Which inventory method provides the highest profit? Which method provides the best income statement matching? Which method provides the better balance sheet valuation? Is a LIFO liquidation occurring? Accounting using the Dollar Value LIFO Method (last in, first out inventoy) with a single inventory pool to calculate the price index, ending inventory dolla Gross profit in 2014 also benefitted from candy inventory holding gains of $6. Ending. LIFO cost of merchandise sold (45 × $39) + (30 × $35) + (1 × $30 Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under each of the following methods. In most cases, a company uses the most recent costs when selling inventory items. . The profitability ratios include profit margin, return on assets, and return on stockholders' equity. The main feature of the LIFO (last-in, first-out) method for cost of goods sold is that it selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period. This figure represents the gross profit for the product. LIFO liquidation uses this LIFO method of inventory valuation. , the last in) is assigned to cost of goods sold and matched against revenue. Excludes F&I The cost of goods sold would now be $6,625, which is more expensive than it was during the period of rising prices. Normally, prices rise over time, and you will find the last in, first out (LIFO) method very useful. 3. FIFO generally gives the most accurate cost. I need to find the gross profit of these four but do not know how to determine this? *E8-25 Gross profit method. Gross Profit/Net Sales: Term. 3 Return on equity 23. Gross profit method. As entity is using LIFO method therefore cost of 150 units sold will be based on cost of most recent purchases of $15/unit therefore If inventory unit costs have been rising and LIFO liquidation occurs, an inventory-related increase in gross profits will be produced. $101,778. The gross profit method ; The retail inventory method; The gross profit method is based on an understanding of the historic relationship between revenue, cost of goods sold and gross profit. 5. 6 -17. This means a business can report higher deductions for tax purposes. Prepare the company's LIFO liquidation disclosure note that would be included in the 2013 financial statements to report the effects of any liquidation on cost of goods sold and net income. LIFO liquidation 128 65 51. Journal entry to reduce inventory to LIFO: Harga Pokok Penjualan 30,000 cad. 024 Notice that, based on these ratios, Zenab is clearly more profitable than Faybech. 00 each then the gross profit is calculated as follows: Gross profit = Revenue - COGS Gross profit = 200 x 10. The fewer the number of purchases made, or items produced, the further the company needs to go into their older inventory. C)this fact following a prescribed format. If prices are rising and LIFO layers are used—especially if they are very old LIFO layers—then the gross profit from those sales that liquidated old LIFO layers can be very high when compared with A LIFO liquidation results when a company experiences declines in inventory quantities. Gross Profit Ratio = Definition. While Faybech still has a higher current ratio, the difference is smaller than it appears based on the reported balance sheet data. (When calculating average cost per unit round to 3 decimal places, e. The gross profits increase because the older inventory carrying amounts are used for COGS while sales are at current prices. It purchased 600 more units of “Dink” at a cost of $9 each. If, in the same scenario, you use the LIFO method, you sell 50 shares with a cost of $40 and 150 with a cost of $50. (Round "Gross profit ratio" answer to 1 Thus, the gross profit for 2004 under FIFO would have been = $700 (3,000 - 2,300). Decreased cash expenses (from not producing inventory) will increase operating cash flow, although higher income taxes on higher earnings will partially offset this increase in cash flows. Net income increases. (Round average cont per unit to the nearest cent and all other amounts to the nearest dollar. Gueether and Trombley (1994) and Jennings, Simko, and Thompson (1996) document a negative association between a firm's last-in, first-out (LIFO) reserve and the market value of its equity. Moving average inventory method. The store may use the gross profit margin to compare with the industry average to see if it is performing well in the market. 5 million, and gross profits of $17. $304,000. It means that the company has sold more units that it has purchased. False LIFO liquidation profits occur when inventory quantity declines and costs are rising. c. C. Moderate 30–40 *11B Compute ending inventory using retail method. 4166 x 100 = 41. 00 = $4,000 1,500 units x $1. Disadvantages : yUsually does not correspond with the physical flow of goods. By signing up, you'll get thousands of step-by-step solutions to your Last-In First-Out (LIFO) is the reverse of FIFO; the latest cost (i. c. d. Note that under LIFO liquidation, some very "old" costs are matched against current revenues. g. 540. Includes F&I sales unless otherwise noted. Is the most accurate of the commonly used methods. E. B. a. Cost of Goods Sold. Current revenue is matched only with current purchases. LO 7 Understand the effect of LIFO liquidations. Company B COGS for 2014 under FIFO method = COGS under LIFO – (ending LIFO reserve – beginning LIFO reserve) = 760 – (160 – 180) = 780 million. Code to add this calci to your website Just copy and paste the below code to your webpage where you want to display this calculator. The assumption is that the firm sells the last unit of inventory purchased first. 2. 3. Alternative systems may be used in some countries, such as last-in-first-out (LIFO), gross profit method, retail method, or combinations of these. January, 100 Units, $20 FIFO (First In, First Out) and LIFO (Last In, First Out) are two methods of accounting for the value of inventory held by the company. Term 2. And for most, it is. 4166Then multiply by 100 to get the %So . c. , manufactures premium gas barbecue grills. Adjusted gross margin $826 $767 $1,053. 7 million for the fourth quarter 2018 included a $51. e. Similarly, the LIFO valuation will be a better choice when prices are falling. To measure the accounting distortion, we compare inventory turnover, working capital, gross profit, The Last-In, First-Out (LIFO) method assumes that the last unit to arrive in inventory or more recent is sold first. (a) calculate cost of sales and gross profit with data given above (b) calculate cost of sales and gross profit with data given above assuming no purchases were made during the period. It purchased 600 more units of "Tank" at a cost of $6 each. For example, assume a product sold for $100 and cost $25 to produce. IV. If a company performs LIFO liquidation, the old costs will be matched with the current higher sales prices. B)the dollar impact of LIFO liquidation on the year-end inventory balance. LIFO Liquidation Illustration 8-20 40. These are known as LIFO and FIFO. Back to Top. (3) Average cost. In finance, the term is used to describe the amount of cash (currency) that is generated or consumed in a given time period. $ 85,000. The main benefit is that gross profit on a company’s income statement is lower and therefore its tax liability is lower as well as taxable income drops. Disadvantages Of Using LIFO Vs FIFO Method : But any change in a company’s gross profit percentage from year to year will have an impact on the size of the Lifo expense when the price index is adjusted to a cost complement index. 60% 2. To make it clearer, let’s look at the same illustration, but with a new assumption that the sales price/unit is $20. 3 million unfavorable net impact related to the non-cash lower of cost or market (“LCM”) inventory adjustments and the liquidation of last-in, first-out (“LIFO”) inventory layers. Weighted-Average. I only: b. $304,000. (Round average cont per unit to the nearest cent and all other amounts to the nearest dollar. Full Form: First in First out. During The Quarter, We Sell 1,000 Units At $60/unit For Cash. Moderate 15-20 P8-1 Various inventory issues. 2%, from the prior year, driven by margin expansion initiatives, acquisitions and a year-over-year gain in the LIFO reserve. Because the FIFO method results in a higher gross profit, it will make the company more attractive to investors. 2 = $50 15. The 220 lamps Lee has not yet sold would still be considered inventory. LIFO, which stands for Last In, First Out, is an inventory costing method that is allowed in some cases under GAAP but strictly prohibited under IFRS. The company uses a periodic inventory system and the LIFO cost method for its grill inventory. The basic difference between the various applications of this costing method is the time interval between inventory computations. Why does LIFO lower gross profit? Since LIFO assigns the latest costs of the goods purchased or produced to the cost of goods sold, the rising costs mean a higher amount of cost of goods sold on the income statement. Moderate 30-40 P8-2 Compute FIFO, LIFO, and average cost—periodic and perpetual. the firms sells more than it purchases during the year). LIFO conformity rule. 00 per lollypop ($1,000/1,000 lollypops). Inventory Inventory Valuation Valuation Methods Methods -- Summary Summary Illustration 8-31 Notice that gross profit and net income are lowest under LIFO, highest under FIFO, and somewhere in the middle under average cost. Some systems permit determining the costs of goods at the time acquired or made but assigning costs to goods sold under the assumption that the goods made or acquired last are sold first. Dolan Corporation adopted the dollar-value LIFO method of inventory valuation on December 31, 2005. 7% expanded by 750 basis points versus 14. Enter all numbers as positive numbers. 55 per gallon to buy and is then sold to the public for $2. Such erosion matches LIFO Index: A ratio expressed in decimal format that is the measure of LIFO inflation for each LIFO pool for taxpayers using dollar-value LIFO. During inflation, when prices are rising, the LIFO method yields a lower ending inventory, a higher cost of goods sold, a lower gross profit, and a lower taxable income. The gross profit margin (gross profit/sales) is stable for company A which uses the LIFO method because both sales and cost of sales are increasing at the same rate of inflation. ) FIFO LIFO Sales revenue $ 6,660 6,364 Cost of goods sold Gross profit $ 296 i Requirements First-in, first-out 1. LIFO liquidation profit in the amount of $2,600,000, reducing LIFO Reserve, and an inflation effect in 2005 in the amount of $1,945,000, increasing LIFO Reserve. org Accounting for LIFO liquidation, inventory layers (ending inventory from past periods) are sold in a later period which result in inflated profits, older cos That in turn means a lower gross profit than assigning the first or oldest costs to the cost of goods sold under FIFO. These acronyms may sound like a couple of kid’s TV characters, but actually, they’re great ways of calculating the unit costs of goods that have been sold. In other words, it is the reverse of what you did before, because under LIFO, the last (i. Using FIFO, you would sell the inventory in the order it comes in. IRS Regulations and FIFO vs. You can multiply the resulting number by 100 for a percentage. $ -0-. In a period of inflation (as usually is the case) LIFO liquidation will distort net income (make it higher) and incur substantial tax payments. Nichols then sold 700 units at a selling price of $15 each. 9% 12. Sales were $1000. Question: LIFO Liquidation In An Interim Reporting Period Assume That Our Records Include The Following Two LIFO Inventory Cost Pools: Units Cost/Unit BOQ 600 $20 Purchase #1 800 $30 1,400 At The Beginning Of The Quarter (BOQ), We Report 600 Units On Hand At A Cost Of $20 Per Unit. 3% 21. d. The LIFO definition stands for last in, first out. The Last-In-First-Out Method (LIFO) In this case, even though our purchases amounted to $1,800, our cost of goods sold (or cost of sales) amounted to $800. The First-In, First-Out (FIFO) method assumes that the oldest unit of inventory See full list on accountingformanagement. Sales. The best method for a business depends on its goals and current financial position. LIFO liquidation can distort a company’s net operating income, which generally leads to more taxable income. ) FIFO LIFO Sales revenue $ 6,660 6,364 Cost of goods sold Gross profit $ 296 i Requirements First-in, first-out 1. Nichols Company had 400 units of “Dink” in its inventory at a cost of $6 each. In periods of rising prices, LIFO results in the highest costs and therefore the lowest taxable income. Using the Last-In-First-Out method, our closing inventory comes to $1,000. There are two methods of tracking stock and figuring out profit. 2% in last year’s fourth quarter. LIFO Under the LIFO method, your cost of goods sold for the month would be: Gross Cookie Sales: $100 Cost of Goods Sold: $30 Gross Margin: $70. the cost of goods sold can cause the company’s gross profit rate to soar. 8 -13. Johnson then sold 700 units at a selling price of $10 each. 2. Requirement 2 The information might be useful to a financial analyst interested from ECON 101 at University of California, Los Angeles To determine taxable profit, a company must subtract costs from gross revenues. Calculate the gross profit margin ratio using the following formula: Gross profit = revenue – cost of goods sold. LIFO, gross profit, next in, first out (NIFO), specific identification, and several retail methods. The following is an example on how to calculate ending inventory using the gross profit method. Fuels products Adjusted gross profit (loss) and Adjusted LIFO Index: A ratio expressed in decimal format that is the measure of LIFO inflation for each LIFO pool for taxpayers using dollar-value LIFO. $ 77,778 Last In, First Out (LIFO) LIFO is the opposite of FIFO and means that the value of the inventory is expressed as the result of selling the newest goods first. 3, or 30%. That is the amount of income that a station is making at this time. Now consider the store's gross profit margin if you sold the older case of cookies first (that is, you used the first-in-first-out, or FIFO, method): Gross Cookie Sales $100 Cost of Goods Sold: $25 common method of calculating merchandise inventory cost flows is the LIFO method. 3 -18. Using LIFO, the ending inventory is valued at 1,900 and cost of goods sold is 1,200. In this instance, the gross profit under LIFO is higher than the gross profit under FIFO. What about the ending inventory — the products you haven’t sold […] LIFO is simple to understand, easy to operate among these inventory management systems. This creates an inflated profit margin distorts net income. Complex 40-55 P8-3 Compute FIFO, LIFO, and average cost—periodic and perpetual. Moderate 30–40 *9B Determine ending inventory under a perpetual inventory system. If Mayberry Home Improvement Store uses a periodic LIFO system, gross profit for the year will be reported as $902 (revenue of $1,950 less cost of goods sold of $1,048). Last-in, First-out (LIFO) Under LIFO, a business assumes that the last inventory purchased is the first to be sold. 6 million. 2,000. Moderate 25-35 Gross Profit $ 850 (1) Gross Profit % = Sales-Cost of Sales old)/Sales=33%. For LIFO and FIFO :Assume sales returns had a cost of $18 and purchase returns had a cost of $24. g. Results in an unssustainable increase in the gross margin percentage. e. For that reason, company officials can easily keep track of gross profit during the year by subtracting purchases from revenues. The answer is b but i can not figure out how to get to that conclusion. LIFO liquidations can occur due to a variety of reasons, such as strikes or other production disruptions, etc. LIFO accounting allows companies to sell inventory and calculate the purchase cost of that inventory -- which determines the deduction they may take -- as if the most recent product sold was the most recent bought and stored as inventory. This phenomenon is called LIFO liquidation. To determine taxable profit, a company must subtract costs from gross revenues. included as part of gross profit. Why LIFO Liquidation Occurs. Exhibit 3 presents an income statement based on the income statements from Exhibit 1 with the cost of goods sold, gross profit, and operating profit presented on a non-LIFO basis and the current-period LIFO effect of $60,000 included in the $(10,000) total nonoperating items. ) (1) LIFO. Cast Iron’s December 31, 2016, fiscal year-end inventory consisted of the following (listed in chronological order of acquisition): The replacement cost of the grills throughout Gross profit per barrel results of $43. That gives you a taxable profit of https://brainmass. cost of goods sold. An increase in gross profit accompanied by a decrease in LIFO reserve must Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2022 assuming that Cast Iron purchased 38,000 units (as per the first assumption) and 20,000 units (as per the second assumption) during the year and uses the FIFO inventory cost method rather than the LIFO method. 8) million and $(57. Last in First out. d. Saving taxes LIFO. To determine gross profit for a product, subtract the cost of the goods sold from the gross sales revenue for each product. Back to Top. 50. To determine taxable profit, a company must subtract costs from gross revenues. Gross Profit = (Total Sales – Total Costs of Goods Sold) The gross profit margin however is a percentage figure and the store calculates this using the formula: Gross Profit Margin = (Gross Profit / Total Revenues) x 100. Although the company’s taxable income was $10, ($40 minus the $30 FIFO cost of goods sold) the company’s actual profit that year was $7 ($40 minus the $33 cost of the replacement inventory). It purchased 600 more units of "Tank" at a cost of $6 each. There are several reasons why LIFO liquidation occurs, including: A sudden cash flow Cash Flow Cash Flow (CF) is the increase or decrease in the amount of money a business, institution, or individual has. Under the LIFO method, 500,000 units from year four are liquidated, resulting in revenues of $25 million, COGS of $7. 3. This is a guide to LIFO Liquidation. LIFO reserve has decreased over the period. The erosion of old inventory layers can sometimes lead to dramatically higher profit, since the older i To calculate COGS (Cost of Goods Sold) using the LIFO method, determine the cost of your most recent inventory. 4. LIFO Layer: A LIFO layer is the same as a LIFO increment. Determine the difference in gross profit between the LIFO and FIFO inventory cost systems. IFRS prohibits LIFO due to potential distortions it may have on a company’s profitability and financial statements. gross profit using the LIFO inventory costing method. If the units sell for 10. FIFO's higher cost of goods sold resulted in lower gross profit, lower income before taxes, lower income taxes expense, and lower net income than under the LIFO perpetual method. 3%. $ -0- b. Under LIFO, our cost of goods sold is higher than it was under FIFO and our ending inventory is lower than under FIFO. Calculate the gross profit for each product sold by a company. Use the following formula to calculate the percentage of sales: Gross profit margin ratio = (15,000 -10,000) / 15,000 = 33% * Learning Objective: Remove LIFO dipping, a non-sustainable factor from gross margin analysis. $304,000. Furniture Palace has cost of goods available for sale of $5000. A liquidation of LIFO inventories for interim reporting purposes may create a problem in measuring cost of sales. g. Historic Average data: Revenue. The last-in, first-out (LIFO) inventory method assumes that the goods most recently acquired or manufactured are sold first. In other words, it measures how efficiently a company uses its materials and labor to produce and sell products profitably. 1 1. The gross profit method of valuing inventory: A. * LIFO liquidation: Gross profit distortion Improving gross margin was reported But the improvement was due to LIFO liquidation * Current ratio example Understated because of LIFO LIFO reserve adjustment restates inventory to approximate current cost. 66%So your gross profit margin percentage is 41. (S&P gross profit as % of total fixed overhead expense) Light-Duty Trucks 8. That in turn means a higher gross profit than under the FIFO cost flow assumption. In this case, older inventory is sold or liquidated. 303. 5 and all other answers to 0 decimal places, e. Multiple Choice As the company reduces its inventories, the costs transferred to the cost of goods sold will come from older-c-and lower-cost layers. b. LIFO gross profit margin LIFO pretax income/sales. The gross profit would be determined as $800 under LIFO method and $600 under FIFO method. Gross profit margin will be abnormally high and unsustainable ("phantom" gross profits). 40%. $100 - $25 = $75. Cost of goods sold may be the same or different for accounting and tax purposes, depending on the rules of the particular jurisdiction. $200. Compute the amount of phantom profit that would result if the company used FIFO rather than LIFO. ) The effect of LIFO inventory liquidation on its reported profits in 1984 are an increase in net income by $2. $109,000. LIFO liquidation. 2% versus the prior year quarter, and adjusted EBITDA margins of 21. When LIFO inventory is liquidated, the old costs are matched with the current revenues and as a result, financial statements show higher income. And it is the scientific and logical way to use the inventory when needed by production or sales department keeping into account various parameters, namely cost of goods sold (COGS), tax, and net profit made. 6 million increase in LIFO expense, driven largely by inflation in the cigarette, confection and grocery categories. 0 million, offset by a $7. This is called LIFO liquidation. Excluding the LIFO liquidation, the GM percentage still declines in 1992, and increases in 1993. $400. 66 %. 2. LIFO with the Perpetual Inventory Method The following information about our product Super Widget will be used to illustrate the calculations involved using the Periodic and Perpetual Inventory Methods with the LIFO Costing Method (Cost Flow Assumption). During the fourth quarter, Fuel products segment gross profit (loss) was $(66. Moderate 40–50 *10B Compute gross profit rate and inventory loss using gross profit method. This is called LIFO liquidation. 5,550. Gross profit margin will be abnormally high and unsustainable ("phantom" gross profits). Arises when purchases for the period are not sufficient to offset the sale of inventory in the period. 3. LIFO Liquidation Gross profit margin increases. The Weighted Average Method The top number in the equation, known as gross profit or gross margin, is the total revenue minus the direct costs of producing that good or service. LIFO: The last-in-first-out (LIFO) method does just the opposite wherein everything would be higher except the COGS. Thus LIFO liquidation effect for the Year will be $5000 ($30000-$25000). Determine Paula’s Parkas cost of goods sold and ending inventory for January. Wrapping it up: What is a LIFO Reserve? The LIFO reserve is the difference between the cost of inventory calculated using the FIFO method and using the LIFO method. Profit sharing and other bonus arrangements are often on LIFO inventory assumption. Therefore, under these circumstances, FIFO would produce a higher gross profit and, similarly, a higher income tax expense. The estimated cost of goods sold on the income statement for the period is [latex]$1000\cdot. 1. , the newest) inventory you bought is considered to be sold first, while under FIFO, the oldest inventory/purchases you bought/had is considered sold first. During the fourth quarter, Fuel products segment gross profit (loss) was $(66. I don't understand phantom profit. 2. The inventory valuation method is adopted by most of the companies to reduce gross profit. Based on the above, there is a 60% gross profit ($3,000 ÷ $5,000) inherent in the sale of the assets. 4 million or $0. How to calculate LIFO? LIFO has the opposite functionality of FIFO. 6% 12. 195,000. Your COGS will contain the latest and highest costs when This causes LIFO Liquidation to occur and ironically increase profit! During declining prices of raw materials, LIFO method makes COGS lower and increase Gross Profit. In the words, the inventory which was received in the last would be used first. The reason is that the cost of goods sold will be higher and the inventory costs will be lower under LIFO than under FIFO. A LIFO liquidation occurs when a firm using LIFO sells more inventory during a period than it produces. The last-in, first-out method assigns inventory costs as if you sell the items you most recently obtained first. In this example of LIFO costing a new inventory balance is computed after each receipt and each issue of materials, with the ending inventory consisting of 1,000 units valued at $7,800. LIFO liquidation occurs when the number of units in ending inventory declines from the number of units that were present at the beginning of the year. Solution: (a) Cost of sales. LIFO layer. Hoping someone can explain on how LIFO reserve affectsthe oil industry, our sample includes 14 major oil companies which are identified as LIFO users. 00 - 1,200 Gross profit = 800 FIFO vs LIFO Comparison of Gross Profit 19 LIFO Liquidation Example Beginning Balance as of Year 5 consists of 460 units, purchased as follows Year Units Unit Cost Total Cost 1 100 50 5,000 2 110 60 6,600 3 120 80 9,600 4 130 100 13,000 Total 460 34,200 Cost of unit during Year 5 120 Sales during Year 5, units 360 Sales price 200 Year 5 Purchases = 0 Units Year 5 Purchases = 360 Where LIFO means Last In First Out, and FIFO means First In First Out. That in turn means a lower gross profit than assigning the first or oldest costs to the cost of goods sold under FIFO. This is strictly not due to LIFO liquidation but it nevertheless makes the profit looks larger than if the company had employed FIFO method. FIFO will have a higher ending inventory value and lower cost of goods sold (COGS) compared to LIFO in a period of rising prices. 0752 x $22,300 = $1,675. Subtracting this estimated cost of goods sold from the cost of goods available for sale (beginning inventory plus purchases) provides an estimate of ending inventory. Cast Iron Grills, Inc. LIFO/current cost basis increases (decreases) by . ) later are sold first and those which are manufactured or acquired early are sold last. LIFO liquidation refers to the reduction in reported profits from using LIFO in periods of rising inventory costs. To defer taxes indefinitely, purchases must always be greater than or equal to sales. Under LIFO: COGS = $1,700; Revenue = 350 x $15 = $5,250; Gross profits under LIFO = $5,520 – $1,700 = $3,820 . 9% (Annualized net pretax profit as % of net worth + lifo) Total light-duty 11. If the cost of raw materials increases, the company will sell the higher-cost goods first. 2× 15. Impact of inflation: What decreases the cost of goods sold and increases the net profit is the fact that when costs are increasing, the items acquired later are expensive. Gross profit is lower under LIFO than FIFO, which would result in lower income taxes because overall profit would be lower. Recommended Articles. Gross Profit. a. Back to Top. Systematic LIFO lures some business leaders in because it usually shows a lower net income, reducing your tax obligation. 23 of Earnings per unit, and Adjusted EBITDA of $55. The $600 gain would pass through to the shareholder and be taxed currently Solved: Explain why does LIFO shows a less gross profit during rising prices. As a result, LIFO generally ‘matches’ current selling prices to current costs and results in a gross profit that reflects relatively current margins. Your COGS, gross profit, net profit and taxes due are all set by your choice of cash flow method. $600. By moving high-cost inventories to cost of goods sold, businesses can lower their reported profit levels and defer income tax recognition for the total purchases. Special Issues Related to LIFO Older, low cost inventory is sold resulting in a lower cost of goods sold, higher net income, and higher taxes. What are LIFO layers? A LIFO layer refers to a tranche of cost in an inventory costing system that follows the last-in, first-out ( LIFO ) cost flow assumption. Excludes F&I sales. both quarterly and annual financial statements. 25 = $250[/latex]. FIFO will have a higher ending inventory value and lower cost of goods sold (COGS) compared to LIFO in a period of rising prices. At the yearend Inventory as per FIFO stands at $100000 under the FIFO method and $70000 under the FIFO method. 5 million; and 500,000 units from year three It includes material cost, direct, which increases gross profits, and generates more income to be taxed. If a company uses LIFO, a LIFO liquidation is problematic for a company's income taxes: A. Gross Profit Ratio Gross Inventory cost flow methods: LIFO liquidation; ratios. The primary driver of the decline stemmed from the rise in RINs costs, which negatively impacted the fourth quarter gross profit and Adjusted EBITDA results. When LIFO liquidation profits are material, the SEC requires that its income effect be reported. If costs were to steadily decrease over several years, LIFO would result in a higher gross profit than FIFO. 50% of total net sales for 2014 and 2013, respectively. Includes F&I sales unless otherwise noted. The reason is that LIFO would be assigning the latest costs (which will be lower costs than the first or oldest costs) to the cost of goods sold on the income statement. A high gross profit helps you more easily cover your fixed costs and end up with net income, which is shared with company owners. A company’s business assets ready for sale are what make up the inventory. the gross profit is: 8,000 x (10 - 8) = $16,000. 17 units@ S 13 each 5. Gross Profit Method Ratio of gross profit to sales is used to estimate inventory that is stolen or destroyed by fire, flood, or other type of damage, as we ll as for inventory estimation for interim statements when physical count is not practical (Exhibit 6 -8). And for moving-average, round cost per unit to 3 decimal places. Answer of 1. LIFO liquidation profits occur when: Definition. 20 per common share and a reduction in the net loss by $15. Determine Paula’s Parkas cost of goods sold and ending inventory for January. 55 per gallon to buy and is then sold to the public for $2. 00) = $800. 70 per gallon creating a normal gross profit of $0. The inventory turnover ratios are, however, virtually identical. The use of a pure LIFO system is troublesome for interim periods, for which estimates must be made of years-end quantities and prices. A comparison of both companies on a LIFO basis is presented below: Zenab Faybech Sales Cost of goods sold Gross profit Selling and general expense Pretax income $ 5,000 $ 92,700 61,300 $ 31,400 26,400 $ 77,000 53,675 $ 23,325 Average cost calculates cost of goods sold using the overall average inventory costs. 2,000 units x $2. 00 - 550 Gross profit = 1,450 LIFO Method; The second method in our FIFO vs LIFO comparison is LIFO. Assume the same facts as in problem 6 above, but that Paula’s Parkas uses the perpetual LIFO method. The company uses a periodic inventory system and the LIFO cost method for its grill inventory. 8% 19. Assumes that the gross profit rate will remain the same for the current year as it has in the past year or so. In dollar value LIFO we calculate the layers because the inventory would comprise the earliest purchases. C. 4. LIFO Reserve Formula = FIFO Inventory-LIFO Inventory = $100000-$70000 = $30000. The inclusion of-these old and low costs in . 3. In this way, the cost of goods sold consists of the last The following table reveals that the amount of gross profit and ending inventory can appear quite different, depending on the inventory method selected: The preceding results are consistent with a general rule that LIFO produces the lowest income (assuming rising prices, as was evident in the Gonzales example), FIFO the highest, and weighted However, if the liquidation occurs in a taxable year ending after December 31, 1953, the notification may be given at any time within 3 months after the promulgation of regulations under section 1321, or prior to the expiration of the 6-month period following the filing of the return, whichever expiration date later occurs. Fuels products Adjusted gross profit (loss) and Adjusted EBITDA of $(71. Cost of Good Sold: LIFO $ FIFO $ Moving average $ Ending Inventory LIFO $ FIFO $ Moving average $ Gross Profit: LIFO $ FIFO $ Moving average $ an item may be in a LIFO inventory layer and would be included as part of the inventory balance until the layer is liquidated. This is the correct income statement as there is a buildup/maintenance of inventory. It is stated:"Under LIFO and with increasing prices, a firm that sells more goods than it purchases or produces in a period may show an unsustainable increase in gross profit margin because items recognized in cost of sales are valued older, lower prices, while sales are recorded at current, higher (S&P gross profit as % of total fixed overhead expense) Light-Duty Trucks 7. Accordingly, SCO would recognize $600 ($1,000 × 60%) of gain on the receipt of the $1,000, and $2,400 ($4,000 × 60%) is deferred until cash is received on the note. Last In, First Out (LIFO) LIFO assumes the opposite, that you will sell your newest goods first. Which PrintDone 4 units sold for $20 each in cash. Prices paid by a company for its inventory often fluctuate. Under LIFO, the company reported a lower gross profit even though the sales price was the same. $200. Complex 40-55 P8-4 Compute FIFO, LIFO, and average cost—periodic and perpetual. Since LIFO layers peeled off have lower inventory costs, this would cause a one-time increase in gross profit. A LIFO liquidation occurs when a significant drop in inventory level leads to the erosion of an earlier or base inventory layer. (2) FIFO. Certain expenses are included in COGS. The last in first out method may seem counter-intuitive to some. 1 In periods of rising Milford Company had 400 units of "Tank" in its inventory at a cost of $4 each. In the current year, gasoline cost $2. 15 per gallon. This decrease in pretax income is close to 50%. That gives you a taxable profit of $4,500. To defer taxes indefinitely, purchases must always be greater than or equal to sales. 4% 16. • Prior to liquidation, an eliminating entry is needed in the consolidation workpaper each time consolidated statements are prepared to restate the inventory to its cost to the consolidated entity. Compute cost of goods sold and gross profit uning FIFO, LIFO, and average cost methods. LIFO, FIFO, and average-cost, under the perpetual system; compare gross profit under each assumption. The company began 2016 with the following inventory layers (listed in chronological order of acquisition): During 2016, 30,000 units were purchased for $25 per unit. 2 = $42 ! 4 units sold for $20 each in cash, but FIFO used for matching Cash + Inventory = L + RE 80 = 80 Note: profit = $48-32 = - 32 EInv,yr. That's because it references the most recently purchased items, which means your inventory value should closely match current prices. A decrease in gross profit percentage will result in a greater measure of inflation and produce a larger Lifo adjustment than if the gross margin had remained LIFO has been applied over the years so that the inventory is reported at the 1972 cost of $0. 3% (Annualized net pretax profit as % of net worth + lifo) Total light-duty 10. In its first month of operation, Maze Company purchased 100 units of inventory for $6, then 200 units for $7, and finally 150 units for $8. Here we also discuss the definition, working, and example of LIFO Liquidation along with advantages and disadvantages. $ 88,000. Estimated gross profit rates may be used to estimate a company’s cost of goods sold and its ending inventory for: A. Therefore, under these circumstances, FIFO would produce a higher gross profit and, similarly, a higher income tax expense. 1% 13. When inventory purchase costs are rising. The deeper you dig into your LIFO layers, the more LIFO has been applied over the years so that the inventory is reported at the 1972 cost of $0. Under FIFO: COGS = $875; Revenue = 350 x $15 = $5,250; Gross profits under FIFO = $5,520 – $875 = $4,645 . The LIFO liquidation, therefore, causes a higher tax liability in periods of high inflation. The LIFO liquidation overstated normal gross profit by a. Suggest two situations that might lead to involuntary UFO Gross profit of $3. Disregarding income tax, determine the LIFO liquidation profit or loss, if any, for each of the three years. D. 5. 58% and 5. yExcludes inventory holding gains and losses from gross profit. Prepare the company’s LIFO liquidation disclosure note that would be included in the 2013 financial statements to report the effects of any liquidation on cost of goods sold and net income. These fluctuating costs must be taken into account regardless of which method a business uses. FIFO: The first-in-first-out (FIFO) method usually yields a higher gross profit, higher taxable income, and lower cost of goods sold (COGS) due to higher ending inventory. quarterly but not for annual financial statements. Management must be aware of these differences, especially if management's performance is evaluated on the basis of net income. If you prefer, you can file an election statement that gives the same information requested on Form 970. This video discusses the concept of LIFO liquidation. The last in first out (LIFO) method first matches against revenue the cost of the last goods purchased. 2. 6 million in the year-ago period. 00 each then the gross profit is calculated as follows: Gross profit = Revenue - COGS Gross profit = 200 x 10. In fact it’s only allowed in the US and it’s banned by the International Financial Reporting Standards (IFRS). 9× Circuit City 25% 8% 4. 120. neither quarterly nor annual financial statements. This is calculated as follows: (500 x $1. When the income effect of a LIFO liquidation is material,the SEC requires that the 10-K report disclose A)the dollar impact of LIFO liquidation on both a before- and after-tax basis. You proved your CGS calculation by calculating the amount sold, by going from the newest back, or 400 @13 + 150 @12= 7000. Also note that LIFO allows managers to adjust their gross profit by adjusting the timing of their purchases. Relevant data ning spanfrom January 2008 to December 2012are obtained for all the 14 oil companies. 69 grew 29. LIFO reserve. The reason for this attention is that LIFO and FIFO have different effects on Disregarding income tax, determine the LIFO liquidation profit or loss, if any, for each of the three years. This implies that firm needs to liquidate its older inventories by 75 units (=125-50) COGS (under LIFO) during year 3 = 50*3 + 50*2 +25*1 = 275 COGS based on current cost = 125*3 = 375 Gain in pre-tax income due to LIFO liquidation = COGS based on current cost - COGS (under LIFO) 375 - 275 = 100 33 Sharp increases in profit can result when old LIFO "layers" are liquidated. In the current year, gasoline cost $2. In addition, complete Parts III, IV, and V, as applicable. 514 Summer 2003 Session 6 The periodic inventory system is used. If the units sell for 10. Such erosion matches The Partnership’s $18. LIFO liquidation may be involuntary-that is beyond the control of management. Last in, first out method. Convert the value to initial cost = 256,800 /1. $600. B. The LIFO method stands for “last in, first out,” and takes the most recently purchased or “last in” material first, as needed. Gross profit margin is a profitability ratio that calculates the percentage of sales that exceed the cost of goods sold. Some systems permit determining the costs of goods at the time acquired or made but assigning costs to goods sold under the assumption that the goods made or acquired last are sold first. utk mengurangi persedia utk LIFO 30,000 8-48 LO 7 Explain the significance and use of a LIFO reserve. When To File The number of records to be maintained in Last in First out increases. 42 per gallon. Since the reason for valuing an inventory using LIFO is usually to defer the payment of income taxes by increasing the cost of goods sold, the LIFO reserve essentially represents the amount by which an entity's taxable income has been deferred by Compute cost of goods sold and gross profit uning FIFO, LIFO, and average cost methods. The objective of the LIFO accounting method is to permit taxpayers to properly match their current sales revenues with the current replacement costs and thereby compute--and pay taxes on--a meaningful gross profit amount. III. Last in first out is the opposite of FIFO in that the last items acquired by the business are the first ones sold. Back to Top. Next in, first out. 9) million were down significantly compared to the fourth quarter of 2019. Gross Profit = Net Revenue – COGS Gross Margin % = ((Net Revenue – COGS)/Net Revenue)*100 In some instances, the choice of LIFO or FIFO makes intuitive sense for a specific company. Multiply that cost by the amount of inventory sold. The correct answer is supposed to be LIFO. 07 = $240,000 Then check for layers starting from the initial year. LIFO gives the highest inventory valuation and gross profit when costs are falling. More specifically, LIFO is a method of valuing inventory. At the end of the month, 180 units remained. 9 -11. 87. annual but not for quarterly financial statements. The LIFO liquidation overstated normal gross profit by. The difference between the LIFO and FIFO calculation is $4000. LIFO (Last in First Out) means that the inventory will be sold in the opposite order as it was received. This LIFO calculator can be used to calculate the leftover value of a company's inventory and cost of goods sold using the last-in-first-out method (LIFO). 047. Gross Profit includes cost of goods sold, but not SG&A or advertising. 42 per gallon. 4) million, compared to $21. Consider the example mentioned above to calculate COGS using LIFO. Regardless of the underlying reason for a LIFO liquidation, the resulting decrease in COGS will increase gross profits, pretax income, and net income. 0% 17. The Tax Advantage of LIFO Gross profit $460 $340 Operating expenses 260 260 Income before taxes $200 $ 80 Income tax expense (40%) $ 80 $ 32 FIFO LIFO 29 The most attractive feature of LIFO is low income tax payments when prices are increasing. Balance Sheet Sales revenue (880 units sold x $40 selling price) $35,200 Less: FIFO cost of goods sold 13,850 Gross profit $21,350 LIFO Gross Margin Sales revenue (880 units sold x $40 selling price) $35,200 Less: LIFO cost of goods sold 14,600 Gross profit $20,600 Exercise 5-4 (15 minutes) a. Gross profit (sales less cost of goods sold) under LIFO is $2,868. Inventory (a) FIFO $ 7400 (b) LIFO $ 6840 (c) Weighted average $ 7176 (d) Specific identification $ 7030. LIFO liquidation occurs when the number of units in ending inventory is less than the number of units in the beginning inventory (i. (Round average cont per unit to the nearest cent and all other amounts to the nearest dollar. Costs are rising and inventory quantity declines: Term. LIFO Liquidation Older, low cost inventory is sold resulting in a lower cost of goods sold, higher net income, and higher taxes. n Assumes reliable estimate of company's usual gross profit rate (gross profit is Accounting Intermediate Accounting: Reporting And Analysis Cost of Goods Sold As an accountant for Lee Company, your supervisor gave you the following calculations of the gross profit for the first quarter: The three alternative cost flow assumptions are FIFO, average, and LIFO (the alternatives are not necessarily presented in this sequence). 8% 17. Identify the cause of a LIFO liquidation and the reason that it is viewed as a theoretical concern by accountants. That is the amount of income that a station is making at this time. Gross profit margin was 5. LIFO Liquidation: Erosion of the LIFO inventory under a specific-goods (unit LIFO) approach. ) FIFO LIFO Sales revenue $ 6,660 6,364 Cost of goods sold Gross profit $ 296 i Requirements First-in, first-out 1. e. 36. Gross profit % ROE I--Turn Best Buy 21% 26% 6. Gross profit would be calculated as $800 under LIFO and $600 under FIFO. 216,000. This process is called LIFO liquidation. The LIFO Method is preferred by many companies because it has the effect of reducing a company’s taxes and therefore increasing cash flow. lifo liquidation gross profit