companies have tended to use LIFO, which reduces their income taxes in times of inflation.  The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve. This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method. LIFO liquidation Notwithstanding its deferred tax advantage, a LIFO inventory system can lead to LIFO liquidation, a situation where in the absence of new replacement inventory or a search for increased profits, older inventory is increasingly liquidated (or sold).If prices have been rising, for example through inflation, this older inventory will have a lower cost, and its liquidation leads to the recognition of higher net income and the payment of higher taxes, thus reversing the deferred tax advantage that initially encouraged the adoption of a LIFO system. Some companies who use LIFO have decades-old inventory recorded on their books at a very low cost. For these companies a LIFO liquidation results in an inflated net income (and higher tax payments).
Companies can use liquidations to manage their earnings.;