Final answer:
The major disadvantages of using LIFO inventory method are inventory understatement, lower profits in inflationary times, and it doesn't approximate the physical flow of inventory.
Step-by-step explanation:
The major disadvantages of using LIFO (Last-In, First-Out) inventory method are:
1. Inventory is understated. With LIFO, the cost of goods sold is based on the most recently purchased inventory, leading to older, lower-priced inventory being shown as remaining in the inventory. This results in a lower valuation of inventory, which can misrepresent the true value of the inventory on the company's financial statements.
2. Lower profits reported in inflationary times. LIFO assumes that the most recently purchased items are the first ones sold. In periods of inflation, this means that higher-priced inventory is being sold, resulting in higher cost of goods sold and lower reported profits.
3. Doesn't approximate the physical flow of inventory. LIFO does not necessarily reflect the actual order in which inventory is sold, as it assumes that the most recently purchased items are the first ones sold. This may not align with the company's actual inventory management practices.