Final answer:
Using FIFO during inflation periods puts old costs into COGS, leading to inflated earnings that do not accurately reflect current market values. This can overstate profits and affect a company's financial reporting and taxes.
Step-by-step explanation:
The disadvantage of using the FIFO (First-In, First-Out) method is that it puts older, and often lower, costs into Cost of Goods Sold (COGS). This can lead to higher reported profits because the COGS may not reflect the current market value of the goods sold if costs have been rising.
Thus, during periods of inflation or when the cost of inventory is increasing, using FIFO can result in inflated earnings. This potentially overstates profits and can lead to financial statements that do not accurately represent a company's financial health.
Furthermore, this can affect taxation, as higher profits may lead to higher taxes, while not necessarily reflecting the true purchasing power, given the inflationary environment.