The first-in, first-out (FIFO) accounting method has two key disadvantages. It tends to overstate gross margin, particularly during periods of high inflation, which creates misleading financial statements. Costs seem lower than they actually are, and gains seem higher than they actually are.

Does LIFO overstate inventory?

LIFO is not a good indicator of ending inventory value because it may understate the value of inventory. LIFO results in lower net income (and taxes) because COGS is higher. However, there are fewer inventory write-downs under LIFO during inflation.

Does FIFO increase inventory?

If your inventory costs are increasing over time, using the FIFO method and assuming you're selling the oldest inventory first will mean counting the cheapest inventory first. ... But if your inventory costs are decreasing over time, using the FIFO method will increase your Cost of Goods Sold, reducing your net income.