A cookie is a small peice of information deposited by a webserver on a user's computer to identify the user on a future access. It could be used to automatically login the user, or to gather statisticts.
Cookies have been a privacy concern as they have been misused by advertisers. However, disabling cookies is not a solution. Several websites would stop working if you disabled cookies.
Firefox implements cookie whitelisting. My recommended approach would be to accept all session cookies, and only allow whitelisted sites to set permanent cookies.
To access the cookie manager, select Tools -> Options. Then select the privacy Tab, and expand the cookies section.