Final answer:
FIFO, with increasing cost prices, leads to lower cost of sales due to older, cheaper stock being sold first, but results in higher inventory values on the balance sheet. It can benefit stock control by promoting the sale of older inventory, reducing the risk of obsolescence.
Step-by-step explanation:
The impact of FIFO (First-In, First-Out) on the cost of sales and stock control becomes particularly significant when cost prices are increasing. Under the FIFO method, the earliest costs of inventory are recorded as the cost of sales. This means that when prices are rising, the cost of goods sold will reflect the older, lower costs of purchases, resulting in a lower reported cost of sales than if the newer, higher-cost stock was used. This practice also causes the remaining inventory to be valued at the higher current prices, potentially overstating stock value.
As a result, during periods of inflation, companies using FIFO will report higher gross margins and higher inventory values compared to those using alternative methods such as LIFO (Last-In, First-Out). However, FIFO's impact on stock control can be positive since the method encourages the liquidation of older inventory, which can minimize the risks associated with inventory obsolescence.