Cottesloe Ltd has been using the FIFO costing method to account for inventories for several years

Effects of Continuing Existing Accounting Policies:

In a period of inflation, use of FIFO results in higher profits than under moving/weighted average or LIFO. If all profits are paid out in dividends, then dividends paid by Cottesloe Ltd will automatically be higher under FIFO during inflation. This will lead to an eventual shortage of cash when the company replaces its inventory at prices above previous price levels. The company will be forced eventually to borrow money, or to issue more share capital, in order to continue its operations at the same physical level as in the past.