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The Advantages of the Use of the FIFO Method to Ministops

Annual Net Income
A Research presented to
Mrs. Carissa C. Cabaysa
Department of English Foreign Languages and Literature
CAS, San Beda College, Manila

In Partial Fulfillment of the requirements for the Subject

ENG4B- Technical writing for business
First semester, AY 2016-2017

by
Belgica, Jullia Francesca D.
Salvanera, Jessa S.
2BAC

October 2016

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Abstract
The research investigated how the use of the First-in-first-out method helped
generate close to accurate net incomes to Ministop. To further illustrate this, Ministops
financial statements for the year 2014 and 2015 were analyzed using the formulas for
computing its inventory using the FIFO method.
An interview with Ministops branch manager in San Miguel, Manila, Malacaan
branch was also conducted. As a result, it was proven that the FIFO inventory method
was an effective way to make Ministops net income close to accurate. The research
highlights the highly effective use of the FIFO method in a business like Ministop. With
the highly effective use of the FIFO inventory method, companies would expect
favorable outcomes when it comes to paying their taxes and selling their products.

Introduction
Different inventory methods have different effects on a companys net income.
Net income will the define the companys profit and the companys output tax. The lower
the net income, the lower the tax that the company is obliged to pay.
It is stated in the International Financial Reporting Standards (IFRS) that the net
income the company used to pay their output tax will also be the same net income that
will be showed in their financial statements.
There are only two accepted inventory methods in accounting for a companys
inventory. The first of which is the First-In-First Out (FIFO) method. This method of
costing for inventory is the assumption that the first goods purchased are also the first
goods sold. In most companies, this assumption closely matches the actual flow of goods,
and so is considered the most theoretically correct inventory valuation method. The other
accepted inventory costing method is the weighted average method. When using the
weighted average method, we divide the cost of goods available for sale by the number of
units available for sale, which yields the weighted-average cost per unit. In this
calculation, the cost of goods available for sale is the sum of beginning inventory and net
purchases.

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The third type of inventory costing is the last in first out method. LIFO allows
companies to calculate the cost of goods sold based on the price of the most recently
purchased (last-in) inventory, rather than inventory that was purchased more cheaply in
the past and has been sitting on the shelf. That increases the cost of goods sold, which
lowers profits and, thus, taxable income. The IAS 2, Inventories does not permit the use
of the last-in, first-out method formula to measure the cost of inventories. Under the
LIFO method, the cost of the most recent purchase is charged to cost of sales; hence, the
cost of inventory is based on the cost of the earliest acquisitions.
The research will show the highly effective use of the FIFO method of inventory to
Ministops annual net income. It will answer the question How will the FIFO method
bring Ministops annual net income to a more accurate amount? and Why is the FIFO
method the most appropriate type of inventory accounting method for a merchandising
business like Ministop?

Methodology
The research focused on Ministops inventory costing method specifically the
different effects of the the General Accepted Accounting Principles (GAAP) and IFRS
accepted inventory costing methods. The research suggests that the FIFO method is
greatly advantageous to Ministops type of business. To prove this, an interview with
Ministops San Miguel, Manila Malacaans branch manager was conducted. To further
prove that the FIFO method is an effective way to make Ministops net income accurate,
the research will illustrate the use of the acceptable inventory accounting methods.

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FIFO Method
In this method, the remaining inventory is measured at its most recent cost. There
is no proper matching of cost against revenue since earlier costs are matched to the
current revenue.
The weighted average method
In this type of inventory costing method, the cost of each item is determined from
the weighted average cost formula:
Total cost of goods available for sale x units on hand
Total units available for sale

Results
Table 1 shows the FIFO method used as Ministops inventory method for the year ended
2015

Why is the FIFO method the most appropriate accounting inventory method for
Ministop? Table one shows that there were 95,618 worth of inventories in Ministop

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Malacaan branch for the year ended 2015. It is established that the use of the FIFO
method results to an accurate net income for different types of businesses.
In the interview conducted with Mr. Jason De Castro, Ministop Malacaans
branch manager, he stated that they have been using the FIFO method ever since he
started working there. He said that the FIFO method is advantageous because the
inventory turnover in their branch is fast paced. In a business like Ministop, the FIFO
inventory method is the best way to use for accounting and selling their products. He also
said that the use of this accounting inventory method is easier than other methods. FIFO
is also used in selling their products which makes it easier for them to determine the most
recent prices of their goods.

Table 2 shows the net income of Ministop, Malacaan for the year ended 2015

FIFO Method is an effective way to bring Ministops annual net income to a more
accurate amount. Table two shows that the total net income before tax was valued at 416,
725. This net income is a result of the FIFO method. The accounting inventory method
used resulted to a close to accurate net income. It resulted to that because this inventory
method is often the same as the physical flow of the units sold or produced.

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The weighted average method

Table 3 shows the weighted average illustration

Weighted average method is not an appropriate type of inventory accounting

method for Ministop. This method assumes that the entity sells its inventories
simultaneously. This is commonly used in the manufacturing business where inventories
are piled or mixed together and cannot be differentiated. In a business like Ministop, the
turnover and selling of their products are fast paced compared to entities manufacturing
and producing such products that require weighted average inventory method. This
accounting inventory method would not be appropriate with Ministops merchandise
business, thus, making the net income inaccurate. An inaccurate Net income may lead to
an increase or decrease on the taxable income.

The research has made favorable results with the use of the FIFO accounting
inventory method. It has been proven that the FIFO method produces a close to accurate
accurate net income and uses recent prices which results to an exact estimation of the
entitys inventory.
The interview with Ministop, Malacaans branch manager also helped the
research prove that the FIFO method was an accounting inventory method that is
consistent with the way they treat their product turnover. It made the entitys accounting
works easier and faster.

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Discussion
With the research conducted, it has been proven that the use of FIFO method
often results to an accurate annual net income in Ministops financial statements. This
was supported by illustrations of the different accepted accounting inventory methods and
an interview conducted with the branch manager.
It was further proven that this inventory method is often times the same as the
physical flow of the entitys products and thus, results to an exact estimation of the
products left in the ending inventory.

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Reference:
Robles, N., & Empleo, P. (2016). The intermediate accounting series (2016th ed.).
Mandaluyong city: Millennium Books, inc.

Valix, C., Peralta, J., & Valix, christian (2016). Financial Accounting volume one:
first part (2016th ed.). C.M. Recto Manila: GIC Enterprises & Co., Inc.
FIFO method. (2016). Retrieved October 10, 2016, from Accounting tools,
http://www.accountingtools.com/fifo-method
Weighted average inventory calculations. (2016). Retrieved October 10, 2016,
from http://accountinginfocus.com/financial-accounting/inventory/weighted-averageinventory/