Mohamed book thesis

Use of Accounting for Inventory In Somaliland Business Firms

Page 1 UNIVERSITY OF HARGEISA

MOHAMED MOHAMOUD MUSE

UNIVERSITY OF HARGEISA FACULTY OF BUSNIESS ADMINISTRATION

HARGEISA, SOMALILAND

“The use of accounting for inventory in Somaliland business firms”

RESEARCH PAPER




“BACHELOR DEGREE OF BUSINESS ADMINISTRATION”

“Accounting Stream”

PRAPARED BY:

MOHAMED MOHAOUD MUSE

ADVISOR: MOHAMOUD YUSUF JAMA

ACCADEMIC YEAR

2010-2011

UNIVERSITY OF HARGEISA

Use of accounting for inventory in Somaliland business firms

Chapter: one

Introduction

Chapter: two

Literature Review

Chapter: three

Research

Methodology

Chapter: four

Analysis and

discussions

Chapter: five

Conclusions and

Recommendations

Chapter: six

Appendix:

A & B




Prepared by: Mohamed mohamoud mouse

ID: BA644

Advisor: Pro. Mohamoud Yusuf Jama

Project Paper Submitted in Partial Fulfillment of the Requirement for the Degree of Business Administration.

RESEARCH PROPOSAL SUBMISSION FORM

Project Paper Title: Use of Accounting for Inventory in Somaliland business firms.

Director UNIVERSITY OF HARGEISA (UOH)

Faculty of Business Administrations (Accounting stream) Dear Sir,

Attached are the following documents for evaluation and approval: Chapter 1: Introduction

Chapter 2: Literature Review Chapter 3: Research Methodology Chapter 4: Data Analysis

Chapter 5: Conclusion, Recommendation & Future work References

Appendix I have thoroughly checked my work and I am confident that this is free from

grammatical errors, weaknesses in sentence construction, spelling mistakes, referencing mistakes and others, I have checked guidelines for writing project paper and I am satisfied that the project paper proposal satisfied its

requirements.

Thank you,




Student Signature: ___________________ Date: __________________

I have read the student research proposal and I am satisfied that it is in line with the UOH BBA program guidelines for writing project proposal. It is also

free from major grammatical errors, sentence construction weaknesses, citation and others.

Supervisor's Signature: _________________ Date: __________________

DECLARATION

Name: Mohamed Mohamoud Mouse

Student's Number: BBA644

I hereby declare that this project paper is the result of my own study based on my interest to enter into this line of business, aside from parental guidance

and my friends support to enable me to establish this study. For the latest internet system of which I conduct research as one of my source for this study,

quotations for the inquiry and summaries which have been duly acknowledge.

I hereby verify that this research is not submitted in substance for any other

degree. Signature: __________________ Date:_________________

Supervisor Name: Mohamoud Yusuf Jama

Signature: __________________ Date:_________________




Application to conduct Research Paper

PART A: STUDENT PARTICULAR

1. Student’s Name: Mohamed Mohamoud Mouse

Student's Number: BBA644 PART B: PARTICULAR ABOUT THE PROJECT

1. Title of the project: Use of Accounting for Inventory in Somaliland business

firms 2. Research Objective: The main objective of this research is to find the most

proper accounting method on performing the Inventory by comparing different methods of inventory accounting systems

3. Proposed Research Method

Research Design: Inquiry and Internet

PART C: FACULTY'S INPUTS 1. Topic chosen: Accepted / Not Accepted

2. Suggested supervisor for the student:




Dedicated to

My loved parents;

Mrs. Halima and Mr. Mohamoud

May ALLAH rest their souls in the heaven and be merciful to them as they were

to me in my childhood (Amen) and honorable professor who had a great talent teaching method, and brought beautiful studies.




ACKNOWLEDGEMENTS

First, thanks to “ALLAH” who gave me the power of doing this program and

implementing, who also allowed me to reach my spiral goals. First of all to complete this research required the assistance, guidance and

support of a number of people to whom I would like to express my deeply appreciation and acknowledge them which makes this project finally seem uncomplicated.

I would like to thank my supervisor Pro. Mohamoud Yusuf Jama for his

guidance throughout the preparation of this study. Realizing this project would not have been achievable without his support and the encouragement of him this masterpiece would never have been completed.

For his special guidance and un-accountable advice for doing the research and

extremely diligent in reviewing text chapters, exercise, problem, and their solutions that paves the way in implementing and preparing this research paper

I am also would like to thanks many people who guided and support me throughout the developing of the text and express my sincere appropriation

their expert attention that effectively guided this book through production process.




The text and its sumplent have been enriched by the comments of many reviewers’. I am indebted to each of them, particular to the following educators

who assisted me.

I also, would like to thanks for Ilham Dayib Ali who support and examine all my questionnaires, examples, and exercise to ensure that I am technically accurate for my presentation material literally.

I am also, thanks to dozen of my colleagues for adopting their encouragement and cooperative support.

Abstract

The objectives of the paper is to investigate how business firm’s use for accounting system to their inventory in the business operation in Somaliland. Research through data collection has been made in different location that

surveying much more questionnaires of time.

One of the most important processes in any organization is the inventory. Finding the right inventory is another vital element. Some organizations are doing their inventory quarterly which needs a lot of efforts and very precise

procedure.

Therefore it is very necessary to accept an efficient inventory process to give the right status. The researcher has chosen known organization to examine which method is

efficient to fulfill this type of operation. Electronic and computer shops, supermarkets and other trade channels is the

company that applied the accounting inventory.

This project is examining most known accounting methods. And then select the most proper accounting method on performing the inventory.

The researcher has chosen known organization to find out the inventory accounting methodology that is right to the daily sale transactions by keeping




out the entire inventory fraudulently and material misrepresentations that can lead a fact failure.

We recognized that the organization’s Material managements is the another

dramatic way of finalized the research paper on the material competencies, and the inventory uniqueness that explain the overall statements of the thesis.

DCONTEXT PAGE

Cover page………………………………………………………...01

Title page……………………………………………………………..02

Research proposal submission form……………………………03

Declaration page……………………………………………………04

Application to conduct research paper………………………….05

Dedication page………………………………………………….…06

Acknowledgement………………………………………………….07

Abstract……………………………………………………………….8

Table of contents………………………………………………….09

List of figures……………………………………………………..10

List of abbreviations…………………………………………….12

1.0 INTRODUCTIOSN:

1.1 Introduction…………………………………………….…13

1.2 Background……………………………………………….14




1.3 Thesis statements………………………………………..15 1.4 Objectives of the study………………………………….15

1.5 Significant…………………………………………………16 1.6 Scope of the study……………………………………….17

1.7 Structure of the paper………………………………….18

2.0 LITERATURE REVIEW:

2.1 definition of inventory accounting……………………..19

2.2 definition of accounting……………………………………19

2.3 types of inventory accounting…………………………..21

2.4 just in time inventory control…………………………...22

2.5 conventional inventory pricing……………………….…22

2.6 last in first out ………………………………………..…23

2.7 major advantage of LIFO…………………………..…24

2...8 major disadvantage of LIFO……………………….24

2.9 setting inventory strategy…………………………….25

2.10 key considerations…………………………………...26

2.11 inventory accounting methods………………….….27

2.12 method of inventory evaluation……………………28

2.13 inventory control…………………………………..…29

2.14 economic order quantity……………………….….30

3.0 RESEARCH METHEDOLOGY:

3.1 introductions…………………………………………...31

3.2 research design………………………………………..31

3.3 method of data collection……………………………..31

3.4 in-depth interview……………………………………..32

3.5 data collection source……………………………..…32




3.6 sampling methods…………………………………….32

3.7 limitations……………………………………………....33

4.0 ANALYSIS AND DISCUSSIONs:

4.1 introduction…………………………………………....34

5.0 CONCLUSION AND RECMMENDATIONS:

5.1 conclusions………………………………………………60

5.2 recommendations………………………………………62

6.0 APPENDIX:

6.1 Appendix A

Questionnaires……………………………………………..64

6.2 Appendix B

Bibliography…………………………………………………….68

LIST OF TABLES & FIGURES PAGE

Tab & Fig 4.1………………………………………………………35

Tab & Fig 4.2………………………………………………………36

Tab & Fig 4.3………………………………………………………37

Tab & Fig 4.4………………………………………………………38

Tab & Fig 4.5………………………………………………………39

Tab & Fig 4.6……………………………………………………….40

Tab & Fig 4.7……………………………………………………….41

Tab & Fig 4.8………………………………………………………42

Tab &Fig 4.9………………………………………………………43




Tab & Fig 4.10…………………………………………………….44

Tab & Fig 4.11…………………………………………………....45

Tab & Fig 4.12……………………………………………………46

Tab & Fig 4.13……………………………………………………47

Tab & Fig 4.14……………………………………………………48

Tab & Fig 4.15……………………………………………………49

Tab & Fig 4.16……………………………………………………50

Tab & Fig 4.17……………………………………………………51

Tab & Fig 4.18……………………………………………………52

Tab & Fig 4.19……………………………………………………53

Tab & Fig 4.20………………………………………………………54

Tab & Fig 4.21………………………………………………………55

Tab & Fig 4.22………………………………………………………56

Tab & Fig 4.23……………………………………………………..57

Tab & Fig 4.24…………………………………………………….58

Tab & Fig 4.25…………………………………………………….59

LIST OF ABBREVIATIONS:

FIFO: first in first out

LIFO: last in first out JIT: just in time EOQ: economic order quantity




CHAPTER ONE

1.0 An INTRODUCTION

1.1 INTRODUCTION

This book will introduce the use of accounting for inventory in Somaliland business and the primary issue in accounting for inventories is the amount of cost to be recognized, and it is intended to.

Introduce you the use of accounting for inventories in Somaliland

business firms.

What accounting system they use for their small business

Types of inventory that small business carries.

Cost of carrying inventory in small business in Somaliland

How to account for the recognition as an expense

Role played by inventor in the business enterprises in Somaliland

All these factories are main core of the book that has been to understand the inventories accounting system in Somaliland business firms that can exist in all time.

Also, shows you that the inventories are represent the major investment in all kind of business large once as well as small because many companies failed

their inventory tied up to much money.




There are three principal types of business organizations that have developed as ways of owning and operating business enterprise.

In general, business entity or organizations are:

• Sole proprietorship • Partnerships

• Corporations

1.2 BACKGROUND

Accounting and managing of inventory, which typically represents 45% to 90% of all expenses for business, is needed to ensure that the business has the right goods on hand to avoid stock-outs, to prevent shrinkage (spoilage/theft),

and to provide proper accounting. Many businesses have too much of their limited resource, capital, tied up in their major asset, inventory. Worse, they may have their capital tied up in the wrong kind of inventory. Inventory may be

old, worn out, shopworn, obsolete, or the wrong sizes or colors, or there may be an imbalance among different product lines that reduces the customer appeal

of the total operation.

As every business use on inventory accounting system it is really takes a serious corrective and careful management accounting procedures to report accurately otherwise a misappropriations and material misrepresentation can

occur. So by using accounting system it necessary all the inventory that a business has to go through accounting procedures and special policies.

The word 'inventory' can refer to both the total amount of goods and the act of counting them. Many companies take an inventory of their supplies on a regular basis in order to avoid running out of popular items. Others take an

inventory to insure the number of items ordered matches the actual number of items counted physically. Shortages or overages after an inventory can indicate a problem with theft (called 'shrinkage' in retail circles) or inaccurate

accounting practices.




Companies also take an inventory every quarter in order to generate numbers for financial reports and tax records. Ideally, most companies want to have just

enough inventories to meet current orders. Having too many products languishing in a warehouse can make a company look less appealing to

investors and potential customers. Quite often a company will offer significant discounts if the inventory numbers are high and sales are low. This is commonly seen in new car dealerships as the manufacturers release the next

year's models before the current vehicles on the lot have been sold. Furniture companies may also offer 'inventory reduction sales' in order to clear out their showrooms for newer merchandise.

The conflicting objectives of cost control and customer service often pit a firm’s

financial and operating managers against its sales and marketing system. By helping the organization to make better decisions, the accountants can help

the business enterprise to change in a very positive way that delivers increased value for the business operating activity.

1.3 THESIS STATEMENT

For accounting inventories in business firms needs a much accurate accounting methods and transaction records, which tied up the inventory accounting purpose and proper procedures that leads further satisfactory of

business investors and other regulatory body.

Each country has its own rules about accounting for inventory that fit with their financial-reporting rules. Inventory Turn is a financial accounting tool for evaluating inventory and it is not necessarily a management tool. An

organization's inventory can appear a mixed blessing, since it counts as an asset on the balance sheet, but it also ties up money that could serve for other

purposes and requires additional expense for its protection. Physical counts and quantity records shall be reconciled and adjusting entries prepared to bring physical and financial records into agreement. If products are too

hazardous or inaccessible for a physical count, alternative means (such as perpetual records and measuring techniques) shall be used to establish

quantities.

Use of accounting for inventory is a crucial in keeping track of smooth going accountability of firm’s inventory management and their accounting procedures and inventory policies to the stewardships.

So, statement of the problem inaugurates how accounting for inventory is so important. To achieve project mandates it has to make sure;

http://en.wikipedia.org/wiki/Sales

http://en.wikipedia.org/wiki/Marketing

http://en.wikipedia.org/wiki/Accounting

http://en.wikipedia.org/wiki/Asset

http://en.wikipedia.org/wiki/Balance_sheet




How small business use for inventory accounting system

The role of accountability of business managers

Inventory transaction processing

How small business make inventory reporting system

Relevant facts related to the inventory accounting system

1.4 THE OBJECTIVE OF RESEARCH STUDY It is very important that the business enterprise use accounting procedures and policies to their inventory management system which can make more

accurate measurement of inventory on hand by the business firms through period of time.

Does this make effective and reliable inventory accounting system to small business so as to find easy inventory management and accounting system throughout the business enterprise? We do this so.

In this project, we consider how effectively and efficiently small business enterprise use accounting system for their inventory throughout accounting period and fiscal year.

So, the objective of the research is;

To fulfill the partial academic requirements to attain the Bachelor Degree of BBA

To distinguish between perpetual and periodic inventory system

To identify the major advantage and disadvantage of LIFO

To identify the method of accounting of inventory that has been selected by the business enterprises

To explain how inventory are evaluated in business enterprises

To identify when inventory are valued at net realized value

To explain how inventory are reported and analyzed

1.5 Significance of the research

The purpose of the study is to highlight or examined overall importance of

using inventories accounting in the Somaliland business firms throughout the operation period.

Opening a wide range of operation activities among the business firms and their accounting procedures, the physical inventory counts should be

performed or supervised by business firms other than the person responsible for the inventory or the person maintaining the inventory records to help ensure the integrity and objectivity of the counts reported.

These significant of the project paper shows how it important to see how the firms are uses the inventory accounting systems and their application and in




applying Somaliland business firms. Because there is a lot of misunderstanding among the business operations and their relevant actors, it’s

also the customers may believe that there are a lot of weakness in the business accounting. Specially, in the inventory accounting systems in Somaliland

business firms, the functions related on business operation and its systems is served to the community on the basis on trade purpose. The importance of this project comes mainly from the importance of the

inventory roll in the life of any business as a vital and essential tool in management and accounting. Most small businesses underestimate the importance of their inventory or of inventory management process. They do not

realize that many of the headaches are caused by a lack of control and knowledge of their inventory. This study plays vital roles to ensure and clarify

in inventory accounting systems of Somaliland business firms/organization whether it is strong or weak and all entire service about the accounting inventory systems in business forms. Also, this project paper is important for

the researcher to fulfill the partial requirement for the award of BA in accounting departments by the University Of Hargeisa (UOH).

1.6 Scope of the study The study has been confined for the use of accounting for inventory in

Somaliland business organization. When the sampling data will be collected, especially the study focused on the accounting inventory reporting systems in Somaliland business firms.

The business firms try to engage the contemporary accounting systems for further detailed information among the business organizations on the basis of

environmental force and microfinance situations. This focused on the business developments, so it needs for more crackdowns to find a well standardized and smoothly developed operation to the business organizations.

1.7 The structure of the paper

This project consists of six chapters; each one has its own indication and detailed explanations, there is additional hypothesis which shows the material

collected and integrated idea about the project paper.

The first chapter concentrates all the basics of the project by telling some

basic information that related to the project paper incorporated with overview of the project paper, core of the paper.

Introduction of the project paper; which tells how the project has been developed and arranged on the basis of inventory accounting systems and its

usages.




Project background, which highlights the basic background of accounting and managing of inventory of the business firms, fundamental principle of

accounting, and challenge.

Thesis statements; which tells how thesis is organized and directed under the study.

Objective of the research study, including identifications and explanations.

Significance: this shows how inventory accounting is important to business

firms.

Scope of the study: how the firms are confined the method of accounting

standardized or contemporary systems are used, how large does the firms operated in inventory accounting purpose.

Second chapter focused on “Literature review”; including an overview, history, plan and schedule, types of inventory, steps, pricing methods, inventory

accounting categories, techniques, reasons for keeping inventory, merchandising enterprises, and economic order quantity model.

Third chapter discussed the research methodology which is also the core the project and incorporate with the “research designing, method of data collection

which are two “primary and secondary”, in-depth interview and data collection source, sampling methods, and analyzing techniques.

Fourth chapter is determined for analyzing and findings that including the inventory policy and store function, monitor and evaluate the management process, data presentation and interpretation, data analyzing and hypothesis

testing, and findings, and accounts that frequently misstated.

Fifth chapter addresses the conclusion and recommendations and look-over the serious coherence of inventory management and reports, recommendation has been applied on the basis of research.

Sixth chapter Appendixes; appendix A information related to use of accounting for inventory in Somaliland business firms, and appendix B which

is determines the summary of the findings.

Reference;

Reference has been selected among the books including accounting books,

websites and others such as internets.




Chapter two 2.0 LITERATURE REVIEW

An overview of inventory accounting

2.1 What is inventory accounting?

Inventory accounting may sound like a huge undertaking but in reality, it is quite straightforward and easy to understand. You start with the inventory you

have on hand. No matter when you sell product, the value of your inventory will remain constant based on accepted and rational methods of inventory accounting. Those methods include weighted average, first in/first out, and last

in/first out. Christopher R. Marburg, CPA, MBA 1

So, let us define the two terms individually.

2.2- Definition of Accounting Accounting is the language of business. It is a standard set of rules for measuring a firm’s financial performance. Assessing a company’s financial

performance is important for many groups, including:

➢The business officers (managers and employees)

➢ Investors (current and potential shareholders)

➢ Lenders (banks)

➢ General public

In another word, accounting is a standard language of measuring financial performance by a variety of organizations. Accounting follows GAAP, which are

1 Christopher R. Marburg, CPA, MBA




guidelines for measuring and presenting financial information on a fair, consistent, and straightforward basis.

GAAP is developed by FASB on the behalf of the SEC, with input from a variety of interest groups. IFRS are international accounting standards and are

developed by IASB. Accounting is a system in which identify, analysis, measure, record, summarize and communicate relevant economic information to other for

decision making Mr. Wilkinson 2 Accounting is the system a company uses to measure its financial performance by noting and classifying all the transactions like sales,

purchases, assets, and liabilities in a manner that adheres to certain accepted standard formats. It helps to evaluate a Company’s past performance, present condition, and future prospects. “Accounting Basics”

Inventory is asset items held for sale in the ordinary course of business or goods that will be used or consumed in the production of good to be sold. The

description and measurement of inventory requires a careful attention. Inventory accounting may sound like a huge undertaking but in reality, it is

quite straightforward and easy to understand. You start with the inventory you have on hand. No matter when you sell product, the value of your inventory will remain constant based on accepted and rational methods of inventory

accounting. Those methods include weighted average, first in/first out, and last in/first out. Inventory again can be defined as goods being held for resale. In

manufacturing, inventory can be raw materials, work-in-process, and finished

goods. Let’s be clear, working with inventory can be complex depending on the

type and size of business. However, the basic concepts of inventory are not

hard to grasp and you really should have some familiarity with them.

The first step is to conceptualize the “inventory process”. In other words, think

about what is going on. For example, suppose your company is in business to

sell a product. The product is acquired either by manufacturing it or

purchasing it as a finished product. During an accounting period, such as one

month, all, or a portion of the inventory is sold. Hopefully, the cost of the

product did not exceed its sale price so that a profit was realized. With the

money from the profit, more inventories can be purchased to sell, cover

overhead expenses, and pay yourself.

2 Mr. Wilkinson 2




The purpose of accounting is to provide a means of recording, reporting, summarizing, and interpreting economic data. In order to do this, an

accounting system must be designed. A system design serves the needs of users of accounting information. Once a system has been designed, reports can

be issued and decisions based upon these reports are made for various departments. Since accounting is used by everyone in one form or another, a good understanding of accounting principles is beneficial to all procedures and

special policies.

Economy: maintain the value of items in stock at the lowest practical levels in order both to economize the use of working capital and to minimize the costs of

storage. Identification: systematically defining and describing all items in stock. Receiving: accepting, from all sources, all items which are used in the

government unit. Inspection: examining incoming items for quality and quantity 2.3 TYPES OF INVE3TORY ACCOUNTING SYSTEM 1 Periodic inventory system

Periodic inventory accounting involves an increase (debit) to Purchases when acquisitions are made. Remember, “Purchases” is a general ledger (GL) account

found in the cost of sales section of the Profit & Loss Statement. At the close of the period, a physical count of the remaining inventory is required to determine the amount unsold. The quantity is then priced and recorded in order to

determine the cost of goods sold.

Under periodic inventory system, the following journal entry is recorded at the end of accounting period.

2 Perpetual inv4entory system

As acquisitions of new inventory are made, they are charged (debited) to the Inventory account. Each time a sale is made a corresponding entry is made removing (crediting) the item from Inventory and charging (debiting) COGS (or

Purchases). The result is that the Inventory account maintains a current balance, and the COGS account reflects the cost of goods sold to date. One of

the benefits of using a perpetual inventory system is that you can run interim financial statements without the necessity of a physical inventory count. In

3 Financial Accounting II,

4 Financial Accounting II




addition, shortages and any other discrepancies may be discovered and corrective action taken.

One way to remember the difference between the two methods is that the periodic system discloses what is on hand, whereas, the perpetual system

discloses what should be on hand. Perpetual inventory system updates inventory accounts after each purchase or

sale. Inventory subsidiary ledger is updated after each transaction. Inventory quantities are updated continuously.

Under perpetual inventory system, changes in merchandise inventory account are recorded after each transaction.

2.4 JUST-IN-TIM5E Inventory Control (JIT)

"Just-in-time production is a simple idea that may be difficult to implement, "

wrote Gershon and Weiss6. "The basic concept is that finished goods should be produced just in time for delivery, and raw materials should be delivered just in time for production.

When this occurs, materials or goods never sit idle, which means that a minimum amount of money is tied up in raw materials, semi finished goods,

and finished goods…. The just-in-time approach calls for slashing production and purchase lot sizes and also buffer stocks—but incrementally, a little at a

time, month after month, year after year.

The result is sustained productivity and quality improvement with greater

flexibility and delivery responsiveness." This production concept, which originated in Japan and became immensely popular in American industries in the early and mid-1990s, continues to be hailed by proponents as a viable

alternative for businesses looking for a competitive edge.

2.5 Conventional Inventory Pricing Methods

1- FIFO First-in, first-out (Last-in, Still-here) implies that the items that were

purchased first will be sold first. Cost of goods sold is calculated by using the oldest prices and ending inventory is calculated based on the most recent prices. Using this method tends to result in a fair statement of inventory on the

Balance Sheet.

5 Khalid Al Kaabi, Inventory Accounting

6 Gershon and Weiss




This is because the ending inventory was purchased most recently. Further, when inventory turns over regularly, the prices used for the cost of goods sold

are somewhat current resulting in fair presentation of the cost of sales amount. 2- LIFO

Last-in, first-out (First-in, Still-here) implies that the items most recently acquired will be the first sold. Cost of goods sold is calculated by using recent prices, while ending inventory is calculated using the oldest prices. This

method tends to emphasize the matching concept accounting principle by matching current costs with current sales on the Profit and Loss Statement. 2.6 Last-in/First-out Accounting Method.

Under7 the LIFO method, a business assumes that the last item added to inventory is the first item sold. Thus, current sales are reduced by the cost of

the most recently acquired inventory to determine the net income from the sale. (Under the FIFO method, the business assumes that the first item added to inventory is the first item sold.)

When inventory costs are rising, as in an inflationary period, the LIFO method

results in lower taxable income since the cost of goods sold reflects the more recent, higher inventory values. Conversely, if inventory costs decline during a year, LIFO will increase taxable income as current lower-cost inventory values

are used to determine the business’ cost of goods sold. Under the Internal Revenue Code, a business may only use the LIFO method if

it also applies it for financial-accounting purposes.

For many retail businesses, LIFO is a more accurate method for measuring financial performance and calculating the associated income tax. LIFO takes into account the greater costs of replacing inventory, thereby giving a more

conservative measure of both the financial condition of the business and the economic income subject to tax. Absent LIFO, phantom profits would be taxed.

In addition, LIFO improves a company’s cash flow, which allows the company to use its retained capital more efficiently to finance ongoing inventory replenishment.

LIFO repeal would mean a forced change in fundamental tax accounting for any business that has historically relied on LIFO for its tax reporting, including

countless retailers. As a result, such businesses would have to recapture their LIFO reserves.

7 Intermediate Accounting Books




The result would be substantial additional income tax, even if spread over several years, especially for businesses that have relied on LIFO for many years

or even decades. Since companies would have no economic income from such an accounting adjustment, they would effectively be taxed on non-existent cash

flow.

2.7 Major advantage of LIFO

Matching, the more recent cost are matched against current revenues to

provides a better measures of current earnings, and the inventory profit occur when the inventory cost matches against sale and inventory replacements. A tax benefit, which is the major reason why LIFO has, became popular. As

long as the price level increase inventory quantities do not decrease, a deferral income tax occurs.

Improved a cash flow, which is related to the tax benefits, because the tax most be paid in cash as consequences.8 Future earning benefits, with LIFO the firm’s future reports earning will not

be affected substantially by the future price decline. 2.8 Major disadvantages Reducing earnings, many corporate managers view the lower profit of

reporting under LIFO method in inflationary time as distinct disadvantages that reports the profits rather than lower tax.

Inventory understated, the LIFO may have inventory distorting effects on company’s balance sheet. Physical flow, LIFO does not approximate the physical flow of the items except

in peculiar situations. Involuntary liquidations, the distortion in reporting the income for given

period may results as well as consequences that are detrimental from an income tax point of view. Weighted Average

This method involves assigning the same unit price to items in Inventory and to items in COGS. The price assigned is the average price for the period calculated by taking the total cost of beginning inventory plus the cost of all units

purchased during the period and dividing the total by the number of units involved.This consists of either merchandise or manufacturer which has always goods

available for resale to customers or further processing. However, retailers are not the

8 Intermediate Accounting Books




only businesses that maintain inventory. Manufacturers also have inventories related to the goods they produce. Goods completed and awaiting sale are termed “finished goods” inventory. 2.9 Setting an Inventory Strategy

9No single inventory strategy is equally effective for all businesses. Indeed, there are many different factors that can impact the usefulness of a given inventory strategy, including positioning of inventory, rationalization,

segmentation, and continuous improvement efforts. Moreover, small businesses in particular often face financial and logistical limitations when erecting their inventory systems. And of course, different industries have

different inventory needs. Consumer goods producers, for instance, need to have well-balanced inventories at the point of sale, while producers of

industrial and commercial products typically do not have clients that require the same degree of delivery lead time.

When a company is faced with a need to establish or reevaluate its inventory control systems, business experts often counsel their corporate clients to engage in a practice commonly known as "inventory segmenting" or "inventory

partitioning." This practice is in essence a breakdown and review of total inventory by classifications, inventory stages (raw materials, intermediate

inventories, and finished products), sales and operations groupings, and excess inventories. Proponents of this method of study say that such segmentation break the company's total inventory into much more manageable parts for

analysis.

2.10 Key Considerations

Inventory management is a key factor in the successful operation of fledgling

businesses and long-time industry veterans alike. For both kinds of companies, determining whether their inventory systems are successful or not is predicated on one fundamental question: Does the inventory strategy insure

that the company has adequate stock for production and goods shipments while at the same time minimizing inventory costs? If the answer is yes, then

the company in question is far more likely to be a successful one. Conversely, if the answer is no, then the business is operating under twin burdens that can be of considerable consequence to its ability to survive, let alone flourish.

According to business experts, perhaps no factor is more important in ensuring successful inventory management than regular analysis of policies, practices,

and results. Companies that hope to establish or maintain an effective 9 Khalid Al Kaabi, Inventory Accounting.




inventory system should make sure that they do the following on a regular basis:

1- Regularly review product offerings, including the breadth of the product

line and the impact that peripheral products have on inventory.

2- Ensure that inventory strategies are in place for each product and

reviewed on a regular basis.

3- Review transportation alternatives and their impact on inventory/warehouse

capacities.

4- Undertake periodic reviews to ensure that inventory is held at the level that

best meets customer needs; this applies to all levels of business, including raw materials, intermediate assembly, and finished products.

5- Regularly canvas key employees for information that can inform future inventory control plans.

6- Determine what level of service (lead time, etc.) is necessary to meet the demands of customers.

7- Establish and regularly review a system for effectively identifying and

managing excess or obsolete inventory, and determining why these goods reached such status.

8- Devise a workable system wherein "safety" inventory stocks can be reached and distributed on a timely basis when the company sees an unexpected rise in product demand.

9- Calculate the impact of seasonal inventory fluctuations and incorporate them into inventory management strategies.

10- Review the company's forecasting mechanisms and the volatility of the

marketplaces, both of which can (and do) have a big impact on inventory decisions.

11- Institute "continuous improvement" philosophy in inventory management.

12- Make inventory management decisions that reflect a recognition that

inventory is deeply interrelated with many other areas of business operation.




To summarize, inventory management systems should be regularly reviewed from top to bottom as an essential part of the annual strategic and business

planning processes.

2.11 Inventory Accounting Methods

There are two methods used to account for inventory. The accrual method is

recommended for organizations that track their inventory balances. These organizations know their ending inventory balance, but can be unsure of their cost of goods sold (COGS). The second method, the adjustment method, is

recommended for organizations that track COGS. In the event an organization has a system that can track both amounts (ending inventory and COGS), either

method may be used. In the case of organizations that do not have an internal system that can track inventory, a physical count must be done each month.

The following formula is used to calculate cost of goods sold regardless of the method used:

Beginning Inventory + Inventory purchases during period(Less returns)= Cost of goods available for sale-Ending inventory= Cost of goods sold.

The accrual method is recommended for organizations that track their inventory balances. This method is performed by the following step:-

1- All inventory (less returns) acquired during the period is recorded by debiting purchases the offsetting entry is to accounts payable.

2- At the end of each month, update the FIS balances of inventory based upon the balances maintained in internal records

3- It is required that a physical inventory count be done at least once per fiscal

year. After the inventory on hand is counted, adjust the internal records to match the physical count. Once the internal records are adjusted, update the balances in the FIS. If, based on the physical count, the organization has

experienced any shrinkage in the inventory balances.

4- If, when reviewing the Monthly Operating Detail, extra purchases are

identified that were not posted directly to COGS/AP, they would need to be added via the AP accrual process.

Some organizations do not purchase products or materials for resale; however, they do maintain inventory for their own use in the provision of a service.




The adjustment method is recommended for organizations that track their COGS balances. The method could be performed by the following step :-

1- The inventory is debited when inventory is acquired. This is a significant

difference when compared to the accrual method.

2- Sales of inventory are recorded by debiting cost of goods sold, and crediting

inventory for the cost of the merchandise sold. This provides a continuous record of balances in both the inventory object code and cost of goods sold.

3- A physical inventory and reconciliation to the general ledger is required at least once a year.

4- If the physical inventory count differs from the official inventory figures recorded in the general ledger, the inventory shortage object code is debited or

the overage is credited to appropriately adjust the FIS inventory figures to physical count values.

2.12 Methods of Inventory Valuation

10Generally Accepted Accounting Principles require that the lower of cost of

market be used no matter which inventory valuation method is used. A valuation method is used to compute the cost of the inventory dollar amounts

and then it is compared to the market dollar amount. The lower of the two amounts must be used when recording inventory.

Regardless of which inventory accounting method is used, inventory values must be assigned. Four types of historical-cost-based inventory valuation are covered on the following pages: Specific Identification, Average Cost, FIFO, and

LIFO. The retail Method, which uses an estimated inventory cost, is also discussed.

1-Specific Identification

Specific Identification traces actual cost flows. The flow of costs through goods available for sale into cost of goods sold or cost of ending inventory matches the physical flow of inventory units. Each unit of inventory and its cost must be

specifically identified.

2-Average Cost Valuation Method

10

Khalid Al Kaabi, Inventory Accounting.




In this valuation method, the calculation of cost of goods is averaged among the units of inventory. The two methods consist of weighted average, which is

used in a perpetual system.

2-Moving Average--Perpetual

Continuous or moving average assigns a unit value to cost of goods available

for sale. In this scenario, the average cost determines cost of goods sold at

the time of each sale. This method requires a calculation of average unit cost

after each purchase.

3-FIFO (First In First Out)

Regardless of the actual physical flow of goods, FIFO is calculated by assuming

that goods entering inventory first are sold first, and goods entering inventory last are sold last. In a sense, the earliest inventory costs are considered cost of goods sold and the latest are considered ending inventory. There is a FIFO

method for both Periodic and Perpetual.

4-LIFO (Last in First Out)

Regardless of the actual physical flow of goods, LIFO is calculated by assuming

that goods entering inventory last are sold first, and goods entering inventory first are sold last. In a sense, the latest inventory costs are considered cost of goods sold and the earliest are considered ending inventory. There is a LIFO

method for both Periodic and Perpetual.

5-Retail Method

The retail method estimates the dollar amount of ending inventory, and is acceptable for external reporting if it yields results that reasonably approximate

the result that would have been obtained under one of the cost flow methods.

The simple form of the Retail Method requires the following:

1. Cost and retail beginning inventory selling prices.

2. Cost and retail current period purchases.

3. Retail sales for period.

2.13 Inventory control




Inventory control is concerned with minimizing the total cost of inventory. In the U.K. the term often used is stock control. The three main factors in

inventory control decision making process are.

A physical inventory is a count of what is currently in stock in the warehouse, comparing that count to what the computer thinks is in stock, and making any necessary adjustments to get the computer counts to match the warehouse

counts. Then post the costs of those physical count adjustments to General Ledger and provide an inventory variance report to see where the counts were off, and by how much.

Some warehouses do a full warehouse physical inventory only once a year.

Others do a full warehouse count on a monthly basis.

The physical Inventory option can be used to do full warehouse counts or cycle

counts. If you plan on doing cycle counts, we must keep in mind that cycle counts can most easily be done by item category, by picking location or by using the inventory item.

Whether doing a full warehouse physical count or a cycle count, the company

is comparing what is actually out in the warehouse to what the computer has recorded as being in stock out in the warehouse.

Therefore it is necessary to make sure that what has been done in the warehouse has been entered on the computer and has been posted. It is also important that what has been entered into the computer has in fact been

completed in the warehouse.

The company wants to make sure that any stock picked to fill orders has been

Filled and Shipped on the computer and posted. Also the company dose not wants to include stock that has been used to fill orders in its counts.

2.14 Economic Order Quantity Model 11The economic order quantity model (EOQ) was developed to find the optimal

order quantity. Ahlstrom (2001) found that 84 percent of the firms surveyed used the EOQ model for inventory control. Annual holding cost will increase with an increase in lot size, but in contrast, the annual order cost decreases

with an increase in lot size. Material cost is independent of lot size because it is assumed to have a fixed

price.

11

Operation Research Books




The concept of the EOQ is that there is a tradeoff between the fixed order cost and the holding cost.

The EOQ assumes the four following inputs: annual demand of the product, fixed cost incurred per order, cost per unit, and holding cost per year as a

fraction of product cost. Using those inputs, there are three costs that must be considered when deciding on lot size. The first is annual material cost which is annual cost of material purchased.

3.0 Research METHODOLOGY:

3.1 Introduction

Although many studies and researches has been made in the field of inventory accounting, yet this project tries to highlight the implementations of inventory

accounting methods in practice in one of the leading companies in Somaliland.

Most of published researches regarding the subject look to inventory and

inventory accounting, being the subject matter, from an academic point of view where it is hard to find a published research which emphases on a particular

research study and conducted in a real life company.

Research represents the strategies involves in collecting and analyzing data

collected, in order to have meaningful interpretations of the research findings. This section attempts to give an insight into the way and manner in which this research was carried out. This includes the mode of data collection, how these

data were analyzed and the research design. 3.2 Research Design This has been conducting through interviews, data collection, sampling system, analysis techniques and self administered questioners that have been embodying the overall objectives of the research study and empathy of the

paper. 3.3-Method of data collection

The research of the project has been made through two methods of data collection and they are;




Primary secondary

The primary data is the results of the questionnaires and the interviews gathered from the business enterprise in Somaliland Also, look over how business firms get accounting records to their inventory and cite of inventory management system in small companies in Somaliland.

Secondary data collection which focused on the literature of current field of use of accounting for inventory in Somaliland business firms that leads the business activity and trading system.

One of the main idea of this adherent is how data have been collected from

different local business that shows the inventory accounting policies to see whether that the inventory record are free from errors and misrepresentation in its accounting records and financial presentation of the fiscal year of business

firms in Somaliland Study research is used to study the contemporary phenomenon in its real-life context data for the studies in this research and was collected from multiple

sources. It is generally accepted that multiple data sources allow an investigator to address a broader range of historical and behavioral issues.

3.4 In-depth interviews Inventories should be properly stored and physically secured to prevent theft, destruction, or deterioration. Physical security measures should be

commensurate with the size, type, and value of the inventory. Sensitive or attractive items should be safeguarded by storage in locked or limited access storage areas.

3.5-Data collection sources Data collection source can include relevant documents, such as position of

inventory, inventory descriptions, accounting manuals, firm’s structure, charts and training documents as well as some published information about business firms, such as financial statements and annual reports. Inventory can be

viewed as a real option, specifically an option on future sales. Real options create value in uncertain conditions and, using contingent claims payoffs from

inventory positions, can be mapped on to the underlying asset. 3.6 sampling methods A simplified sample method has been used for the research study which

consists of twelve business forms in Somaliland on the basis of inventory management and accounting procedures. Besides this, the business firms in Somaliland always use to account for

accurate measurement on inventory that they have on hand.




As usual, it is realized that the Somaliland business firms used tp account for their inventory periodically. Also, it has been realized which method they use to

price, costing system, and how they evaluate inventory periodically. A sampling method that has been selected including the following firms;-

I. HI-TECH ELECTRONICS

II. SUPER TATA TECHNOLOGY

III. DARASALAM SUPER MARKET IV. HADI SUPER MARKET V. INDO-DERO COMPANY

VI. ALNUR- MANUFACTURER VII. MECED STATIONARY

VIII. OMAR INTERNATIONAL TRADING CO.

3.7 Limitations The most once that have come across was the times that lead shorting

distributions of the questionnaires.

The most companies’ dot understanding the meaning of the study and they on’t

want to clarify their inventory accounting systems.

The main limitation faced by the researcher was the lack of commitment by the

company’s accountants and staff to help in feeding accurate information and providing the proper data to complete the project in required time frame.

The facilitation was inadequate such that to implements to the research study.

There are no hard and fast rules to abide by business firms, but some extremely useful guidelines to help your thinking about the subject are exists.

On the other hand, because suppliers have problems with inventory control, just as sellers do, they may be interested in making deals to induce customers to purchase inventories brig the limitations.

An inventory that is not compatible with the firm’s market also become the

most big constraints that firms will lose profitable on the sales leads to limited the research study.

Lack of keeping an inventory fresh and up to date requires constant attention by any organization, large or small makes the limitations of the study.




To find out Periodic reviews of the inventory data to detect slow-moving or obsolete stock and to identify fast sellers are were essential limitations for the

research.

Economy: the economic scale was the limitations to maintain the value of the lowest practical levels. Identification: systematically defining and describing all items in stock.

Receiving: accepting, from all sources, all items which are used in the business unit. Inspection: examining the exact data and other incoming for further quality

and quantity in the research study.

Chapter four 4.0 FINDINGS 4.1 Introduction

The inventory policy of Somaliland business firm can only be appreciated in the context of its unusual circumstances as the leading business inventory model

and one of the functional of the business firm’s within the country. It then implies that whatever policy is adopted at the inventory level must take into consideration the overall company’s objectives.

The main determinant of the company’s inventory policy is the private economy itself in which the demand of their product stands as another factor.

According to business managers, the company is constantly reviewing performance as a unit of the economy; thus what happens in the economic

environment affects the policies and strategies of the company as a whole and the raw material as subsets.

The company’s objective is to maintain quality, increase market shares and Profitability.

This implies that enough inventories should be available to enhance continues purchasing and selling. This fact also determines the levels of inventory, which

the company keeps. So, we will see the discussion of this research and their




findings in a form of figures and percentage that identify the degree of inventory accounting usages in the field of business operations.

This is indicating us that the largest number of s/l businesses are

independently owned businesses, the question is that if this is the fact what is

the type of business that use inventory accounting system? We will see the

answer of this in our analysis and discussions.

Q1- what type of business do you have?

60% of the respondents are indicated that they have sole proprietorship, and 28% have told that they own partnership and 8% explained in form of corporation.

table 4.1.

Business type frequency percentage

sole proprietorship 15 60%

Partnership 7 28%

Corporation 3 12%

Total 25 100%




Figure 4.1 what type of business do you have

Q 2: do you use inventory accounting system in your business?

48% of the respondents indicated that they use little inventory accounting system in their business, while respondents explained they use as moderately,

and 52% of the respondents identified that they not use inventory accounting systems in their accounting procedure.

table 4.2:

Choice No of respondents Percentage

Yes 12 48%

No 13 52%

Total 25 100%

0%

20%

40%

60%

80%

100%

sole proprietorship

partnership corporation total

60%

28%

8%

100%

percentage

sole proprietorship partnership corporation total




Figure 4.2: do you use inventory accounting system in your business.

Q3- if you use, which of the following method is used?

32% of the corporation respondent shows that they use of inventory accounting

system like perpetual, , while 24% of the partnerships indicated the use of periodic and 28% of respondent have explained the use of both, and 16% of the respondents demonstrated that they do not use at all.

table 4.3:

Choice No of respondents percentage

perpetual system 8 32%

periodic system 6 24%

both 7 28%

0%

20%

40%

60%

80%

100%

Yes No Total

48% 52%

100%

Percentage

Yes No Total




Now of the above 4 16%

Total 25 100%

Figure 4.3: if you use, which of the following method is used.

Q4- do you think that the perpetual inventory system has more accurate then the periodic?

40% of the respondents sole proprietorship demonstrated that the perpetual

invocatory system is more accurate than the periodic, 32% of partnership explained the use of perpetual is more measurable then the periodic, while 28%

of corporation indicated that the perpetual is more accurate then the periodic.

table 4.4:

Choice frequency percentage

Yes 10 40%

No 8 32%

I don't know 7 28%

0%

20%

40%

60%

80%

100%

Perpetual periodic both of them Non of them Total

32%24% 28%

16%

100%

percentage

Perpetual periodic both of them Non of them Total




Total 25 100%

Figure 4.4: do you think that the perpetual inventory system has more accurate then the

periodic.

Q5- Does the accounting for inventory needs strong internal control?

52% of respondents demonstrated that inventory control is one of the most crucial accounting records, while 28% of the respondents indicated it’s not good to have inventory accounting control and 20% of the respondents

identifies that they do not sure whatever is it.

table 4.5:


Yes 13 52%

No 7 28%

Not sure 5 20%

Total 25 100%

0%

20%

40%

60%

80%

100%

Yes No I don't know

40%

53%

7%

100%

percentage

Yes No I don't know




Figure 4.5: Does the accounting for inventory need strong internal control.

Q6-does FIFO assume the order that good goods purchased?

38% of the respondents indicated that the FIFO have a good order of goods purchase, while 16% of the respondents demonstrated that is not good to have

FIFO order of goods purchased, and 46% of the respondents identified that they have no Idea about FIFO methodology.

table 4.6:


Yes 5 38%

No 2 16%

Not sure 6 46%

Total 13 100%

0%

20%

40%

60%

80%

100%

Yes No Not sure Total

27%

46%

27%

100%

percentage





Figure 4.6: does FIFO assume the order that good goods purchased?

Q7-does the FIFO have good inventory reserve?

31% of the respondents explained that FIFO have good inventory reserve, 46%

of the respondents determined that it has not d that much alternative to reserve the inventory orders, and 23% of the respondents say we have no idea

about the FIFO reserve.

tabel 4.7

Choice Respondents Percentage

Yes 12 31%

No 8 46%

I don 't know 6 23%

Total 26 100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


38%

16%

46%

100%

percentage





Figure 4.7: does the FIFO have good inventory reserve.

Q8-does the FIFO approximate the physical flow of goods?

36% of the respondents determined that physical flow of goods is not assured,

while 24% of the respondents demonstrated that it is necessary to have a good physical flow of goods, and 40% explained that is no ultimate usage of physical goods flow.

Table 4.8:


Not sure 9 36%

Yes 6 24%

No 10 40%

Total 25 100%

0%

20%

40%

60%

80%

100%

Yes No I don 't know Total

31%

46%

23%

100%

Percentage

Yes No I don 't know Total




Figure4.8: does the FIFO approximate the physical flow of goods

Q9- Does the ending inventory is closed to the current cost?

24% of the respondents identified that the ending inventory is good for too

close to the current cost, whereas 28% of the respondents says that they are not sure, and 48% of the respondents identify that ending inventory is good to close to the current cost.

Table 4.9:


Not 6 24%

Not sure 7 28%

Yes 12 48%

0%

20%

40%

60%

80%

100%

Not sure Yes No Total

36%

24%

40%

100%

percentga





Total 25 100%

Figure4.8: Does the ending inventory is closed to the current cost.

Q10-Does LIFO good for using periodic inventory system?

48% of the respondents explained that they are not sure what is it, whereas 36% of the respondents identify that it’s good for using LIFO to the periodic inventory system, and 16% say is not good to have LFIO in periodic system.

table 4.10:


Not sure 12 48%

Yes 9 36%

0%

20%

40%

60%

80%

100%

Not Not sure Yes Total

24% 28%

48%

100%

Percentage

Not Not sure Yes Total




No 4 16%

Total 25 100%

Figure 4.10: Does LIFO good for using periodic inventory system.

Q11- Does LIFO method matches the cost of last purchase against revenue?

32% of the respondent explained it’s an appropriate that LIFO matches cost of last purchase against revenue, while 48% of the respondents identify no, and 20% of the respondents demonstrated that they don’t know at all.

tabel 4.11


Yes 8 32%

No 12 48%

I don't know 5 20%

0%

20%

40%

60%

80%

100%


48%

36%

16%

100%

percentage





Total 25 100%

Figure 4.11: - Does LIFO method matches the cost of last purchase against revenue?

Q12- Does company use for LIFO reserve purpose?

40% of the respondents were reported that they do not sure, whereas 36%

respondents determined it’s good for using LIFO reserve, and 24% say no for purpose of LIFO reserve.

table 4.12:


Not sure 10 40%

Yes 9 36%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Yes No I don't know Total

32%

48%

20%

100%

pecentage

Yes No I don't know Total




No 6 24%

Total 25 100%

Figure 4.12: Does company use for LIFO reserve purpose

Q13- Does LIFO good for tax and external purpose?

20% of the respondents say we don’t know, whereas 32% of the respondents demonstrated not for tax purpose, and 48% explained yes for good tax and

external purpose.

table 4.13:


I don't know 5 20%

Not 8 32%

0%

20%

40%

60%

80%

100%


40% 36%

24%

100%

Percentage





Yes 12 48%

Total 25 100%

Figure 4.13: Does LIFO good for tax and external purpose

Q14-does the internal control practiced in maintaining inventory?

48% of the respondents say yes for internal control practicing, 32% of

respondents determined not to maintain internal control to the inventory, and 20% identify that they do not sure.

table 4.14

No of respondents Percentage

Yes 12 48%

Not 8 32%

Not sure 5 20%

Total 25 100%

0%

20%

40%

60%

80%

100%

I don't know Not Yes Total

20%32%

48%

100%

Percentage

I don't know Not Yes Total




Figure 4.14: does the internal control practiced in maintaining inventory.

Q15- Does the inventory of resale merchandised need various controls?

60% of the respondents demonstrated that it is necessary the merchandising

needs various internal control, whereas 16% of the respondents say no and 24% of the respondents answered that they do not sure.

table 4.15

choice No of respondents Percentage

Yes 15 60%

No 4 16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Yes Not Not sure Total

48%

32%

20%

100%

Percentagge

Yes Not Not sure Total




Not sure 6 24%

Total 25 100%

Figure 4.15: Does the inventory of resale merchandised need various controls.

Q16 does reconciling good for the physical count of the inventory?

36% of the respondents identify that it is good to have physical reconciling counts to the inventory, whereas 44% of the respondents said not to reconcile,

and 20% of the respondents mention that they don’t know.

table 4.16:


0%

20%

40%

60%

80%

100%


60%

16%24%

100%

Percentage





Yes 9 36%

Not 11 44%

I don't know 5 20%

Total 25 100%

Figure 4.16: does reconciling good for the physical count of the inventory

Q17- there is three different approaches of LIFO methods?

36% of the respondents yes that there are three different approaches of LIFO methods, whereas 48% said not sure, and 20% of the respondents determined

no three different LIFO methods.

Table 4.17:


0%

20%

40%

60%

80%

100%

Yes Not I don't know Totol

36%44%

20%

100%

Percentagr

Percentagr




Yes 9 36%

Not sure 12 48%

No 5 20%

Total 25 100%

Figure 4.17: there are three different approaches of LIFO methods

Q18- Does the advantage of LIFO can be including the tax benefits?

56% of the respondents yes, the advantage of LIFO is tax benefits, while 20% of the respondents mentioned that no tax benefits’ and 24% of the respondents

determined that they do not sure.

0%

20%

40%

60%

80%

100%

Yes Not sure No Total

36%

48%

20%

100%

Percentage

Yes Not sure No Total




Table 4.18:


Yes 14 56%

No 5 20%

Not sure 6 24%

Total 25 100%

Figure 4.18: Does the advantage of LIFO can be including the tax benefits

Q19- Does your audit procedures included physical inventory

observations?

36% of the respondents explained that audit procedure includes the physical inventory observations, while 48% of the respondents said no, and 16% of the

respondents determined that it is not applicable.

Table 4.19


Yes 9 36%

0%

20%

40%

60%

80%

100%


56%

20% 24%

100%

Percentage





No 12 48%

N/A 4 16%

total 25 100%

Figure 4.19- Does your audit procedures included physical inventory.

Q20- is inventory priced at lower cost or market?

64% of the respondents said yes to have an inventory pricing, whereas 36% of respondents said no for inventory pricing.

This evidence is showing the certainty of inventory pricing at lower cost or

market.

Figure 4.20:

0%

10%

20%

30%

40%

50%

Yes No N/A

36%

48%

16%

Percentage

Yes No N/A





Yes 16 64%

No 9 36%

Total 25 100%

Figure 4.20: is inventory priced at lower cost or market.

Q21- Do the F/statement discloses the method of inventory evaluation?

72% of the respondents yes for inventory evaluation with financial statement, while, 28% of the respondents said no for inventory evaluation.

This identifies how well a financial statements con be disclosed in the methods of inventory evaluations.

Figure 4.21:


0%

20%

40%

60%

80%

100%

Yes No Total

64%

36%

100%

Percentage

Yes No Total




Yes 18 72%

No 7 28%

Total 25 100%

Figure 4.21: Do the financial statement discloses the method of inventory evaluation

Q22- Is the determination of inventory cost includes the overhead items?

32% of the respondents demonstrate that it is include inventory cost to the overhead items, 68% of the respondents said no for overhead items.

These are some indications that determines and demonstrate how inventory

costs can be include some overhead items exclude otherwise. the explaining what is the overhead cost that can be consider and include the overall inventory accounting management in the field of merchandise.

Table 4.22:

0%

20%

40%

60%

80%

100%

Yes No Total

72%

28%

100%

Percentage

Yes No Total




Choice No respondents Percentage

Yes 8 32%

No 17 68%

Total 25 100%

Figure 4.22: Is the determination of inventory cost includes the overhead items.

Q23- Does your business determine the inventory needs and then create plan to fill those need?

56% of the respondents identify that is good to have inventory needs that

stimulate the business, and 44% of the respondents said no inventory needs.

Table 4.23:


Yes 14 56%

No 11 44%

0%

20%

40%

60%

80%

100%

Yes No Total

32%

68%

100%

Percentage

Yes No Total




Total 25 100%

Figure 4.23: Does your business determine the inventory.

Q24-Did your business use monitor and evaluation process by the

management? 60% of the respondents demonstrate that their business use monitoring and

evaluation, while 36% of the respondents identify no, and 4% of the respondents explained not applicable. This is clarifies the need and understand major value of monitoring and

evaluations of the firm’s inventory accounting procedures. Table 4.24:


Yes 15 60%

0%

20%

40%

60%

80%

100%

Yes No Total

56%

44%

100%

Percentage

Percentage




No 9 36%

N/A 1 4%

Total 25 100%

Figure 4.24: Did your business use monitor and evaluation process by the management.

Q25- Does your business implement the EOQ concept?

32% of the respondents identified that their business no implement the

economic order quantity, while 40% of the respondents demonstrate that they

maintain the economic order quantity, and 28% 0f the respondents mentioned

that they are not applicable.

The identifying inventory accounting characteristics includes a large number of

firms that merchandise a similar product at same time having similar stores

has been found.

0%

20%

40%

60%

80%

100%

Yes No N/A Total

60%

36%

4%

100%

Percentage

Percentage





No 8 32%

Yes 10 40%

N/A 7 28%

Total 25 100%

table 4.25:

Figure 4.25: Does your business implement the EOQ concept.

CHAPTER FIVE

5.0 CONCLUSION AND Recommendations 5.1 conclusions

The objective of this research study was to discover how well adequately

established inventory accounting system of Somaliland business firms. Though inventory is most likely two steps from cash (the firm must convince

someone to buy the goods, usually on account, and then must collect from the

customer), many times creditors look to current assets as one indication of a

0%

20%

40%

60%

80%

100%

No Yes N/A Total

32%40%

28%

100%

Pecentage

No Yes N/A Total




company's ability to repay. The current ratio and inventory turnover play a

major role in these lending decisions.

100% of merchandisers rely on a certain level of inventory to assure the

continued sales that result in ultimate cash and inventory accounting inflows

to the firm, and judgments about a firm's inventory accounting are based in

part on management's ability to keep enough on hand to avoid stock-outs

without investing too much asset. Finally, if inventories build, this could signal

a tapering off of demand and fewer expected future cash flows. These attributes

make the asset inventory rank fairly high on relevance.

They point out 60% of Somaliland is sole proprietorship which uses the

inventory accounting system that indicate the lower of cost or market rule,

requiring a judgment about whether the utility of inventory (in essence, its

resale value) has been impaired. This determination is relevant, because it

influences the assessment of future expected cash and inventory physical

flows.

On the other hand, we find out that 28% of the business are partnership which

probably use inventory accounting system throughout the business operations,

12% is an corporation which is the backbone of economic growth through the

society.

48% of the companies are fully disclose their inventory accounting and

valuation approaches (FIFO, LIFO, etc.), and once a method is adopted, they

used with consistency from year to year, and 52% companies may be granted a

change in method. Exactly what constitutes inventory often depends on firms

practice but we found out these things are adherent. And firm’s analysts keep

abreast of special circumstances.

On the base of methods 32% of the business used perpetual systems 24% of

business are used of periodic inventory system, 28% of business showed that

they use both methods on the base of inventory accounting, and 16% of the

business is absolutely do not use.

Similarly, accountants are charged with determining whether the value of

goods in the ending inventory has fallen—due to obsolescence, wear and tear.

40% of business reports an amount for inventory that accurately reflects the




methods that have been on the perpetual and periodic in all the business

types. But financial statement users should be able to rely on a good faith

effort. That is, accountants offer their best judgment based on available history

and other facts (such as a widely recognized decline in market value for similar

goods) and should not attempt to bias that estimate either upward or

downward.

We realized that 52% business firms used strongly internal control and it is

crucial in accounting records while 28% indicated that is not necessary to have

internal inventory control and 20% business has been realized that they are

just counts in their inventory, but no process that have mentioned.

On the other hand, the business firms are among the usage of accounting as

indicated. 385 of report analyzing under the FIFO methods that assumes

orders that goods is purchased, while 16% of the business firms stated not

necessary either use of FIFO methods or other things else and 46% of the

analysis is indicate that they don’t know what methods they process.

36% of the respondents indicated that is not insured the FIFO approximation,

while it is good for assigning the FIFO flow of inventory and physically

determined This concept is referred to as “neutrality,” and it enhances the

primary characteristic of reliability. Furthermore, recognition of a decline in

value in the year in which it occurs represents an attempt to adhere to the

matching principle so that the expense associated with the loss in value is

recorded in the same accounting period, rather than waiting until the goods are

sold (presumably at a lower price) in the future.

32% of the findings as presented above in all the research study show that

the alternative hypotheses and accept, 40% of our analysis also shows that the

company operates a policy of making orders on a quarterly basis within a

period of one year. Also it can be as well observed that the business firms does

not always adopt the EOQ model in placing orders for its raw materials and

this account for the variations between the calculated EOQ and the expected

order sizes of the company. For at least three years out of the five years under

study, the expected value was greater than the observed value for each

inventory/product. This implies that the




28% of Somaliland business firms including super markets, electronics and

soon have excess investment in inventory. We also observe that there is a

positive correlation between sales and inventory usages. We, thus, concluded

that inventory usage depends on sales that means as sales increases, inventory

usages should also be on the increase.

5.2 RECOMMENDATIONS

Finally, I recommend the importance of inventory accounting system is

to be the master leader of inventory accounting development and to

become highly developed to meet the rising challenges in most corporate

entities and this is in response to the fact that inventory is an asset of

distinct feature.

The inventory handling situation of the firms should be prioritize in

mannern way.

I also, recommend to Somaliland business firms to reveal using inventory

accounting model. Because, It is seen that the business firms that go

through a well-built policy is able to handle its idle stock without

incurring unnecessary costs. A basis for inventory planning and control

was also provided in this study.

Though looking through the inventory policy of the firms, it can be said

to be dynamic to some extent but the analysis and findings have revealed

the need to remedy some situations in the Firm’s accounting of

inventory. The study thus suggests some to remedy certain defects in the

films/co inventory accounting policy and if these recommendations are

implemented, the company's inventory accounting policy that will attain

a greater accurate and measurable.

The emphasis should be normally placed on the economic order quantity

model because it was seen to be in the best interest of business firms to

maintain an optimal level of materials in store, the level that minimizes

total cost of investment in inventory. To achieve this successfully,

different costs, which are associated with inventory, should be

segregated and accumulated in such a way that EOQ can be easily

determined.

In the analysis, we also mentioned that there was a positive relationship

between inventory and sales and between inventory and production cost.




This does not imply that inventory automatically determines purchasing

costs or sales and vice-versa. However, it does show that inventory levels

can be a useful indication of what level of sales to expect. It is thus

recommended that the sales and marketing department of the business

firms should pay closer attention to the growth pattern of inventory

accounting and incorporate it in sales forecasting technique.

Materials records unit should also pay attention to sales growth over the

years and thus take into consideration, the obvious relevance of sales

and purchasing cost in making decision with regards to inventory

We also, recommend the hiring an inventory accounting expert that

produce a better inventory accounting records in the future operations.

In order to proceed the firms competitive advantage, it necessary to

articulate overall steps that can bridge the gabs if it exist in your

business firms.

In business development purpose, we recommend to assign a better

specialized inventory accountant group that will handle all the

warehousing and activities of inventory departments in your

companies/firm.

This will leads higher efficiency and productive mechanisms models in

inventory flow of movements and getting a competitive advantage and all

necessary capabilities that will facilitate the brightness development of

your business.

6.0 APPENDIX: UNIVESITY OF HARGEISA

6.1 Appendix A

Questionnaire

Introductions




Questionnaires about the use of accounting for inventory on small business in Somaliland

Sir/madam

I am one of the senior candidate students for obtaining Bachelor Degree of business Administration (BBA) in University Of Hargeisa from the months

ahead which I am going to complete for the four years running studies.

The questionnaires has been prepared to get information about the how

business organizations in Somaliland use accounting for their inventory on the basis of operation and how effectively use accounting records to their inventory management system to control inventory movement of firms as the purpose of

protection.

Notice: “your information is very crucial and confidential”

“I am thanking to everyone who gives me appropriate answer about the

questionnaires”

The information associated to “the use of accounting for inventory of small

business in Somaliland.

All questions have been designed on the basis a “yes” answer indicates a satisfactory condition, while a “no” answer indicates that supplementary information is required by way of explanation of the situation, and “not sure/I

don’t know” indication the alternative inventory accounting procedures that may have been adopted. Researcher: “Mohamed Mohamoud Muse.

Demographic respondents

Please circle the appropriate answer.

1- What type of business do you have?

a. Corporation b. Partnership

c. Sole proprietor ship (one person)

Name of respondents-----------------------------------------------------------------------------

District------------------------------------- Date------------/----------------/-------------------

Occupation--------------------------------------- Organization---------------------------------

-




2- Do you use inventory accounting system in your business?

a. Yes b. No

3- If you use, which of the following system do you use?

a. Perpetual inventory system b. Periodic inventory system c. Both of them

d. None of the above

4-Does the perpetual system has more accurate than the periodic?

a. Yes b. No

c. I don’t know

5-Does the accounting for inventory need strong internal control?

a. Yes b. No

c. Not sure

6-Does the FIFO assumes the orders that goods has been purchased?

a. Yes

b. No c. Not sure

7-Does the FIFO have good inventory reverse? a. Yes b. No

c. I don’t know 8-Does the objective of FIFO is to approximate the physical flow of goods?

a. Not sure b. Yes c. No

9-Under of FIFO, does the ending of inventory is closed to the current cost?

a. Not b. Not sure

c. Yes




10-Under the LIFO, does it good to use periodic inventory system? a. Not sure

b. Yes c. No

11-Does LIFO method matches the cost of last purchase against revenue? a. Yes b. No

c. I don’t know 12-Does company use for LIFO reserve purpose?

a. Not sure

b. Yes c. No

14-Do accepted internal control practices a person who maintaining the inventory accounting records should be independent of these functions?

a. Yes

b. Not c. Not sure

15-Does the inventory of resale merchandised need various controls that should be present for their primary control?

a. Yes

b. No c. Not sure

16-Does reconciling the physical count of the inventory to the inventory

records help to make ensure that the accuracy of the inventory records has been taken?

a. Yes b. No c. I don’t know

17- Does the three different approaches to compute LIFO go through specific goods LIFO; specific goods pool LIFO, and dollar-value LIFO?

a. Yes b. Not sure c. No

18- Does the advantage of LIFO can be including the tax benefits, and improving cash flow?

a. Yes b. No

c. Not sure




19-Does your audit procedures included physical inventory observations and shipping and receiving cutoff tests?

a. Yes b. No

c. N/A 20-are inventory priced at lower cost or market (net realizable value) or other methods?

a. Yes b. No

21-Do the financial statement discloses the method of inventory evaluation? a. Yes

b. No 22-Is the determination of inventory cost includes the overhead items?

a. Yes

b. No 23-Does your business determine the inventory needs and then create plan to

fill those need? a. Yes b. No

24-Did your business use monitor and evaluation process by the management? a. No b. Yes

c. N/A 25-Does your business implement the EOQ concept?

a. No b. Yes c. N/A

Appendix B

Bibliography

(The Collected Knowledge of Arithmetic, Geometry, Proportion and Proportionality).




Christopher R. Marburg, CPA, MBA “definition of Inventory accounting” McDonald’s Corp’s

“Standard financial statements serve as a yardstick” Mr. Wilkinson “Accounting is a system”

HKAS 2 (March 2004 “Conventional Inventory Pricing Methods, Steps in Accounting for

Inventory” J1.12001 “Inventory system for traffic control device”

LARSON PYLE/ZIN NELSON “fundamental accounting principle”, fifth edition

DONALDKRESO and WEY GANDT JARREY.J “intermediate accounting”

ninth edition JEFF SLATER and RICK PONTICELL “Business Mathematics” “FIFO,

LIFO, and WEIGHTED AVERAGE METHODS” EDMONDS MC MAIR MILAN “Fundamental Financial Accounting

Concept”, fourth edition

KHALID AL KAABI, Inventory Accounting from his “MBA research

studies”.

“Open University of Malaysia”

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