INVENTORY EVALUATION FOR ALNOOR SPARE PARTSsomthesis.com/.../2017/06/INVENTORY-EVALUATION-FOR-Alnour-Spare-parts.pdf · INVENTORY EVALUATION FOR ALNOOR SPARE PARTS 3 Dedication This

INVENTORY EVALUATION FOR ALNOOR SPARE PARTS

1


BY

Yousuf Mohamed Abdalla

A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS OF THE DEGREE OF BACHELOR

OF BUSSNESS ACCOUNTING (BBA)

ADMAS UNIVERSITY

August 2012

HARGEISA SOMALILAND

http://admashmc.com/main


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Declaration

I hereby declare that this thesis written for the award of Degree of Bachelor of

business in Accounting (BBA) is my original work. It has never been submitted

to any academic institution for the award of a degree of the equivalent.

Yousuf Mohamed Abdalla

Signature____________________________

Date___________________________

This thesis has been submitted with my approval as supervisor:

Kolike Gopal,

Professor of Accounting and Finance,

Solomon Wakjira Gute

Department Head


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Dedication

This paper is dedicated to may mother Habiba Ismail Qayad whose care and attention

to my growth, development and learning is unforgettable she had always been a

source of encouragement and inspiration through-out my life. I am especially

thankful to her for her relentless effort which had substantially contributed to may

successful completion of the university. I am particularly indebted to her for the

migrated of ways in which she assisted and supported me to realize my potential.


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ACKNOWLEDGEMENT

I would like to express our thanks to the almighty ALLAH, most beneficent, most

powerful, most merciful, most gracious, single-handedly and the lord of the universe,

who gave me the ability to complete this research paper successfully.

From the formative stages of this thesis, to the final draft, I owe an immense debt of

gratitude to my beloved Teacher and Advisor, Dr. Kolike Gopal. His sound, sage

advices, patient encouragement aided the writing of this thesis in innumerable ways

and careful guidance he is providing to me during this paper.

I also have no words to express my indebtedness and my great thanks to my parents,

brothers and sister, who have helped me to hold up remarkably well under the stress

and strain for being helpful and supportive.

The end of long time I have been learning Admas Universiy I’m here to forward my

deepest acknowledgement to any one who contributed me in doing my writing

process technically and financially. My utmost thanks and all praises are due to

ALLAH who makes me to write this paper, first I would like to thank for my wife for

her support of advice and morally.

Thanks to all lecturers of the university and all level of management you’re blocks of

the system.

Thanks to may special friend, Idiris Abdi Birshe, who encouraged me morally and also

helped financially.

Thanks to all may friends, especially close friends such vice presedent of Admas

University branch of Hargeisa Hussein Abdulahi Mohamud, Mohamed Abdi Gire,

Mohamed Ibrahim Ahmed, Mukhtar Mohamed Ahmed, Mukhtar Abdi Birshe and

general director of ministry of justice Mohamed Muse Haji Abdi (Galaidh), and co-

workers during my university, I will never forget the brilliant days we were shared.

Lastly, I will not forget the help of few people during the time I was preparing this

research paper. I would like to express my great expression and love to my friend

Mustafa Jama Khabile who devote me his time and advice through all the time.


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ABSTRACT

This research has been analyses the inventory evaluation for Alnoor Spare parts how

it’s good for business and also how inventory management is very important function

that determines the health of the business.

Mean while this study describes the methods of getting better inventory system of

the inventory and accounting system among the merchandise business.

The research tools used in this research paper to get know the facts were

questionnaire distributed to the respondents working different areas.

A last the paper will recommend to establish now policies about exporting raw

materials to improve inventory ways of developing.

This research recommends that organization to use perpetual inventory system,

because it gives you continue record of change in inventory in the in the inventory

account. That is all purchase and sale of goods are recorded directly in the inventory

account as they occur.


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Contents

Dedications ..................................................................................................................... 3

ACKNOWLEDGEMENT .................................................................................................... 4

Contents ......................................................................................................................... 6

CHAPTER ONE .................................................................. Error! Bookmark not defined.

INTERODUCTION .......................................................... Error! Bookmark not defined.

Chapter Two ................................................................................................................. 10

LITARATURE REVIEW ................................................................................................ 11

OBJECTIVES OF INVENTORY VALUATION .............................................................. 13

INVENTORY SYSTEMS ............................................................................................ 13

MEANING OF INVENTORY ACCOUNTING .............................................................. 12

ADVANTAGES OF FIFO METHOD ........................................................................... 14

DISADVANTAGES OF FIFO METHOD ..................................................................... 14

ADVANTAGES OF LIFO METHOD ........................................................................... 14

DISADVANTAGES OF LIFO METHOD ...................................................................... 14

COMPARISON OF THE METHODS ......................................................................... 15

CONSISTENCY PRINCIPLE .......................................................................................... 17

Chapter three ............................................................................................................... 18

3.0 Research METHODOLOGY .................................................................................. 19

3.1 Research Design .............................................................................................. 19

3.2 Data Collection Method .................................................................................. 19

3.3 Primary Source ................................................................................................ 19

3.4 Secondary Source ............................................................................................ 19


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3.5 Practical Sources ............................................................................................. 20

3.6 Sampling method ............................................................................................ 20

3.7 Significance of the study ................................................................................. 20

3.8 Limitations ....................................................................................................... 20

Chapter four .................................................................... Error! Bookmark not defined.

4. Data analysis and findings .................................................................................... 23

4.1 Introduction .................................................................................................... 23

Answers of the questions and their charts ............................................................... 24

Chapter five .................................................................................................................. 46

5.1. Conclusion .......................................................................................................... 46

Recommendation ..................................................................................................... 48

Appendix A .................................................................................................................. 50


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Figure List

1. Figure 4.2 …………………………………………………………………………………………….16

2. Figure 4.3…………………………………………………………………………………………….17

3. Figure 4.4…………………………………………………………………………………………….18

4. Figure 4.5…………………………………………………………………………………………….19

5. Figure 4.6…………………………………………………………………………………………….20

6. Figure 4.7…………………………………………………………………………………………….21

7. Figure 4.8…………………………………………………………………………………………….22

8. Figure 4.9XXXXXXXXXXXX…………………………………………………………………….

9. Figure 4.10…………………………………………………………………………………………….23

10. Figure 4.11…………………………………………………………………………………………….24

11. Figure 4.12…………………………………………………………………………………………….25

12. Figure 4.13…………………………………………………………………………………………….26

13. Figure 4.14…………………………………………………………………………………………….27

14. Figure 4.15XXXXXXXXXXXXXXXXXXX……………………………….

15. Figure 4.16…………………………………………………………………………………………….28

16. Figure 4.17…………………………………………………………………………………………….29

17. Figure 4.18…………………………………………………………………………………………….30

18. Figure 4.19…………………………………………………………………………………………….31

19. Figure 4.20…………………………………………………………………………………………….32

20. Figure 4.21…………………………………………………………………………………………….33

21. Figure 4.22…………………………………………………………………………………………….34

22. Figure 4.23…………………………………………………………………………………………….35

23. Figure 4.24…………………………………………………………………………………………….36

24. Figure 4.25…………………………………………………………………………………………….36

25. Figure 4.26…………………………………………………………………………………………….37


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Chapter One

1. Introduction:

Inventory valuation is an important. It is concerned with the controlling our

materials upon which we all depend. That is reason for any organizations

existences, whether organization is large or small, manufacturing or

merchandising, product or service oriented, for profit or not profit.

Thankfully, most organization has now come to understand the importance of

inventory valuation any business, by implementing a system, which eliminate

stock-outs surplus and minimizing association

Also there is emotion that organization in Somaliland spending amount of

money improving their inventory.

Since most of Somaliland organizations are merchandize, inventories are

frequently the largest current asset of that organization and effective of their

inventory control may give them improvement of their business including

making profit, minimize costs, and excellent financial report.

Inventory valuation also exciting it is at center of so many changes affecting

the business world, changes in customer preference, changes in the flexibility

to choose changes in customers you when you made an effective valuation of

your inventory and changes in your capital investment.

Inventory plays lions share in our daily lives: this is the fact that is the fact that

most families go to the market one day ready for the good of the coming week

and person have to estimates a supply and demand of his/her family in to

protect a stock-out and probably when a visitors come to his as friends.

allowed that the stocks are applicable with their original order will not be discharged

from the warehousing, if the inspectors give marks stocks means that those stocks


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can be issued to their branches, the remaining unmarked stocks is divided in two part,

misorder stock and damage stock. Those items will be returned to the company

which have been purchased (Japan), inspection of this operation is always carry on by

the departmental managers and it’s their responsibility.


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CHAPTER TWO

LITARATURE REVIEW

Definition of inventory

Inventories are unconsumed or unsold goods purchased or manufactured. According

to international accounting standard 2 (IAS2), inventories are tangible property:

(a) Held for sale in the ordinary course of business; (b) In the process of

production for such sale, or (c) To be consumed in the production of goods or

services for sale.

Thus, the term inventory includes stock of (i) finished goods (ii) work in process and

(iii) raw materials and components.

Incase of trading concern inventory primerly consists of finished goods, while incase

of manufacturing concern inventory consists of raw materials, components, stores,

work in process and finished goods.

According to FESS.WARREN author of (accounting principles book) – The term

inventories is used to designate (a) merchandise held for sale in the normal course of

business and (b) materials in the process of production or held for such use.

According to C MICELLE TARAS and SOUNTARAS CPIM, PMP (2) inventory is an asset

that is earned by business that has the express purpose of being sold to end

customers or distributors, it includes raw materials, work in process, and finished

goods.

Finished goods inventory – items that are in stock and that await sale to your

customer, they have completed the manufacturing process and are ready for sale.

The proper management of finished goods inventory is a key concern to many

business.

Raw materials – a substance or material that is used in the manufacturing of finished

goods.

WIP (work in process) – material that is the production process, but isn’t yet a

finished goods.


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Inventory is also defined as assets that are intended for sale, are in the process of

being produced for sale or are to be in producing goods. The following equation

expresses haw company’s inventory is determined.

Beginning inventory + net purchases – cost of goods sold = ending inventory.

MEANING OF INVENTORY ACCOUNTING

The word inventory simply means the goods and services that business hold in stock.

It is requirements of “GAAP” that inventory is properly accounted for according to a

very particular set of standards, so as to limit the potential of overstating profit by

understating inventory value and to limit the potential to overstate a company’s

value by overstating the value of inventory which has in fact materially depreciated in

value.

There are three basis approaches to valuing inventory that are allowed by “GAAP”

a) First in first out (FIFO)- Under FIFO the cost of goods sold is based upon the

cost of material bought earliest in the period, while the cost of inventory is

based upon the cost of material bought later in the year. This results in

inventory being valued close to current replacement cost. During periods of

inflation the use of FIFO will result in the lowest estimate of cost of goods sold

among the three approaches and the highest net income.

b) Last in first out (LIFO)-Under LIFO the cost of goods sold is based upon the

cost of material bought towards the end of the period, results in costs that

closely approximate current costs. The inventory however is valued is valued

or the basis of the cost of materials bought earlier in the year. During periods

of inflation the use of LIFO will result in the highest estimate of cost of goods

sold among three approaches, and lowest income.

c) Weighted average - Under the weighted average approach, both inventory

and the cost of goods sold are based upon the average cost of all units bought

during the period. When inventory turns over rapidly this approach will more

closely resemble FIFO than LIFO.

These above approaches are those approaches which has been widely

adopted companies but there are also other approaches which hasn’t been

adopted widely such as:


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d) Specific identification method

e) Highest in first out method (HIFO)

f) Base stock method

g) Next in first out method.

OBJECTIVES OF INVENTORY VALUATION

Inventory has to be properly valued because of the following reasons:

Determination of income: The valuation of inventory is necessary for the

determination the true income earned by a business during a particular

period. Gross profit is the excess of sale over cost of goods sold, cost of goods

sold is ascertained by adding opening inventory to and deducting closing

inventory from purchases.

Determination of financial position: The inventory at and of a period is to be

shown as a current asset in the balance sheet of the business. Incase the

inventory isn’t properly valued the balance sheet will not disclose the correct

financial position of the business.

INVENTORY SYSTEMS

Records pertaining to quantity and value of inventory in hand can be maintained

according to any following two systems:

i) Periodic inventory system

ii) Perpetual inventory system

Periodic inventory system: Incase of this system the quantity and the value of

inventory is found out only at the end of the accounting period after having a physical

verification of the units in hand. The system doesn’t provide the information

regarding the quantity and value of materials in hand on continuous.

Perpetual inventory system: It is also known an automatic inventory system.

According to the institute of cost and management accountants London, it is a system

of records maintained by the controlling department which reflects the physical

movement of stocks and their current balance. The basic object of this system is to


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make available details about the quantity and the value of stocks of each item at all

times.

ADVANTAGES OF FIFO METHOD

The FIFO has the following advantages;

It values stock nearer to current market prices since stock is presumed to be

consisting of the most recent purchases.

It is base on cost and therefore no unrealized profit enters into the financial

accounts of the company.

The method is realistic since it takes into account the normal procedure of

utilizing/selling those materials/goods which have been longest in stock.

DISADVANTAGES OF FIFO METHOD

The FIFO method has the following disadvantages;

It involves complicated calculation and hence increases the possibility of

clerical errors.

Comparison between different jobs using the same type of material becomes

sometimes difficult.

ADVANTAGES OF LIFO METHOD

The LIFO method has the following advantages;

It takes into account the current market conditions while valuing materials

issued to different jobs or calculating the cost of goods sold.

The method is based on cost, and therefore no unrealized profit or loss is

made on account of use of this method.

DISADVANTAGES OF LIFO METHOD

The method is suitable for only materials which are of bulky and non-

perishable only.


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COMPARISON OF THE METHODS

These different methods will affect cash flow, the actual or assumed association of

inventory unit costs with goods sold or in stock—not goods flow, the actual

movement of goods.

Therefore, gross profits will vary among the different methods. The example of 250

pairs of jeans sold at $15 each in Table 2 demonstrates this phenomenon. Suppose

that 80 pairs of jeans remain unsold during this period, making up the ending

inventory, and apply the inventory prices supplied above for each method: the first

100 pairs of jeans were bought for $10 and the next 200 for $10.75—or $3,150.

The differences in value of the ending inventory stem from the different ways each

method calculates the ending inventory—by determining whether newer or older

jeans were left, determining the weighted average for the two purchases, assuming

the remaining 80 pairs are newer pairs, or assuming the remaining pairs are older

pairs, respectively. Consequently, the differences in gross profit shown in Table 2

reflect the assumptions made about cash flow using the various inventory pricing

methods, not the actual goods flow.

Of these four inventory methods, the most popular methods used are FIFO and LIFO.

Even though LIFO does not reflect the actual flow of goods in most cases,

approximately 50 percent of major companies use this method. The FIFO method

may come the closest to matching the actual physical flow of inventory. Since FIFO

assumes that the oldest inventory is always sold first, the valuation of inventory still

on hand is at the most recent price.

Assuming inflation, this will mean that cost of goods sold will be at its lowest possible

amount. Therefore, a major advantage of FIFO is that is has the effect of maximizing

net income within an inflationary environment. The downside of that effect is that

income taxes will be the greatest.

The LIFO method is preferred by many companies because it has the effect of

reducing a company’s taxes, thus increasing cash flow. Nevertheless, these attributes

of LIFO are present only in an inflationary environment. Under LIFO, a company

always sells its newest inventory items first. Given inflation, these items will also be

its most expensive items. So cost of goods sold will always be at its greatest amount;

therefore, net income before taxes will be at its lowest amount, and taxes will be

minimized, which is the major benefit of LIFO.


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Another advantage of LIFO is that it can have an income smoothing effect. Again,

assuming inflation and a company that is doing well, one would expect inventory

levels to expand. Therefore, a company is purchasing inventory, but under LIFO, the

majority of the cost of these purchases will be on. The income statement as part of

cost of goods sold. Thus, the most recent and most expensive purchases will increase

cost of goods sold, thus lowering net income before taxes as well as lowering taxes

and net income. Net income may be still be high, but not as high as it would if FIFO

had been used.

On the other hand, if a company is doing poorly, it will have a tendency to reduce

inventories. To do so, the company will have to effectively sell more inventory than it

acquires. Since a company using LIFO assumes it sells its most recent purchases first,

the inventory that remains is older and less expensive (given inflation). So when a

company shrinks its inventory, it sells older, less expensive inventory. Therefore, the

cost of goods sold is lower, net income before taxes are higher, and net income is

higher than it otherwise would have been.

A disadvantage of LIFO is the effect it has on the balance sheet. If a company always

sells its most recent inventory first, then the balance sheet will contain inventory

valued at the oldest inventory prices. For instance, if a company were to switch from

FIFO to LIFO in 1955, then unless the inventory was zeroed out at some point in time,

there may be units of inventory valued at 1955 prices, even though the physical

inventory is comprised of the most recent units. As a result, the inventory account

can be dramatically undervalued if a company has adopted LIFO, and if during that

time, the cost of inventory has increased.

The LIFO method is justified based upon the matching principle, as the most recent

cost of inventory is matched against the current revenue generated from the sale of

that inventory. FIFO does not, however, distort the valuation of inventory on the

balance sheet like LIFO can potentially do; Companies generally disclose their

inventory accounting methods in their financial statements, usually as a footnote or a

parenthetical note in the relevant sections. Therefore, when examining financial

statements, it is imperative that the inventory notes be read carefully, to determine

the method of inventory valuation chosen by a company. It is most likely that either

FIFO or LIFO would have been chosen. Assuming inflation, FIFO will result in higher

net income during growth periods and a higher and more realistic inventory balance.

In periods of growth, LIFO will result in lower net income and lower income tax

payments, thus enhancing a company’s cash flow. During periods of contraction, LIFO


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will result in higher income levels. LIFO also has the potential to greatly undervalue

inventory over time.

CONSISTENCY PRINCIPLE

The consistency principle states that businesses must use the same accounting policy

and procedures from period to period. Consistency makes it possible to compare a

company’s financial statements from one period to the next, suppose you are

analyzing a company’s net income pattern. The company has switched from LIFO to

FIFO. Its net income has increased dramatically, but only as a result of the change in

inventory method. If you did not know of the change, you might believe that the

company’s increased income arose from improved operations, which is not the case.

The consistency principle does not require that all companies within an industry use

the same accounting method. Nor does it mean that a company may never change its

own accounting method. However, a company making an accounting change

discloses the effect of the change on net income. Also, auditors mention their clients

accounting changes in the audit report on a company’s financial statements.

Spare parts inventories are different from other types of inventory in companies.

Cullen and LEE (1990), Zheng and Agrawal (1997), Muksadt (2001), Kumar (2005) and

Rego (2006) have printed out same important factors in the management of these

inventories.

Customers have rising expectations concerning quality of associated products

and services. The occurrence of failure is already a concern and the delay in

repairing due to lack of spare parts worsens client’s negative perception.

Some items have high demand (parts with great wearing and those related to

preventive maintenance) but the great majority has intermittent demand.

Spare parts are extremely expensive in some segments, and their repair

(instead of discard) is feasible, damaged units can be replaced either by new

units or by repaired ones, in this case the inventory control models should

also consider the cost and repair time.

Inventory control: upon deciding that the part needs to be stored, an inventory

replenishment routine is necessary, considering different goods (costs/ or service

level) and demand behavior (trend and seasonality).


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A part from the objectives which is important that a business must evaluate it’s

stocks according to financial procedures act, Alnoor spare parts business evaluate

their stocks at end of every year ending because of following factors:

a) It is important to evaluate stocks to determine the standard position for the

well running of the concern.

b) It is important to evaluate stocks to determine the true income earned by the

concern for the period of the year ending.

c) It is important to evaluate stocks for the necessary of fulfillments for the

payments of “SEKO money” which is applicable for such trading according to

Islamic law.

d) It is important to evaluate stocks for the preparations of financial

statement/balance sheet of the concern.

e) It is important to evaluate stocks in order to renew and repair stock

warehousing and stores for the period counting of stocks.

Alnoor spare parts is one of the best dealers of spare parts in Somaliland it has it’s

branches and stores throughout Somaliland as well as Ethiopia. As per the low of

Alnoor financial act it has to be valued at end of every year. For the following topics

we shell study basic methods for the evaluation of ALNOOR SPARE PARTS.


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CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 Research Design

This research is descriptive research project, as its major purpose is to get a better

understanding of the importance of accounting for and their inventory control .this

study were used questionnaire-based method to collect detailed information

regarding the topic. The methodology employed by this study is developed by taking

into account the specific social and cultural context of Somaliland businesses. Issues

and capability of the researcher, the time-frame and the availability of resources are

also taken into account.

The main tool used in this research paper is questionnaire to collect the relevant and

to analyze data collect.

3.2 Data Collection Method

In data collection of this study, the source of information would be as follows:

Primary, secondary and practical sources.

3.3 Primary Source

Are 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 control system in small companies in Somaliland.

3.4 Secondary Source

Data is sourced from related internet sites, journals, online newspapers, periodicals,

and books and other academic publications relating to the importance of accounting


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for inventory control. Collection which focused on the literature of current field of

accounting for inventory control in Somaliland business firms that leads the business

activity and trading system.

3.5 Practical Sources

Under this method the research has taken a practical example for evaluation of

ALNOOR spare part inventory which has been done by ALNOOR accounting

department. In this research the information were taken from the books of accounts

of ALNOOR Spare Parts company, and it has been presented in this thesis as an

example report.

3.6 Sampling method

The sampling method that the research used was random sampling. The size of the

sample was 12 Business firms in Somaliland on the basis of inventory evaluation 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 to account for their inventory

periodically. Also, it has been realized which method they use to price, costing system,

and how they evaluate inventory periodically.

3.7 Method of data analysis and interpretation

After the collection of both quantitative and qualitative data, the researcher has

continued to analyze by using descriptive method. The analyzed data has been

interpreted by using tables and percentages. Finally, the conclusion and the

recommendation have been based on the findings that the researcher discovered

during the activity

1.5 Significance of the study

The study helps to provide detail information to the Alnour spare parts

finance office employees and the higher administration to perceive the

significance of inventory valuation.


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It becomes a document for the upcoming generation for those who want to

find out the task of inventory valuation.

The study has provided information to the interested parties.

The study is determined solution for the problem raised in the spare parts.

It can avail possible situation to the problems (past mistakes) rose at least to

minimize them.

It helps the spare parts to forecast the future image and the measurements of

inventory valuations of the different sub sectors

3.9 Limitations

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

distributions of the questionnaires.

The most companies’ do not understanding the meaning of the study and

they don’t want to clarify their inventory accounting systems.

The main limitation faced by the researcher was the lack of efforts 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.

Lack of reference in the library.

Shortage of secondary data.

Lack of resource and shortage of fund.


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CHAPTER FOUR

4. Data analysis and 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 and

control in the field of business operations.


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Answers of the questions and their charts

Q1- Name of the respondent?

Q2- Gender of the respondent?

In this question the respondent sex has been asked for five persons, the respondent’s

gender varied in this forthcoming percentage: male were 4 while female is 1.

Therefore, it has been observed most of the business participated in the survey were

mostly running by male

Choices Number Percentage

Male 4 80

Female 1 20

Total 5 100%

Figure 4.2 Gender of the respondent

This implies that the majority of the respondents were male because the people who

always run these activities are male according to the social attitude in Somaliland.

Q3 - Educational level of the respondents?


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According the figure below, the educational level of the respondents was varied

widely, the respondents opted four different levels from the filling responses options.

As depicted in the figure, in the primary level the respondents has not filled or ticked,

in the secondary level option 80% were filled. While 4 in the percentage of 20% had

reached university level education and not filled other educations, so the

respondents most of them were secondary level.

Percent

0

10

20

30

40

50

60

70

80

Primary

Secondary

University

Others

Figure 4.3 Educational level of the respondents

This indicates that the employees have enough knowledge to their job description

and load of the task and that they have the ability to do the daily activities with out

any difficulties.

Q4- what type of business do you have?


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66.7% of the respondents are indicated that they have sole proprietorship, and 25%

have told in partnership and 8.3% explained in form of corporation

Frequency Percent

sole proprietorship 8 66.7

Partnership 3 25.0

Corporation 1 8.3

Total 12 100.0

Figure 4.4 what type of business do you have.

This examines that business people in Somaliland have no wide idea about the

partnership and the corporation as well as the rules and regulations and tax policies

related the advantage and the disadvantages and the future profitability, which

became a tackle to get a number of businesses engaged in partnership and

corporation.

Q5- What is nature of your business?


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As depicted in table 4.5 of the above, (58.3%) of the business organizations are

merchandizing companies. (8.3%) of Somaliland business organizations are

manufacturing companies and the remaining (33%) are service companies.

Frequency Percent

Merchandise 7 58.3

Manufacture 1 8.3

Service 4 33.3

Total 12 100.0

Figure 4.5 what is nature of your business.

This implies that Somaliland has no a tangible manufacturing companies due to lack

of international recognition and the knowhow raw material in the country that can

cover the need of the company, and the majority of the country merchants practice

to import good and services from the out side countries.

Q6- What is the type of your inventory?

This question concerns the nature of the inventory, so 1 of (20%) of the respondents

inventory was electronics, and 2 of (40%) of the responses inventory was spare parts


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and also 20% of the respondents ware consumption products, the last one was other

and one respondent was filled and it is 20%.

0

5

10

15

20

25

30

35

40

Percent

Electronic

Spare Parts

consumptionproducts

Others

Figure 4.6 what is the type of your inventory

This indicates that the majority of Somaliland business inventories are spare parts,

while the consumption and electronics have the same priority in side the society.

Q7 – When you established your business?

In this question the respondents confirmed that their business establishment was

widely dispersed in different and varied annam’s. Three companies where in the

market since establishment of Somaliland 1991. While other two company was 1996

and 2010. So, one company 30 year old so and it was functioning many years the

youngest business was aged 1.


29

0

20

40

60

80

1-10years Old 70

10-20 years

old

20

20-30 years

old

10

Percent

Figure 4.7 when you established your business.

This implies that Somaliland business was started during the destruction of great

Somalia that Somaliland separated the rest of Somalia and it was continuously

increasing day after day.

Q8 – Who support you this business?

In this question most of the business that asked this question was answered that they

have no any support. 3 of (60%) of the respondents, and 2 of (40%) of the

respondents were helped by their family.


30

No Support

Family Support

Figure 4.8 who support you this business?

This indicates that the first time there was no a prominent business men in

Somaliland those can help each other, but every person started by him self with out

any external support , while the succeeded ones helped their descendants for the last

decades.

Q9 – How many employees working your business?

In this question the answers that respondents gives us was very different, so two

businesses who filled this questionnaire said that their employees are 80 and 90.

While other business employees between 7 up to 30 employees.

This indicates that the large businesses have the ability to recruit around hundred

employees for Somaliland six regions and the possibility of the export for different

regions, and the second alternative of the employment rate in the country.

Q10 - Are they professionals of accounting?

As illustrated in figure 9.9 the respondents answers are that 80% of the respondents

are no professional workers, but only 20% of that employees where were provisional.


31

Choices Number Percentage

Yes 1 20

No 4 80

Figure 4.10 are they professionals of accounting.

This implies that the main factor of Somaliland business failure is shortage of business

knowledge especially accounting that can differentiate the profit and loss of the

business, while the rest can face theft, fraud and error.

Q11 Do you conduct inventory accounting system in your organization?

91.7% of the respondents indicated that they use little inventory accounting system

in their business, while respondents explained they use as moderately, and 8.3% of

the respondents identified that they not use inventory accounting systems in their

accounting procedure.

Frequency Percents

Yes 11 91.7

No 1 8.3

Total 12 100.0


32

Figure 4.11 do you conduct accounting your organization.

This explains that most businesses in Somaliland understood the importance of

accounting especially conducting inventory methods, while the more business

merchants practice the inventory system, there are some others who still lack the

accounting principles and practices.

Q12- Do you think that your business have well planned accounting system which

prevent fraud and error rather than correcting?

91.7% of the respondent yes has well planned accounting system and 8.3% is no well

planned accounting system.

Frequency Percent

Yes 11 91.7

No 1 8.3

Total 12 100.0


33

Figure 4.12 - do you have well planned accounting system which prevent fraud rather

than correcting.

This implies that businesses in Somaliland varies in planning and conducting

accounting system which can be preventive for any problems that can face to the

businesses whether fraud, error, misconception, or any other risks.

Q 13- do you have inventory control system?

91.7% of respondents demonstrated that inventory control is one of the most crucial

accounting records, while 8.3% of the respondents indicated it’s not good to have

inventory accounting control.

Frequency Percent

Yes 11 91.7

No 1 8.3

Total 12 100.0


34

Figure 4.13 - do you have inventory control system

This examines that Somaliland society understood the concept of accounting during

the last ten years because of large number of graduates and the need of financial

statement preparation.

Q-14 if yes is your inventory control system manual or computerized system?

The researcher tried to identify what type of inventory control system Somaliland

organization uses. 7(58.3) of the business interviewed said that they use

computerized accounting system. 5(41.7) of the business said that they use manual

accounting system.

Frequency Percent

computerized system 7 58.3

manual system 5 41.7

Total 12 100.0


35

Figure 4.14- your inventory control system is manual or computerized.

This implies that the computer soft wares helped the business organizations for time

management and accuracy of the information on the other hand there are a lot of

businesses those still use the manual system.

Q15- Who manages the financial information of your company’s inventory?

As depicted in figure 50% of the respondent indicated that accounting personnel’s

manages financial information of the company’s inventory, 16.7% of the respondent

answered that store keeper manages financial information of the company’s

inventory, 25%of the respondent showed that authorized person manages the

financial information of the company’s. 8.3% of the respondent others manage the

financial information of the company’s.

Frequency Percent

accounting personnel’s 2 50.0

store keeper 1 16.7

authorized person 1 25.0

other please specify 1 8.3

Total 12 100.0


36

Figure 4.16 does your organization set up clear objective to guide inventory

transaction and corrective

Figure 4.15 who manage the financial information of your company’s

inventory.

this implies that accounting professionals manage the activities and un specified

percentage influence the cycle but the highest influence is based on the

accounting entity

Q16 - Does your organization set up clear objective to guide inventory

Transaction and correcting?

91. % of the respondent said yes has clear objective inventory transaction and

correcting.8.3% of the respondent said no clear objective to guide inventory

transaction and correcting.

Frequency Percent

yes 11 91.7

no 1 8.3

Total 12 100.0


37

This indicates that the establishment of business is based on tangible objectives those

will be a base for success in the future, while a few investors emotionally invest with

out knowledge and enough capital.

Q.17- Do you prepare receiving note when goods are received?

91.7% of the respondent said they prepare receiving report when the good are

received wild 8.3% of the respondent are not prepare any receiving report when the

goods received.

Frequency Percent

Yes 11 91.7

No 1 8.3

Total 12 100.0

Figure 4.17 Do you prepare receiving note when the goods are received.

This indicates that the store(receiving department) and the purchase department

have a legal agreement about accounting policy and procedure in the organization

towards documenting whether physical or financial transactions.

Q18- What are most probably errors happen in your inventory system?


38

The researcher tried to known what errors happen in your inventory, however the

study found 16.7%of the respondent said omission errors, 66.7% of the respondent

indicated that the transportation error happen,8.3%of the respondent said that an

error and principle,8.3% of the respondent said that an incorrect entry happen.

Frequency Percent

omission error 2 16.7

transportation error 8 66.7

error and principle 1 8.3

incorrect entry 1 8.3

Total 12 100.0

Figure 4.18 what are most probably errors happen in your inventory system.

This indicates that there is no transportation agencies in the country that are legally

established in the country those can facilitate to avoid errors that can decrease the

profit of the organization, while listing of the goods with their prices can face

omission during the sale.

Q19- Which inventory status recording system does you adopt?


39

41.7% of the corporation respondent shows that they use of inventory accounting

system like perpetual, while 33.3% of the partnerships indicated the use of periodic

and 25% of respondent have explained the use of both.

Frequency Percent

Perpetual 5 41.7

Periodic 4 33.3

both of them 3 25.0

Total 12 100.0

Figure 4.19 which inventory status recording system does you adopt.

This implies that the spare part inventories are non perishable goods those need a

daily up date that can facilitate the ending inventory reports and purchase orders of

the customers.

Q20. Does the perpetual system has more accurate than the periodic?

50.7% of the respondent’s sole proprietorship demonstrated that the perpetual

invocatory system is more accurate then the periodic, 41.7% of partnership explained

the use of perpetual is more measurable then the periodic, while 8. % of corporation

said I don’t know.


40

Frequency Percent

Yes 6 50.0

No 5 41.7

I don’t now 1 8.3

Total 12 100.0

Figure 4.20 does the perpetual system has more accurate than the periodic.

This implies that the exact system of determining the on hand goods and goods for

sale is perpetual that can explain it in detail, while the periodic system wants to wait

at the end of the year that can increase the risk of the business to be failure.

Q21 - does the accounting for inventory control needs strong internal control?

75% of the respondents say yes for internal control practicing, 16.7% of respondents

determined not to maintain internal control to the inventory, and 8.3% identify that

they do not sure.

Frequency Percent

Yes 9 75.0

No 2 16.7

not sure 1 8.3

Total 12 100.0


41

Figure 4.21 does your accounting for inventory need strong internal control.

this examines that the internal control of the inventory is crucial in the organization

because there are the possibilities of theft, error and fraud, while the checking

between the store (receiving department) and the accounting section is must and

their mismatch will be a risk in the organization.

Q22- does your organization have annual financial statement? If yes which method

used.

As depicted in figure 4.22 33.3% of the respondent said they count their inventory

through the FIFO method. 33.3% of the respondent indicated that inventory in

counted in LIFO method. Where 25% of the respondent showed them they account

their inventory by using AVERAGE method. And the remaining 8.3%of the respondent

use other method.

Number of respondent Frequency Percent

FIFO method 4 33.3

LIFO method 4 33.3

AVERAGE method 3 25.0

1 8.3


42

Total 12 100.0

Figure 4.22 does your business have annual financial statement.

This implies that most of businesses use lifo and fifo respectively because of the

items that the spare part businesses sale, that is impossible to compare two different

items.

Q23 - Does the FIFO have good inventory control?

58.3% of the respondents explained that FIFO have good inventory reserve, 41.7% of

the respondents determined that it has not do that much alternative to reserve the

inventory orders.

Frequency Percent

Yes 7 58.3

No 5 41.7

Total 12 100.0


43

Figure 4.23 does the FIFO have good inventory reverse.

This indicates that FiFo is the suitable method for spare part inventories that provides

the largest inventory and least cost of goods sold with the highest profit , while the

tax is negative side effect in the method.

Q 24 - Does the advantage of LIFO can be including and improving tax benefit and

improving cash flow?

41.7% of the respondents yes, the advantage of LIFO is tax benefits, while 16% of the

respondents mentioned that no tax benefits’ and 41.7% of the respondents

determined that they do not sure.

Frequency Percent

Yes 5 41.7

No 2 16.7

not sure 5 41.7

Total 12 100.0


44

Figure 4.24 does the advantage of LIFO can be including the tax benefits, and

improving cash flow.

This implies that LIFO method has its own benefits according to the tax policies and

procedures, but it has an obstacle of the inventory.

Q25 - Did your business use monitor and evaluation by the management?

91.7% of the respondents demonstrate that their business use monitoring and

evaluation, while 8.3% of the respondents identify no,

Frequency Percent

No 1 8.3

Yes 11 91.7

Total 12 100.0


45

Figure 4.25- did your business use monitor and evaluation by the management.

This indicates the feed back of the business during the year that indicates whether

the objectives is achieved or not and to solve the problems which caused the loss or

decrease of the customers in the organization and it’s the back bone of the

organization to evaluate the annual tasks.

Q26 - Does your audit procedure include physical inventory observation and

shipping and receiving cutoff?

83.3% of the respondents explained that audit procedure includes the physical

inventory observations, while 8.3% of the respondents said no, and 8.3% of the

respondents determined that it is not applicable.

Frequency Percent

Yes 10 83.3

No 1 8.3

Not applicable 1 8.3

Total 12 100.0

Figure 4.26 does your audit procedure includes inventory control observation and

shipping and receiving cut of tests.


46

This indicates that the company uses the basic accounting concepts towards

inventory policy and procedures that can accurately solve the mismatch of the

accounting department reports, store (receiving department) and audit department.

CHAPTER FIVE

Conclusion and Recommendation

5.1. Conclusion

This research concerned an important issue about the degree of accounting for

inventory control in the organization decision making. The objective of that it was

conducted was to study how Somaliland organizations apply their inventory control

to decision making process,

According to that, the survey has been done and the date collected has been

analyzed. Than this conclusion can be drawn:


47

Forms of the business organizations are sole proprietorship, partnership

and corporation, however; the majority of Somaliland business

organizations are sole proprietorship.

Every business organization, whether it is public or private needs

inventory to carry out it is activities. Therefore, accounting in inventory

control plays an integral part of every business organization. In addition,

proper accounting for inventory count needs appropriate accounting

method. However most of the organization that we have studied

indicated that they use appropriate accounting procedures

. Companies use different methods of inventory valuation. However

most of Somaliland businesses use First in First out method (FIFO).and

List in First out (LIFO).

Business organizations record their inventory either periodic or

perpetual by Using computerized accounting system or manual

accounting system, however, most of Somaliland use periodic and

perpetual system through computerized accounting system, more over

accounting person manages the financial information of company’s

inventory.

Preparing receiving note when goods are received takes important role

for the correctness of their inventory. However, most of Somaliland

business prepare receiving note


48

Most of the Somaliland businesses are merchandisers; this is shows that

the export of the country is very low.

Recommendation

Finally, I recommend the importance of inventory accounting system is that

the master leader of inventory accounting development and 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 organization managers must create and maintain an appropriate an

inventory control system.

The research recommends that organizations to use perpetual inventory

system, because it gives them continue record of changes in inventory in the

inventory account. That is all purchases and sales goods are recorded directly

in the inventory account as they occur, and it will be easier to make physical

counting and to find accurate inventory in the financial statement.

To adopt the technological change, they must use their recording systems

particularly financial recording of the business into computerized system,

because this system is less error and less time consuming than manual

system.

The control of materiel and documentation into and out of the storage

activity assist managers in maintaining accountability and custody of stocks.

To make a detailed planning, coordination, and adequate supervision of the

inventory function is necessary to ensure success of the inventory program.


49

To establish a master schedule that sets the beginning and completion dates

for both the counting process and the inventory reconciliation.

In general, the inventory counting process and the reconciliation should be

supervised or performed by an independent person.

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

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

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.

Organization management is required to established and maintain an

adequate inventory control system to protect the fraud and errors.

Now computerized is strongly used in Hargeisa as the study showed this

system is reliable and their program (Tally, Sage, Peach tree, Deck easy, and

Quick book) this provides simply reference file since it identifies the item. Lists

the cost, states the order size, and gives the number of units on hand

automatically an sometimes may gives demand of specific item when stored

in years and that is good for the inventory of organization to learn and used to

their business.


50

Appendix A

ADMAS UNIVERSITY COLLEGE

Introductions

Questionnaires about the Inventory evaluation for Alnoor Spare parts

Dear of respondent:

I am one of the senior candidate students for obtaining Bachelor Degree of business

Administration (BBA) in ADMAS University 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 account and evaluate 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.

All the questions are answered with a simple ‘yes’ or ‘no’.

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

questionnaires”


51

RESEARCHER NAME: YOUSUF MOHAMED ABDALLA

NAME OF RESPONDENT: _________________________

DISRICK___________________________DATE _____/______/________

BUSINESS NAME: _____________________

Q1. Name of the respondent…………………….

Q2. Gender of the respondent?

a. Male

b. Female

Q3. Educational level of the respondent?

a. Primary level

b. Secondary level

c. University level

d. Other, specify…….

Q4. What type of business do you have?

a. Sole proprietorship

b. Partnership

c. Corporation

Q5. What is nature of your business?

a. Merchandise

b. Manufacture

c. Service

Q6. What is the type of your inventory?


52

a. Spare parts

b. Electronics

c. Consumption products

d. other, specify

Q7. When you established your business?

Q8. Who support you this business?

a. Family

b. None

c. Other, specify

Q9. How many employees working in your business…………

Q10. Are they professionals of accounting?

Q11- Do you conduct accounting your organization?

a. Yes

b. No

Q12- Do you think that your business have well planned accounting system which

each prevent to the fraud and error rather than correcting?

a. Yes

b. No

Q13- Do you have inventory control system?

a. Yes

b. No

Q14- If yes is your inventory control system manual system or computerized system?

a. Computerized system

b. Manual system

Q15- Who manages the financial information of your company’s inventory?

a. Accounting personnel


53

b. Store keeper

c. Authorized person

d. Other please specify

Q16- Does your organization set up clear objective to guide inventory transaction and

corrective?

a. Yes

b. No

Q17- Do you prepare receiving note when goods are received?

a) Yes

b) No

Q18- What are most probably errors happen in your inventory system?

a. Omission error

b. Transportation error

c. Error and principle

d. Incorrect entry

Q19- Which inventory status recording system do you adopt?

a. Perpetual

b. Periodic

c. Both of them

d. Or none of the above

Q20- Does the perpetual system has more accurate than the periodic?

a. Yes

b. No

c. I don’t know

Q21 -Does the accounting for inventory need strong internal control?

a. Yes

b. No


54

c. Not sure

Q22- Does your business have annual financial statement? If yes which method used

a. FIFO method

b. LIFO method

c. Average method

d. Other method

Q23- Does the FIFO have good inventory reverse?

a. Yes

b. No

Q24- Does the advantage of LIFO can be including the tax benefits, and improving

cash flow?

a. Yes

b. No

c. Not sure

Q25- Did your business use monitor and evaluation process by the management?

a. No

b. Yes

Q26-Does your audit procedures included physical inventory observations and

shipping and receiving cutoff tests?

a. Yes

b. No


55


56

Appendix B

References

1- FESS. WARREN ACCOUNTING PRINCIPLES 16th Edition

2- C MICELLE TARES and SOUNTARAS (CPIM and PMP)

3- COHEN and LEE 1990 www.scielo.br/pdf/prod/v21n4/en_AOP_T6_0001_0308.pdf

4- ZHENG and AGRAWAL 1997

www.scielo.br/pdf/prod/v21n4/en_AOP_T6_0001_0308.pdf

5- MUKSADT 2001 www.scielo.br/pdf/prod/v21n4/en_AOP_T6_0001_0308.pdf

6- KUMAR 2005 www.scielo.br/pdf/prod/v21n4/en_AOP_T6_0001_0308.pdf

7- REGO 2006 www.scielo.br/pdf/prod/v21n4/en_AOP_T6_0001_0308.pdf

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