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Use of Accounting for Inventory In Somaliland Business Firms               UNIVERSITY OF HARGEISA         FACULTY OF BUSNI...
Use of Accounting for Inventory In Somaliland Business Firms      “BACHELOR DEGREE OF BUSINESS ADMINISTRATION”            ...
Use of Accounting for Inventory In Somaliland Business Firms                              Prepared by:                    ...
Use of Accounting for Inventory In Somaliland Business FirmsStudent Signature: ___________________ Date: _________________...
Use of Accounting for Inventory In Somaliland Business Firms                    Application to conduct Research PaperPART ...
Use of Accounting for Inventory In Somaliland Business Firms                                Dedicated toMy loved parents;M...
Use of Accounting for Inventory In Somaliland Business Firms                           ACKNOWLEDGEMENTSFirst, thanks to “A...
Use of Accounting for Inventory In Somaliland Business FirmsThe text and its sumplent have been enriched by the comments o...
Use of Accounting for Inventory In Somaliland Business Firmsout the entire inventory fraudulently and material misrepresen...
Use of Accounting for Inventory In Somaliland Business Firms 1.3   Thesis statements………………………………………..15 1.4   Objectives o...
Use of Accounting for Inventory In Somaliland Business Firms  3.6 sampling methods…………………………………….32  3.7 limitations………………...
Use of Accounting for Inventory In Somaliland Business FirmsTab & Fig 4.10…………………………………………………….44Tab & Fig 4.11……………………………...
Use of Accounting for Inventory In Somaliland Business FirmsCHAPTER ONE1.0 An INTRODUCTION1.1 INTRODUCTIONThis book will i...
Use of Accounting for Inventory In Somaliland Business FirmsThere are three principal types of business organizations that...
Use of Accounting for Inventory In Somaliland Business FirmsCompanies also take an inventory every quarter in order to gen...
Use of Accounting for Inventory In Somaliland Business Firms      How small business use for inventory accounting system ...
Use of Accounting for Inventory In Somaliland Business Firmsapplying Somaliland business firms. Because there is a lot ofm...
Use of Accounting for Inventory In Somaliland Business FirmsProject background, which highlights the basic background of a...
Use of Accounting for Inventory In Somaliland Business FirmsChapter two2.0 LITERATURE REVIEWAn overview of inventory accou...
Use of Accounting for Inventory In Somaliland Business Firmsguidelines for measuring and presenting financial information ...
Use of Accounting for Inventory In Somaliland Business FirmsThe purpose of accounting is to provide a means of recording, ...
Use of Accounting for Inventory In Somaliland Business Firmsaddition, shortages and any other discrepancies may be discove...
Use of Accounting for Inventory In Somaliland Business FirmsThis is because the ending inventory was purchased most recent...
Use of Accounting for Inventory In Somaliland Business FirmsThe result would be substantial additional income tax, even if...
Use of Accounting for Inventory In Somaliland Business Firmsonly businesses that maintain inventory. Manufacturers also ha...
Use of Accounting for Inventory In Somaliland Business Firmsinventory system should make sure that they do the following o...
Use of Accounting for Inventory In Somaliland Business FirmsTo summarize, inventory management systems should be regularly...
Use of Accounting for Inventory In Somaliland Business FirmsThe adjustment method is recommended for organizations that tr...
Use of Accounting for Inventory In Somaliland Business FirmsIn this valuation method, the calculation of cost of goods is ...
Use of Accounting for Inventory In Somaliland Business FirmsInventory control is concerned with minimizing the total cost ...
Use of Accounting for Inventory In Somaliland Business FirmsThe concept of the EOQ is that there is a tradeoff between the...
Use of Accounting for Inventory In Somaliland Business Firms    Primary    secondaryThe primary data is the results of t...
Use of Accounting for Inventory In Somaliland Business FirmsAs usual, it is realized that the Somaliland business firms us...
Use of Accounting for Inventory In Somaliland Business FirmsTo find out Periodic reviews of the inventory data to detect s...
Use of Accounting for Inventory In Somaliland Business Firmsfindings in a form of figures and percentage that identify the...
Use of Accounting for Inventory In Somaliland Business Firms                                           percentage         ...
Use of Accounting for Inventory In Somaliland Business Firms                                   Percentage                 ...
Use of Accounting for Inventory In Somaliland Business FirmsNow of the above               4                       16%Tota...
Use of Accounting for Inventory In Somaliland Business Firms Total                   25                  100%             ...
Use of Accounting for Inventory In Somaliland Business Firms                                     percentage               ...
Use of Accounting for Inventory In Somaliland Business Firms                                     percentage               ...
Use of Accounting for Inventory In Somaliland Business Firms                                    Percentage                ...
Use of Accounting for Inventory In Somaliland Business Firms                                    percentga                 ...
Use of Accounting for Inventory In Somaliland Business FirmsTotal          25                       100%                  ...
Use of Accounting for Inventory In Somaliland Business FirmsNo            4                             16%Total         2...
Use of Accounting for Inventory In Somaliland Business Firms Total            25                               100%Figure ...
Use of Accounting for Inventory In Somaliland Business FirmsNo              6                                24%Total     ...
Use of Accounting for Inventory In Somaliland Business FirmsYes                    12                          48%Total   ...
Use of Accounting for Inventory In Somaliland Business FirmsFigure 4.14: does the internal control practiced in maintainin...
Use of Accounting for Inventory In Somaliland Business FirmsNot sure      6                               24%Total        ...
Use of Accounting for Inventory In Somaliland Business FirmsYes              9                           36%Not           ...
Use of Accounting for Inventory In Somaliland Business FirmsYes          9                                36%Not sure     ...
Use of Accounting for Inventory In Somaliland Business FirmsTable 4.18:Choice        No of respondents              Percen...
Use of Accounting for Inventory In Somaliland Business Firms   No            12                                   48%   N/...
Use of Accounting for Inventory In Somaliland Business Firms Choice   No of respondents               PercentageYes       ...
Use of Accounting for Inventory In Somaliland Business Firms Yes            18                          72% No            ...
Use of Accounting for Inventory In Somaliland Business Firms Choice         No respondents               PercentageYes    ...
Use of Accounting for Inventory In Somaliland Business FirmsTotal         25                                 100%         ...
Mohamed book thesis
Mohamed book thesis
Mohamed book thesis
Mohamed book thesis
Mohamed book thesis
Mohamed book thesis
Mohamed book thesis
Mohamed book thesis
Mohamed book thesis
Mohamed book thesis
Mohamed book thesis
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  1. 1. Use of Accounting for Inventory In Somaliland Business Firms UNIVERSITY OF HARGEISA FACULTY OF BUSNIESS ADMINISTRATION HARGEISA, SOMALILAND“The use of accounting for inventory in Somaliland businessfirms” RESEARCH PAPER Page 1 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  2. 2. Use of Accounting for Inventory In Somaliland Business Firms “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 firmsChapter: one Chapter: twoIntroduction Literature ReviewChapter: three Chapter: fourResearch Analysis andMethodology discussionsChapter: five Chapter: sixConclusions and Appendix:Recommendations A&B Page 2 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  3. 3. Use of Accounting for Inventory In Somaliland Business Firms 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 FORMProject Paper Title: Use of Accounting for Inventory in Somaliland businessfirms.DirectorUNIVERSITY OF HARGEISA (UOH)Faculty of Business Administrations (Accounting stream)Dear Sir,Attached are the following documents for evaluation and approval:Chapter 1: IntroductionChapter 2: Literature ReviewChapter 3: Research MethodologyChapter 4: Data AnalysisChapter 5: Conclusion, Recommendation & Future workReferencesAppendixI have thoroughly checked my work and I am confident that this is free fromgrammatical errors, weaknesses in sentence construction, spelling mistakes,referencing mistakes and others, I have checked guidelines for writing projectpaper and I am satisfied that the project paper proposal satisfied itsrequirements.Thank you, Page 3 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  4. 4. Use of Accounting for Inventory In Somaliland Business FirmsStudent Signature: ___________________ Date: __________________I have read the student research proposal and I am satisfied that it is in linewith the UOH BBA program guidelines for writing project proposal. It is alsofree from major grammatical errors, sentence construction weaknesses,citation and others.Supervisors Signature: _________________ Date: __________________ DECLARATIONName: Mohamed Mohamoud MouseStudents Number: BBA644I hereby declare that this project paper is the result of my own study based onmy interest to enter into this line of business, aside from parental guidanceand my friends support to enable me to establish this study. For the latestinternet 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 otherdegree.Signature: __________________ Date:_________________Supervisor Name: Mohamoud Yusuf JamaSignature: __________________ Date:_________________ Page 4 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  5. 5. Use of Accounting for Inventory In Somaliland Business Firms Application to conduct Research PaperPART A: STUDENT PARTICULAR1. Student’s Name: Mohamed Mohamoud MouseStudents Number: BBA644PART B: PARTICULAR ABOUT THE PROJECT1. Title of the project: Use of Accounting for Inventory in Somaliland businessfirms2. Research Objective: The main objective of this research is to find the mostproper accounting method on performing the Inventory by comparing differentmethods of inventory accounting systems3. Proposed Research MethodResearch Design: Inquiry and InternetPART C: FACULTYS INPUTS1. Topic chosen: Accepted / Not Accepted2. Suggested supervisor for the student: Page 5 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  6. 6. Use of Accounting for Inventory In Somaliland Business Firms Dedicated toMy loved parents;Mrs. Halima and Mr. MohamoudMay ALLAH rest their souls in the heaven and be merciful to them as they wereto me in my childhood (Amen) and honorable professor who had a great talentteaching method, and brought beautiful studies. Page 6 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  7. 7. Use of Accounting for Inventory In Somaliland Business Firms ACKNOWLEDGEMENTSFirst, thanks to “ALLAH” who gave me the power of doing this program andimplementing, who also allowed me to reach my spiral goals.First of all to complete this research required the assistance, guidance andsupport of a number of people to whom I would like to express my deeplyappreciation and acknowledge them which makes this project finally seemuncomplicated.I would like to thank my supervisor Pro. Mohamoud Yusuf Jama for hisguidance throughout the preparation of this study. Realizing this project wouldnot have been achievable without his support and the encouragement of himthis masterpiece would never have been completed.For his special guidance and un-accountable advice for doing the research andextremely diligent in reviewing text chapters, exercise, problem, and theirsolutions that paves the way in implementing and preparing this researchpaperI am also would like to thanks many people who guided and support methroughout the developing of the text and express my sincere appropriationtheir expert attention that effectively guided this book through productionprocess. Page 7 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  8. 8. Use of Accounting for Inventory In Somaliland Business FirmsThe text and its sumplent have been enriched by the comments of manyreviewers’. I am indebted to each of them, particular to the following educatorswho assisted me. I also, would like to thanks for Ilham Dayib Ali who support and examine allmy questionnaires, examples, and exercise to ensure that I am technicallyaccurate for my presentation material literally.I am also, thanks to dozen of my colleagues for adopting their encouragementand cooperative support. AbstractThe objectives of the paper is to investigate how business firm’s use foraccounting system to their inventory in the business operation in Somaliland.Research through data collection has been made in different location thatsurveying 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 aredoing their inventory quarterly which needs a lot of efforts and very preciseprocedure. Therefore it is very necessary to accept an efficient inventory process to givethe right status.The researcher has chosen known organization to examine which method isefficient to fulfill this type of operation.Electronic and computer shops, supermarkets and other trade channels is thecompany that applied the accounting inventory.This project is examining most known accounting methods. And then select themost proper accounting method on performing the inventory.The researcher has chosen known organization to find out the inventoryaccounting methodology that is right to the daily sale transactions by keeping Page 8 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  9. 9. Use of Accounting for Inventory In Somaliland Business Firmsout the entire inventory fraudulently and material misrepresentations that canlead a fact failure.We recognized that the organization’s Material managements is the anotherdramatic way of finalized the research paper on the material competencies, andthe 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……………………………………………………04Application to conduct research paper………………………….05 Dedication page………………………………………………….…06 Acknowledgement………………………………………………….07Abstract……………………………………………………………….8 Table of contents………………………………………………….09 List of figures……………………………………………………..10 List of abbreviations…………………………………………….121.0 INTRODUCTIOSN: 1.1 Introduction…………………………………………….…13 1.2 Background……………………………………………….14 Page 9 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  10. 10. Use of Accounting for Inventory In Somaliland Business Firms 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………………………………….182.0 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……………………….….303.0 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 Page 10 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  11. 11. Use of Accounting for Inventory In Somaliland Business Firms 3.6 sampling methods…………………………………….32 3.7 limitations……………………………………………....334.0 ANALYSIS AND DISCUSSIONs: 4.1 introduction…………………………………………....345.0 CONCLUSION AND RECMMENDATIONS: 5.1 conclusions………………………………………………60 5.2 recommendations………………………………………626.0 APPENDIX: 6.1 Appendix A Questionnaires……………………………………………..64 6.2 Appendix BBibliography…………………………………………………….68LIST OF TABLES & FIGURES PAGETab & Fig 4.1………………………………………………………35Tab & Fig 4.2………………………………………………………36Tab & Fig 4.3………………………………………………………37Tab & Fig 4.4………………………………………………………38Tab & Fig 4.5………………………………………………………39Tab & Fig 4.6……………………………………………………….40Tab & Fig 4.7……………………………………………………….41Tab & Fig 4.8………………………………………………………42Tab &Fig 4.9………………………………………………………43 Page 11 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  12. 12. Use of Accounting for Inventory In Somaliland Business FirmsTab & Fig 4.10…………………………………………………….44Tab & Fig 4.11…………………………………………………....45Tab & Fig 4.12……………………………………………………46Tab & Fig 4.13……………………………………………………47Tab & Fig 4.14……………………………………………………48Tab & Fig 4.15……………………………………………………49Tab & Fig 4.16……………………………………………………50Tab & Fig 4.17……………………………………………………51Tab & Fig 4.18……………………………………………………52Tab & Fig 4.19……………………………………………………53Tab & Fig 4.20………………………………………………………54Tab & Fig 4.21………………………………………………………55Tab & Fig 4.22………………………………………………………56Tab & Fig 4.23……………………………………………………..57Tab & Fig 4.24…………………………………………………….58Tab & Fig 4.25…………………………………………………….59LIST OF ABBREVIATIONS:  FIFO: first in first out  LIFO: last in first out  JIT: just in time  EOQ: economic order quantity Page 12 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  13. 13. Use of Accounting for Inventory In Somaliland Business FirmsCHAPTER ONE1.0 An INTRODUCTION1.1 INTRODUCTIONThis book will introduce the use of accounting for inventory in Somalilandbusiness and the primary issue in accounting for inventories is the amount ofcost 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 SomalilandAll these factories are main core of the book that has been to understand theinventories accounting system in Somaliland business firms that can exist inall time.Also, shows you that the inventories are represent the major investment in allkind of business large once as well as small because many companies failedtheir inventory tied up to much money. Page 13 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  14. 14. Use of Accounting for Inventory In Somaliland Business FirmsThere are three principal types of business organizations that have developedas ways of owning and operating business enterprise.In general, business entity or organizations are:• Sole proprietorship• Partnerships• Corporations1.2 BACKGROUNDAccounting and managing of inventory, which typically represents 45% to 90%of all expenses for business, is needed to ensure that the business has theright goods on hand to avoid stock-outs, to prevent shrinkage (spoilage/theft),and to provide proper accounting. Many businesses have too much of theirlimited resource, capital, tied up in their major asset, inventory. Worse, theymay have their capital tied up in the wrong kind of inventory. Inventory may beold, worn out, shopworn, obsolete, or the wrong sizes or colors, or there may bean imbalance among different product lines that reduces the customer appealof the total operation.As every business use on inventory accounting system it is really takes aserious corrective and careful management accounting procedures to reportaccurately otherwise a misappropriations and material misrepresentation canoccur. So by using accounting system it necessary all the inventory that abusiness has to go through accounting procedures and special policies.The word inventory can refer to both the total amount of goods and the act ofcounting them. Many companies take an inventory of their supplies on aregular basis in order to avoid running out of popular items. Others take aninventory to insure the number of items ordered matches the actual number ofitems counted physically. Shortages or overages after an inventory can indicatea problem with theft (called shrinkage in retail circles) or inaccurateaccounting practices. Page 14 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  15. 15. Use of Accounting for Inventory In Somaliland Business FirmsCompanies also take an inventory every quarter in order to generate numbersfor financial reports and tax records. Ideally, most companies want to have justenough inventories to meet current orders. Having too many productslanguishing in a warehouse can make a company look less appealing toinvestors and potential customers. Quite often a company will offer significantdiscounts if the inventory numbers are high and sales are low. This iscommonly seen in new car dealerships as the manufacturers release the nextyears models before the current vehicles on the lot have been sold. Furniturecompanies may also offer inventory reduction sales in order to clear out theirshowrooms for newer merchandise.The conflicting objectives of cost control and customer service often pit a firm’sfinancial and operating managers against its sales and marketing system. Byhelping the organization to make better decisions, the accountants can helpthe business enterprise to change in a very positive way that delivers increasedvalue for the business operating activity.1.3 THESIS STATEMENTFor accounting inventories in business firms needs a much accurateaccounting methods and transaction records, which tied up the inventoryaccounting purpose and proper procedures that leads further satisfactory ofbusiness investors and other regulatory body.Each country has its own rules about accounting for inventory that fit withtheir financial-reporting rules. Inventory Turn is a financial accounting tool forevaluating inventory and it is not necessarily a management tool. Anorganizations inventory can appear a mixed blessing, since it counts as anasset on the balance sheet, but it also ties up money that could serve for otherpurposes and requires additional expense for its protection. Physical countsand quantity records shall be reconciled and adjusting entries prepared tobring physical and financial records into agreement. If products are toohazardous or inaccessible for a physical count, alternative means (such asperpetual records and measuring techniques) shall be used to establishquantities.Use of accounting for inventory is a crucial in keeping track of smooth goingaccountability of firm’s inventory management and their accounting proceduresand inventory policies to the stewardships.So, statement of the problem inaugurates how accounting for inventory is soimportant.To achieve project mandates it has to make sure; Page 15 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  16. 16. Use of Accounting for Inventory In Somaliland Business Firms  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 system1.4 THE OBJECTIVE OF RESEARCH STUDYIt is very important that the business enterprise use accounting proceduresand policies to their inventory management system which can make moreaccurate measurement of inventory on hand by the business firms throughperiod of time.Does this make effective and reliable inventory accounting system to smallbusiness so as to find easy inventory management and accounting systemthroughout the business enterprise? We do this so.In this project, we consider how effectively and efficiently small businessenterprise use accounting system for their inventory throughout accountingperiod 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 analyzed1.5 Significance of the researchThe purpose of the study is to highlight or examined overall importance ofusing inventories accounting in the Somaliland business firms throughout theoperation period.Opening a wide range of operation activities among the business firms andtheir accounting procedures, the physical inventory counts should beperformed or supervised by business firms other than the person responsiblefor the inventory or the person maintaining the inventory records to helpensure the integrity and objectivity of the counts reported.These significant of the project paper shows how it important to see how thefirms are uses the inventory accounting systems and their application and in Page 16 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  17. 17. Use of Accounting for Inventory In Somaliland Business Firmsapplying Somaliland business firms. Because there is a lot ofmisunderstanding among the business operations and their relevant actors, it’salso the customers may believe that there are a lot of weakness in the businessaccounting. Specially, in the inventory accounting systems in Somalilandbusiness firms, the functions related on business operation and its systems isserved to the community on the basis on trade purpose.The importance of this project comes mainly from the importance of theinventory roll in the life of any business as a vital and essential tool inmanagement and accounting. Most small businesses underestimate theimportance of their inventory or of inventory management process. They do notrealize that many of the headaches are caused by a lack of control andknowledge of their inventory. This study plays vital roles to ensure and clarifyin inventory accounting systems of Somaliland business firms/organizationwhether it is strong or weak and all entire service about the accountinginventory systems in business forms. Also, this project paper is important forthe researcher to fulfill the partial requirement for the award of BA inaccounting departments by the University Of Hargeisa (UOH).1.6 Scope of the studyThe study has been confined for the use of accounting for inventory inSomaliland business organization. When the sampling data will be collected,especially the study focused on the accounting inventory reporting systems inSomaliland business firms.The business firms try to engage the contemporary accounting systems forfurther detailed information among the business organizations on the basis ofenvironmental force and microfinance situations. This focused on the businessdevelopments, so it needs for more crackdowns to find a well standardized andsmoothly developed operation to the business organizations.1.7 The structure of the paperThis project consists of six chapters; each one has its own indication anddetailed explanations, there is additional hypothesis which shows the materialcollected and integrated idea about the project paper.The first chapter concentrates all the basics of the project by telling somebasic information that related to the project paper incorporated with overviewof the project paper, core of the paper. Introduction of the project paper; which tells how the project has beendeveloped and arranged on the basis of inventory accounting systems and itsusages. Page 17 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  18. 18. Use of Accounting for Inventory In Somaliland Business FirmsProject background, which highlights the basic background of accounting andmanaging of inventory of the business firms, fundamental principle ofaccounting, and challenge.Thesis statements; which tells how thesis is organized and directed under thestudy.Objective of the research study, including identifications and explanations.Significance: this shows how inventory accounting is important to businessfirms.Scope of the study: how the firms are confined the method of accountingstandardized or contemporary systems are used, how large does the firmsoperated in inventory accounting purpose.Second chapter focused on “Literature review”; including an overview, history,plan and schedule, types of inventory, steps, pricing methods, inventoryaccounting categories, techniques, reasons for keeping inventory,merchandising enterprises, and economic order quantity model. Third chapter discussed the research methodology which is also the core theproject and incorporate with the “research designing, method of data collectionwhich are two “primary and secondary”, in-depth interview and data collectionsource, sampling methods, and analyzing techniques.Fourth chapter is determined for analyzing and findings that including theinventory policy and store function, monitor and evaluate the managementprocess, data presentation and interpretation, data analyzing and hypothesistesting, and findings, and accounts that frequently misstated.Fifth chapter addresses the conclusion and recommendations and look-overthe serious coherence of inventory management and reports, recommendationhas been applied on the basis of research.Sixth chapter Appendixes; appendix A information related to use ofaccounting for inventory in Somaliland business firms, and appendix B whichis determines the summary of the findings.Reference;Reference has been selected among the books including accounting books,websites and others such as internets. Page 18 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  19. 19. Use of Accounting for Inventory In Somaliland Business FirmsChapter two2.0 LITERATURE REVIEWAn overview of inventory accounting2.1 What is inventory accounting?Inventory accounting may sound like a huge undertaking but in reality, it isquite straightforward and easy to understand. You start with the inventory youhave on hand. No matter when you sell product, the value of your inventorywill remain constant based on accepted and rational methods of inventoryaccounting. Those methods include weighted average, first in/first out, and lastin/first out. Christopher R. Marburg, CPA, MBA 1So, let us define the two terms individually.2.2- Definition of AccountingAccounting is the language of business. It is a standard set of rules formeasuring a firm’s financial performance. Assessing a company’s financialperformance is important for many groups, including:➢The business officers (managers and employees)➢ Investors (current and potential shareholders)➢ Lenders (banks)➢ General publicIn another word, accounting is a standard language of measuring financialperformance by a variety of organizations. Accounting follows GAAP, which are1 Christopher R. Marburg, CPA, MBA Page 19 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  20. 20. Use of Accounting for Inventory In Somaliland Business Firmsguidelines 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 varietyof interest groups. IFRS are international accounting standards and aredeveloped by IASB.Accounting is a system in which identify, analysis, measure, record,summarize and communicate relevant economic information to other fordecision making Mr. Wilkinson 2Accounting is the system a company uses to measure its financialperformance by noting and classifying all the transactions like sales,purchases, assets, and liabilities in a manner that adheres to certain acceptedstandard formats. It helps to evaluate a Company’s past performance, presentcondition, and future prospects. “Accounting Basics”Inventory is asset items held for sale in the ordinary course of business orgoods that will be used or consumed in the production of good to be sold. Thedescription and measurement of inventory requires a careful attention.Inventory accounting may sound like a huge undertaking but in reality, it isquite straightforward and easy to understand. You start with the inventory youhave on hand. No matter when you sell product, the value of your inventorywill remain constant based on accepted and rational methods of inventoryaccounting. Those methods include weighted average, first in/first out, and lastin/first out.Inventory again can be defined as goods being held for resale. Inmanufacturing, inventory can be raw materials, work-in-process, and finishedgoods. Let’s be clear, working with inventory can be complex depending on thetype and size of business. However, the basic concepts of inventory are nothard to grasp and you really should have some familiarity with them.The first step is to conceptualize the “inventory process”. In other words, thinkabout what is going on. For example, suppose your company is in business tosell a product. The product is acquired either by manufacturing it orpurchasing it as a finished product. During an accounting period, such as onemonth, all, or a portion of the inventory is sold. Hopefully, the cost of theproduct did not exceed its sale price so that a profit was realized. With themoney from the profit, more inventories can be purchased to sell, coveroverhead expenses, and pay yourself.2 Mr. Wilkinson 2 Page 20 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  21. 21. Use of Accounting for Inventory In Somaliland Business FirmsThe purpose of accounting is to provide a means of recording, reporting,summarizing, and interpreting economic data. In order to do this, anaccounting system must be designed. A system design serves the needs ofusers of accounting information. Once a system has been designed, reports canbe issued and decisions based upon these reports are made for variousdepartments. Since accounting is used by everyone in one form or another, agood understanding of accounting principles is beneficial to all procedures andspecial policies.Economy: maintain the value of items in stock at the lowest practical levels inorder both to economize the use of working capital and to minimize the costs ofstorage.Identification: systematically defining and describing all items in stock.Receiving: accepting, from all sources, all items which are used in thegovernment unit.Inspection: examining incoming items for quality and quantity2.3 TYPES OF INVE3TORY ACCOUNTING SYSTEM1 Periodic inventory systemPeriodic inventory accounting involves an increase (debit) to Purchases whenacquisitions are made. Remember, “Purchases” is a general ledger (GL) accountfound in the cost of sales section of the Profit & Loss Statement. At the close ofthe period, a physical count of the remaining inventory is required to determinethe amount unsold. The quantity is then priced and recorded in order todetermine the cost of goods sold.Under periodic inventory system, the following journal entry is recorded at theend of accounting period.2 Perpetual inv4entory systemAs acquisitions of new inventory are made, they are charged (debited) to theInventory account. Each time a sale is made a corresponding entry is maderemoving (crediting) the item from Inventory and charging (debiting) COGS (orPurchases). The result is that the Inventory account maintains a currentbalance, and the COGS account reflects the cost of goods sold to date. One ofthe benefits of using a perpetual inventory system is that you can run interimfinancial statements without the necessity of a physical inventory count. In3 Financial Accounting II,4 Financial Accounting II Page 21 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  22. 22. Use of Accounting for Inventory In Somaliland Business Firmsaddition, shortages and any other discrepancies may be discovered andcorrective action taken.One way to remember the difference between the two methods is that theperiodic system discloses what is on hand, whereas, the perpetual systemdiscloses what should be on hand.Perpetual inventory system updates inventory accounts after each purchase orsale. Inventory subsidiary ledger is updated after each transaction. Inventoryquantities are updated continuously.Under perpetual inventory system, changes in merchandise inventory accountare 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 beproduced just in time for delivery, and raw materials should be delivered justin time for production.When this occurs, materials or goods never sit idle, which means that aminimum amount of money is tied up in raw materials, semi finished goods,and finished goods…. The just-in-time approach calls for slashing productionand purchase lot sizes and also buffer stocks—but incrementally, a little at atime, month after month, year after year. The result is sustained productivity and quality improvement with greaterflexibility and delivery responsiveness." This production concept, whichoriginated in Japan and became immensely popular in American industries inthe early and mid-1990s, continues to be hailed by proponents as a viablealternative for businesses looking for a competitive edge.2.5 Conventional Inventory Pricing Methods 1- FIFOFirst-in, first-out (Last-in, Still-here) implies that the items that werepurchased first will be sold first. Cost of goods sold is calculated by using theoldest prices and ending inventory is calculated based on the most recentprices. Using this method tends to result in a fair statement of inventory on theBalance Sheet.5 Khalid Al Kaabi, Inventory Accounting6 Gershon and Weiss Page 22 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  23. 23. Use of Accounting for Inventory In Somaliland Business FirmsThis is because the ending inventory was purchased most recently. Further,when inventory turns over regularly, the prices used for the cost of goods soldare somewhat current resulting in fair presentation of the cost of sales amount. 2- LIFOLast-in, first-out (First-in, Still-here) implies that the items most recentlyacquired will be the first sold. Cost of goods sold is calculated by using recentprices, while ending inventory is calculated using the oldest prices. Thismethod tends to emphasize the matching concept accounting principle bymatching 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 toinventory is the first item sold. Thus, current sales are reduced by the cost ofthe most recently acquired inventory to determine the net income from thesale. (Under the FIFO method, the business assumes that the first item addedto inventory is the first item sold.)When inventory costs are rising, as in an inflationary period, the LIFO methodresults in lower taxable income since the cost of goods sold reflects the morerecent, higher inventory values. Conversely, if inventory costs decline during ayear, LIFO will increase taxable income as current lower-cost inventory valuesare used to determine the business’ cost of goods sold.Under the Internal Revenue Code, a business may only use the LIFO method ifit also applies it for financial-accounting purposes.For many retail businesses, LIFO is a more accurate method for measuringfinancial performance and calculating the associated income tax. LIFO takesinto account the greater costs of replacing inventory, thereby giving a moreconservative measure of both the financial condition of the business and theeconomic income subject to tax. Absent LIFO, phantom profits would be taxed.In addition, LIFO improves a company’s cash flow, which allows the companyto use its retained capital more efficiently to finance ongoing inventoryreplenishment.LIFO repeal would mean a forced change in fundamental tax accounting forany business that has historically relied on LIFO for its tax reporting, includingcountless retailers. As a result, such businesses would have to recapture theirLIFO reserves.7 Intermediate Accounting Books Page 23 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  24. 24. Use of Accounting for Inventory In Somaliland Business FirmsThe result would be substantial additional income tax, even if spread overseveral years, especially for businesses that have relied on LIFO for many yearsor even decades. Since companies would have no economic income from suchan accounting adjustment, they would effectively be taxed on non-existent cashflow.2.7 Major advantage of LIFOMatching, the more recent cost are matched against current revenues toprovides a better measures of current earnings, and the inventory profit occurwhen the inventory cost matches against sale and inventory replacements.A tax benefit, which is the major reason why LIFO has, became popular. Aslong as the price level increase inventory quantities do not decrease, a deferralincome tax occurs.Improved a cash flow, which is related to the tax benefits, because the taxmost be paid in cash as consequences.8Future earning benefits, with LIFO the firm’s future reports earning will notbe affected substantially by the future price decline.2.8 Major disadvantagesReducing earnings, many corporate managers view the lower profit ofreporting under LIFO method in inflationary time as distinct disadvantagesthat reports the profits rather than lower tax.Inventory understated, the LIFO may have inventory distorting effects oncompany’s balance sheet.Physical flow, LIFO does not approximate the physical flow of the items exceptin peculiar situations.Involuntary liquidations, the distortion in reporting the income for givenperiod may results as well as consequences that are detrimental from anincome tax point of view.Weighted AverageThis method involves assigning the same unit price to items in Inventory and toitems in COGS. The price assigned is the average price for the period calculatedby taking the total cost of beginning inventory plus the cost of all unitspurchased during the period and dividing the total by the number of unitsinvolved.This consists of either merchandise or manufacturer which has always goodsavailable for resale to customers or further processing. However, retailers are not the8 Intermediate Accounting Books Page 24 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  25. 25. Use of Accounting for Inventory In Somaliland Business Firmsonly businesses that maintain inventory. Manufacturers also have inventories relatedto the goods they produce. Goods completed and awaiting sale are termed “finishedgoods” inventory.2.9 Setting an Inventory Strategy9No single inventory strategy is equally effective for all businesses. Indeed,there are many different factors that can impact the usefulness of a giveninventory strategy, including positioning of inventory, rationalization,segmentation, and continuous improvement efforts. Moreover, smallbusinesses in particular often face financial and logistical limitations whenerecting their inventory systems. And of course, different industries havedifferent inventory needs. Consumer goods producers, for instance, need tohave well-balanced inventories at the point of sale, while producers ofindustrial and commercial products typically do not have clients that requirethe same degree of delivery lead time.When a company is faced with a need to establish or reevaluate its inventorycontrol systems, business experts often counsel their corporate clients toengage in a practice commonly known as "inventory segmenting" or "inventorypartitioning." This practice is in essence a breakdown and review of totalinventory by classifications, inventory stages (raw materials, intermediateinventories, and finished products), sales and operations groupings, and excessinventories. Proponents of this method of study say that such segmentationbreak the companys total inventory into much more manageable parts foranalysis.2.10 Key ConsiderationsInventory management is a key factor in the successful operation of fledglingbusinesses and long-time industry veterans alike. For both kinds of companies,determining whether their inventory systems are successful or not ispredicated on one fundamental question: Does the inventory strategy insurethat the company has adequate stock for production and goods shipmentswhile at the same time minimizing inventory costs? If the answer is yes, thenthe company in question is far more likely to be a successful one. Conversely, ifthe answer is no, then the business is operating under twin burdens that canbe of considerable consequence to its ability to survive, let alone flourish.According to business experts, perhaps no factor is more important in ensuringsuccessful inventory management than regular analysis of policies, practices,and results. Companies that hope to establish or maintain an effective9 Khalid Al Kaabi, Inventory Accounting. Page 25 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  26. 26. Use of Accounting for Inventory In Somaliland Business Firmsinventory system should make sure that they do the following on a regularbasis: 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/warehousecapacities.4- Undertake periodic reviews to ensure that inventory is held at the level thatbest meets customer needs; this applies to all levels of business, including rawmaterials, intermediate assembly, and finished products.5- Regularly canvas key employees for information that can inform futureinventory control plans.6- Determine what level of service (lead time, etc.) is necessary to meet thedemands of customers.7- Establish and regularly review a system for effectively identifying andmanaging excess or obsolete inventory, and determining why these goodsreached such status.8- Devise a workable system wherein "safety" inventory stocks can be reachedand distributed on a timely basis when the company sees an unexpected rise inproduct demand.9- Calculate the impact of seasonal inventory fluctuations and incorporatethem into inventory management strategies.10- Review the companys forecasting mechanisms and the volatility of themarketplaces, both of which can (and do) have a big impact on inventorydecisions.11- Institute "continuous improvement" philosophy in inventory management.12- Make inventory management decisions that reflect a recognition thatinventory is deeply interrelated with many other areas of business operation. Page 26 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  27. 27. Use of Accounting for Inventory In Somaliland Business FirmsTo summarize, inventory management systems should be regularly reviewedfrom top to bottom as an essential part of the annual strategic and businessplanning processes.2.11 Inventory Accounting MethodsThere are two methods used to account for inventory. The accrual method isrecommended for organizations that track their inventory balances. Theseorganizations know their ending inventory balance, but can be unsure of theircost of goods sold (COGS). The second method, the adjustment method, isrecommended for organizations that track COGS. In the event an organizationhas a system that can track both amounts (ending inventory and COGS), eithermethod may be used. In the case of organizations that do not have an internalsystem 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 themethod used:Beginning Inventory + Inventory purchases during period(Less returns)= Costof goods available for sale-Ending inventory= Cost of goods sold.The accrual method is recommended for organizations that track theirinventory balances. This method is performed by the following step:-1- All inventory (less returns) acquired during the period is recorded bydebiting purchases the offsetting entry is to accounts payable.2- At the end of each month, update the FIS balances of inventory based uponthe balances maintained in internal records3- It is required that a physical inventory count be done at least once per fiscalyear. After the inventory on hand is counted, adjust the internal records tomatch the physical count. Once the internal records are adjusted, update thebalances in the FIS. If, based on the physical count, the organization hasexperienced any shrinkage in the inventory balances.4- If, when reviewing the Monthly Operating Detail, extra purchases areidentified that were not posted directly to COGS/AP, they would need to beadded 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. Page 27 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  28. 28. Use of Accounting for Inventory In Somaliland Business FirmsThe adjustment method is recommended for organizations that track theirCOGS balances. The method could be performed by the following step :-1- The inventory is debited when inventory is acquired. This is a significantdifference when compared to the accrual method.2- Sales of inventory are recorded by debiting cost of goods sold, and creditinginventory for the cost of the merchandise sold. This provides a continuousrecord 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 atleast once a year.4- If the physical inventory count differs from the official inventory figuresrecorded in the general ledger, the inventory shortage object code is debited orthe overage is credited to appropriately adjust the FIS inventory figures tophysical count values. 2.12 Methods of Inventory Valuation10Generally Accepted Accounting Principles require that the lower of cost ofmarket be used no matter which inventory valuation method is used. Avaluation method is used to compute the cost of the inventory dollar amountsand then it is compared to the market dollar amount. The lower of the twoamounts must be used when recording inventory.Regardless of which inventory accounting method is used, inventory valuesmust be assigned. Four types of historical-cost-based inventory valuation arecovered on the following pages: Specific Identification, Average Cost, FIFO, andLIFO. The retail Method, which uses an estimated inventory cost, is alsodiscussed. 1-Specific IdentificationSpecific Identification traces actual cost flows. The flow of costs through goodsavailable for sale into cost of goods sold or cost of ending inventory matches thephysical flow of inventory units. Each unit of inventory and its cost must bespecifically identified. 2-Average Cost Valuation Method10 Khalid Al Kaabi, Inventory Accounting. Page 28 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  29. 29. Use of Accounting for Inventory In Somaliland Business FirmsIn this valuation method, the calculation of cost of goods is averaged amongthe units of inventory. The two methods consist of weighted average, which isused in a perpetual system. 2-Moving Average--PerpetualContinuous or moving average assigns a unit value to cost of goods availablefor sale. In this scenario, the average cost determines cost of goods sold atthe time of each sale. This method requires a calculation of average unit costafter each purchase. 3-FIFO (First In First Out)Regardless of the actual physical flow of goods, FIFO is calculated by assumingthat goods entering inventory first are sold first, and goods entering inventorylast are sold last. In a sense, the earliest inventory costs are considered cost ofgoods sold and the latest are considered ending inventory. There is a FIFOmethod for both Periodic and Perpetual. 4-LIFO (Last in First Out)Regardless of the actual physical flow of goods, LIFO is calculated by assumingthat goods entering inventory last are sold first, and goods entering inventoryfirst are sold last. In a sense, the latest inventory costs are considered cost ofgoods sold and the earliest are considered ending inventory. There is a LIFOmethod for both Periodic and Perpetual. 5-Retail MethodThe retail method estimates the dollar amount of ending inventory, and isacceptable for external reporting if it yields results that reasonably approximatethe 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 Page 29 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  30. 30. Use of Accounting for Inventory In Somaliland Business FirmsInventory control is concerned with minimizing the total cost of inventory. Inthe U.K. the term often used is stock control. The three main factors ininventory 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 anynecessary adjustments to get the computer counts to match the warehousecounts. Then post the costs of those physical count adjustments to GeneralLedger and provide an inventory variance report to see where the counts wereoff, 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 cyclecounts. If you plan on doing cycle counts, we must keep in mind that cyclecounts can most easily be done by item category, by picking location or byusing the inventory item.Whether doing a full warehouse physical count or a cycle count, the companyis comparing what is actually out in the warehouse to what the computer hasrecorded as being in stock out in the warehouse.Therefore it is necessary to make sure that what has been done in thewarehouse has been entered on the computer and has been posted. It is alsoimportant that what has been entered into the computer has in fact beencompleted in the warehouse.The company wants to make sure that any stock picked to fill orders has beenFilled and Shipped on the computer and posted. Also the company dose notwants to include stock that has been used to fill orders in its counts.2.14 Economic Order Quantity Model11The economic order quantity model (EOQ) was developed to find the optimalorder quantity. Ahlstrom (2001) found that 84 percent of the firms surveyedused the EOQ model for inventory control. Annual holding cost will increasewith an increase in lot size, but in contrast, the annual order cost decreaseswith an increase in lot size.Material cost is independent of lot size because it is assumed to have a fixedprice.11 Operation Research Books Page 30 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  31. 31. Use of Accounting for Inventory In Somaliland Business FirmsThe concept of the EOQ is that there is a tradeoff between the fixed order costand 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 afraction of product cost. Using those inputs, there are three costs that must beconsidered when deciding on lot size. The first is annual material cost which isannual cost of material purchased.3.0 Research METHODOLOGY:3.1 IntroductionAlthough many studies and researches has been made in the field of inventoryaccounting, yet this project tries to highlight the implementations of inventoryaccounting methods in practice in one of the leading companies in Somaliland.Most of published researches regarding the subject look to inventory andinventory accounting, being the subject matter, from an academic point of viewwhere it is hard to find a published research which emphases on a particularresearch study and conducted in a real life company.Research represents the strategies involves in collecting and analyzing datacollected, in order to have meaningful interpretations of the research findings.This section attempts to give an insight into the way and manner in which thisresearch was carried out. This includes the mode of data collection, how thesedata were analyzed and the research design. 3.2 Research DesignThis has been conducting through interviews, data collection, sampling system,analysis techniques and self administered questioners that have beenembodying the overall objectives of the research study and empathy of thepaper. 3.3-Method of data collectionThe research of the project has been made through two methods ofdata collection and they are; Page 31 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  32. 32. Use of Accounting for Inventory In Somaliland Business Firms  Primary  secondaryThe primary data is the results of the questionnaires and theinterviews gathered from the business enterprise in Somaliland Also, look over how business firms get accounting records to their inventoryand cite of inventory management system in small companies in Somaliland.Secondary data collection which focused on the literature of current field ofuse of accounting for inventory in Somaliland business firms that leads thebusiness activity and trading system.One of the main idea of this adherent is how data have been collected fromdifferent local business that shows the inventory accounting policies to seewhether that the inventory record are free from errors and misrepresentation inits accounting records and financial presentation of the fiscal year of businessfirms in Somaliland Study research is used to study the contemporary phenomenon in its real-lifecontext data for the studies in this research and was collected from multiplesources. It is generally accepted that multiple data sources allow aninvestigator 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 becommensurate with the size, type, and value of the inventory. Sensitive orattractive items should be safeguarded by storage in locked or limited accessstorage areas.3.5-Data collection sourcesData collection source can include relevant documents, such as position ofinventory, inventory descriptions, accounting manuals, firm’s structure, chartsand training documents as well as some published information about businessfirms, such as financial statements and annual reports. Inventory can beviewed as a real option, specifically an option on future sales. Real optionscreate value in uncertain conditions and, using contingent claims payoffs frominventory positions, can be mapped on to the underlying asset. 3.6 sampling methodsA simplified sample method has been used for the research study whichconsists of twelve business forms in Somaliland on the basis of inventorymanagement and accounting procedures.Besides this, the business firms in Somaliland always use to account foraccurate measurement on inventory that they have on hand. Page 32 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  33. 33. Use of Accounting for Inventory In Somaliland Business FirmsAs usual, it is realized that the Somaliland business firms used tp account fortheir inventory periodically. Also, it has been realized which method they use toprice, 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 LimitationsThe most once that have come across was the times that lead shortingdistributions of the questionnaires.The most companies’ dot understanding the meaning of the study and they on’twant to clarify their inventory accounting systems.The main limitation faced by the researcher was the lack of commitment by thecompany’s accountants and staff to help in feeding accurate information andproviding 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 someextremely 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 customersto purchase inventories brig the limitations.An inventory that is not compatible with the firm’s market also become themost big constraints that firms will lose profitable on the sales leads to limitedthe research study.Lack of keeping an inventory fresh and up to date requires constant attentionby any organization, large or small makes the limitations of the study. Page 33 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  34. 34. Use of Accounting for Inventory In Somaliland Business FirmsTo find out Periodic reviews of the inventory data to detect slow-moving orobsolete stock and to identify fast sellers are were essential limitations for theresearch.Economy: the economic scale was the limitations to maintain the value of thelowest practical levels. Identification: systematically defining and describing all items in stock.Receiving: accepting, from all sources, all items which are used in the businessunit.Inspection: examining the exact data and other incoming for further qualityand quantity in the research study.Chapter four4.0 FINDINGS4.1 IntroductionThe inventory policy of Somaliland business firm can only be appreciated in thecontext of its unusual circumstances as the leading business inventory modeland one of the functional of the business firm’s within the country. It thenimplies that whatever policy is adopted at the inventory level must take intoconsideration the overall company’s objectives.The main determinant of the company’s inventory policy is the private economyitself in which the demand of their product stands as another factor.According to business managers, the company is constantly reviewingperformance as a unit of the economy; thus what happens in the economicenvironment affects the policies and strategies of the company as a whole andthe raw material as subsets.The company’s objective is to maintain quality, increase market shares andProfitability.This implies that enough inventories should be available to enhance continuespurchasing and selling. This fact also determines the levels of inventory, whichthe company keeps. So, we will see the discussion of this research and their Page 34 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  35. 35. Use of Accounting for Inventory In Somaliland Business Firmsfindings in a form of figures and percentage that identify the degree ofinventory accounting usages in the field of business operations.This is indicating us that the largest number of s/l businesses areindependently owned businesses, the question is that if this is the fact what isthe type of business that use inventory accounting system? We will see theanswer 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, and28% have told that they own partnership and 8% explained in form ofcorporation.table 4.1.Business type frequency percentagesole proprietorship 15 60%Partnership 7 28%Corporation 3 12%Total 25 100% Page 35 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  36. 36. Use of Accounting for Inventory In Somaliland Business Firms percentage 100% 100% 80% 60% 60% 28% 40% 8% 20% 0% sole partnership corporation total proprietorship sole proprietorship partnership corporation totalFigure 4.1 what type of business do you haveQ 2: do you use inventory accounting system in your business?48% of the respondents indicated that they use little inventory accountingsystem in their business, while respondents explained they use as moderately,and 52% of the respondents identified that they not use inventory accountingsystems in their accounting procedure.table 4.2:Choice No of respondents PercentageYes 12 48%No 13 52%Total 25 100% Page 36 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  37. 37. Use of Accounting for Inventory In Somaliland Business Firms Percentage 100% 100% 80% 48% 52% 60% 40% 20% 0% Yes No Total Yes No TotalFigure 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 accountingsystem like perpetual, , while 24% of the partnerships indicated the use ofperiodic and 28% of respondent have explained the use of both, and 16% of therespondents demonstrated that they do not use at all.table 4.3: Choice No of respondents percentageperpetual system 8 32%periodic system 6 24%both 7 28% Page 37 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  38. 38. Use of Accounting for Inventory In Somaliland Business FirmsNow of the above 4 16%Total 25 100% percentage 100% 100% 80% 60% 32% 28% 40% 24% 16% 20% 0% Perpetual periodic both of them Non of them Total Perpetual periodic both of them Non of them TotalFigure 4.3: if you use, which of the following method is used.Q4- do you think that the perpetual inventory system has more accuratethen the periodic?40% of the respondents sole proprietorship demonstrated that the perpetualinvocatory system is more accurate than the periodic, 32% of partnershipexplained 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 percentageYes 10 40%No 8 32%I dont know 7 28% Page 38 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  39. 39. Use of Accounting for Inventory In Somaliland Business Firms Total 25 100% percentage 100% 100% 80% 53% 60% 40% 40% 20% 7% 0% Yes No I dont know Yes No I dont knowFigure 4.4: do you think that the perpetual inventory system has more accurate then theperiodic.Q5- Does the accounting for inventory needs strong internal control?52% of respondents demonstrated that inventory control is one of the mostcrucial accounting records, while 28% of the respondents indicated it’s notgood to have inventory accounting control and 20% of the respondentsidentifies that they do not sure whatever is it.table 4.5: Choice frequency percentage Yes 13 52% No 7 28% Not sure 5 20% Total 25 100% Page 39 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  40. 40. Use of Accounting for Inventory In Somaliland Business Firms percentage 100% 100% 80% 60% 46% 40% 27% 27% 20% 0% Yes No Not sure Total Yes No Not sure TotalFigure 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 goodspurchase, while 16% of the respondents demonstrated that is not good to haveFIFO order of goods purchased, and 46% of the respondents identified thatthey have no Idea about FIFO methodology.table 4.6: Choice frequency percentageYes 5 38%No 2 16%Not sure 6 46%Total 13 100% Page 40 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  41. 41. Use of Accounting for Inventory In Somaliland Business Firms percentage 100% 100% 90% 80% 70% 60% 46% 50% 38% 40% 30% 16% 20% 10% 0% Yes No Not sure Total Yes No Not sure TotalFigure 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 toreserve the inventory orders, and 23% of the respondents say we have no ideaabout the FIFO reserve.tabel 4.7 Choice Respondents PercentageYes 12 31%No 8 46%I don t know 6 23%Total 26 100% Page 41 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  42. 42. Use of Accounting for Inventory In Somaliland Business Firms Percentage 100% 100% 80% 60% 46% 31% 40% 23% 20% 0% Yes No I don t know Total Yes No I don t know TotalFigure 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 goodphysical flow of goods, and 40% explained that is no ultimate usage of physicalgoods flow.Table 4.8: Choice No of respondents percentageNot sure 9 36%Yes 6 24%No 10 40%Total 25 100% Page 42 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  43. 43. Use of Accounting for Inventory In Somaliland Business Firms percentga 100% 100% 80% 60% 36% 40% 40% 24% 20% 0% Not sure Yes No Total Not sure Yes No TotalFigure4.8: does the FIFO approximate the physical flow of goodsQ9- Does the ending inventory is closed to the current cost?24% of the respondents identified that the ending inventory is good for tooclose to the current cost, whereas 28% of the respondents says that they arenot sure, and 48% of the respondents identify that ending inventory is good toclose to the current cost.Table 4.9: Choice No of respondents PercentageNot 6 24%Not sure 7 28%Yes 12 48% Page 43 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  44. 44. Use of Accounting for Inventory In Somaliland Business FirmsTotal 25 100% Percentage 100% 100% 80% 60% 48% 40% 24% 28% 20% 0% Not Not sure Yes Total Not Not sure Yes TotalFigure4.8: 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, whereas36% of the respondents identify that it’s good for using LIFO to the periodicinventory system, and 16% say is not good to have LFIO in periodic system.table 4.10: Choice No of respondents percentageNot sure 12 48%Yes 9 36% Page 44 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  45. 45. Use of Accounting for Inventory In Somaliland Business FirmsNo 4 16%Total 25 100% percentage 100% 100% 80% 60% 48% 36% 40% 16% 20% 0% Not sure Yes No Total Not sure Yes No TotalFigure 4.10: Does LIFO good for using periodic inventory system.Q11- Does LIFO method matches the cost of last purchase againstrevenue?32% of the respondent explained it’s an appropriate that LIFO matches cost oflast purchase against revenue, while 48% of the respondents identify no, and20% of the respondents demonstrated that they don’t know at all.tabel 4.11 Choice No of respondents percentageYes 8 32%No 12 48% I dont know 5 20% Page 45 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  46. 46. Use of Accounting for Inventory In Somaliland Business Firms Total 25 100%Figure 4.11: - Does LIFO method matches the cost of last purchase against revenue? pecentage 100% 100% 90% 80% 70% 60% 48% 50% 32% 40% 30% 20% 20% 10% 0% Yes No I dont know Total Yes No I dont know TotalQ12- 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 forpurpose of LIFO reserve.table 4.12: Choice No of respondents Percentage Not sure 10 40% Yes 9 36% Page 46 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  47. 47. Use of Accounting for Inventory In Somaliland Business FirmsNo 6 24%Total 25 100% Percentage 100% 100% 80% 60% 40% 36% 40% 24% 20% 0% Not sure Yes No Total Not sure Yes No TotalFigure 4.12: Does company use for LIFO reserve purposeQ13- Does LIFO good for tax and external purpose?20% of the respondents say we don’t know, whereas 32% of the respondentsdemonstrated not for tax purpose, and 48% explained yes for good tax andexternal purpose.table 4.13: Choice No of respondents PercentageI dont know 5 20%Not 8 32% Page 47 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  48. 48. Use of Accounting for Inventory In Somaliland Business FirmsYes 12 48%Total 25 100% Percentage 100% 100% 80% 60% 48% 32% 40% 20% 20% 0% I dont know Not Yes Total I dont know Not Yes TotalFigure 4.13: Does LIFO good for tax and external purposeQ14-does the internal control practiced in maintaining inventory?48% of the respondents say yes for internal control practicing, 32% ofrespondents determined not to maintain internal control to the inventory, and20% identify that they do not sure.table 4.14 No of respondents PercentageYes 12 48%Not 8 32%Not sure 5 20%Total 25 100% Page 48 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  49. 49. Use of Accounting for Inventory In Somaliland Business FirmsFigure 4.14: does the internal control practiced in maintaining inventory. Percentagge 100% 100% 90% 80% 70% 60% 48% 50% 32% 40% 30% 20% 20% 10% 0% Yes Not Not sure Total Yes Not Not sure TotalQ15- Does the inventory of resale merchandised need various controls?60% of the respondents demonstrated that it is necessary the merchandisingneeds various internal control, whereas 16% of the respondents say no and24% of the respondents answered that they do not sure.table 4.15 choice No of respondents Percentage Yes 15 60% No 4 16% Page 49 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  50. 50. Use of Accounting for Inventory In Somaliland Business FirmsNot sure 6 24%Total 25 100% Percentage 100% 100% 80% 60% 60% 40% 24% 16% 20% 0% Yes No Not sure Total Yes No Not sure TotalFigure 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 reconcilingcounts 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: Choice No of respondents Percentage Page 50 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  51. 51. Use of Accounting for Inventory In Somaliland Business FirmsYes 9 36%Not 11 44%I dont know 5 20%Total 25 100% Percentagr 100% 100% 80% 60% 44% 36% 40% 20% 20% 0% Yes Not I dont know Totol PercentagrFigure 4.16: does reconciling good for the physical count of the inventoryQ17- there is three different approaches of LIFO methods?36% of the respondents yes that there are three different approaches of LIFOmethods, whereas 48% said not sure, and 20% of the respondents determinedno three different LIFO methods.Table 4.17: Choice No of respondents Percentage Page 51 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  52. 52. Use of Accounting for Inventory In Somaliland Business FirmsYes 9 36%Not sure 12 48%No 5 20%Total 25 100%Figure 4.17: there are three different approaches of LIFO methods Percentage 100% 100% 80% 60% 48% 36% 40% 20% 20% 0% Yes Not sure No Total Yes Not sure No TotalQ18- 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% ofthe respondents mentioned that no tax benefits’ and 24% of the respondentsdetermined that they do not sure. Page 52 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  53. 53. Use of Accounting for Inventory In Somaliland Business FirmsTable 4.18:Choice No of respondents PercentageYes 14 56%No 5 20%Not sure 6 24%Total 25 100% Percentage 100% 100% 80% 56% 60% 40% 20% 24% 20% 0% Yes No Not sure Total Yes No Not sure TotalFigure 4.18: Does the advantage of LIFO can be including the tax benefitsQ19- Does your audit procedures included physical inventoryobservations?36% of the respondents explained that audit procedure includes the physicalinventory observations, while 48% of the respondents said no, and 16% of therespondents determined that it is not applicable.Table 4.19 Choice No of respondents Percentage Yes 9 36% Page 53 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  54. 54. Use of Accounting for Inventory In Somaliland Business Firms No 12 48% N/A 4 16% total 25 100% Percentage 48% 50% 36% 40% 30% 16% 20% 10% 0% Yes No N/A Yes No N/AFigure 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% ofrespondents said no for inventory pricing.This evidence is showing the certainty of inventory pricing at lower cost ormarket.Figure 4.20: Page 54 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  55. 55. Use of Accounting for Inventory In Somaliland Business Firms Choice No of respondents PercentageYes 16 64%No 9 36%Total 25 100% Percentage 100% 100% 80% 64% 60% 36% 40% 20% 0% Yes No Total Yes No TotalFigure 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 methodsof inventory evaluations.Figure 4.21: Choice No of respondents Percentage Page 55 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  56. 56. Use of Accounting for Inventory In Somaliland Business Firms Yes 18 72% No 7 28% Total 25 100% Percentage 100% 100% 72% 80% 60% 28% 40% 20% 0% Yes No Total Yes No TotalFigure 4.21: Do the financial statement discloses the method of inventory evaluationQ22- Is the determination of inventory cost includes the overhead items?32% of the respondents demonstrate that it is include inventory cost to theoverhead items, 68% of the respondents said no for overhead items.These are some indications that determines and demonstrate how inventorycosts can be include some overhead items exclude otherwise.the explaining what is the overhead cost that can be consider and include theoverall inventory accounting management in the field of merchandise.Table 4.22: Page 56 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  57. 57. Use of Accounting for Inventory In Somaliland Business Firms Choice No respondents PercentageYes 8 32%No 17 68%Total 25 100% Percentage 100% 100% 68% 80% 60% 32% 40% 20% 0% Yes No Total Yes No TotalFigure 4.22: Is the determination of inventory cost includes the overhead items.Q23- Does your business determine the inventory needs and then createplan to fill those need?56% of the respondents identify that is good to have inventory needs thatstimulate the business, and 44% of the respondents said no inventory needs.Table 4.23: Choice No of respondents Percentage Yes 14 56% No 11 44% Page 57 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE
  58. 58. Use of Accounting for Inventory In Somaliland Business FirmsTotal 25 100% Percentage 100% 100% 80% 56% 60% 44% 40% 20% 0% Yes No Total PercentageFigure 4.23: Does your business determine the inventory.Q24-Did your business use monitor and evaluation process by themanagement?60% of the respondents demonstrate that their business use monitoring andevaluation, while 36% of the respondents identify no, and 4% of therespondents explained not applicable.This is clarifies the need and understand major value of monitoring andevaluations of the firm’s inventory accounting procedures.Table 4.24: Choice No of respondents Percentage Yes 15 60% Page 58 UNIVERSITY OF HARGEISA MOHAMED MOHAMOUD MUSE

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