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INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
1
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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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
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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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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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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INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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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?
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
27
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
28
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.
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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.
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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.
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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?
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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?
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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.
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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.
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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:
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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.
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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.
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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”
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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?
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
55
INVENTORY EVALUATION FOR ALNOOR SPARE PARTS
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