The Impact of Changing Accounting Policy on Financial Statement

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MOGADISHU UNIVERSITY

FACULTY OF ECONOMICS AND MANAGEMENT SCIENCE

DEPARTMENT OF ACCOUNTING

Title of the Thesis

The impa c t of c ha nging

ac count ing pol icy on f ina nc ia l

statement(ka a h pet r ol eum c ompan ies)

Supervisor Student

Mr. Liban Muhiadin Hussein Ahmed Omar M. Moed

Academic year 2011-2012


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Approved

This thesis is submitted in partial fulfillment of the requirement for the degree of BA in

Accounting.

M ogadishu U niversity

Academic year: 2011-2012

F or Graduate Commit t ee

_____________________________

_____________________________

_____________________________

_____________________________

D ean of t he F acul t y of E conomics and M anagement Science

__________________________________


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DECLARATION

I, AHMED OMAR M. MOED, declare to the best of my knowledge that this research thesis is

my original work. It has therefore never been submitted to any university or other institution of

higher learning for any academic award.

Signed: . Signed: .

Mr.Liban Muhiadin Hussein Ahmed Omar M. Moed

(Supervisor) (Student)

Date: .. Date: ..


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DEDICATION

I dedicate this work to my dear mother, Mariam Mooud Hassan who endured hardships for me

until this day, my father, Omar M. Moed M. Osman who was deceased when I was a child, my

uncles, Ibrahim Mooud Hassan, Osman Mooud Hassan, and all my brothers and sisters for

their kindof support during the time of study.

May Allah reward you abundantly.


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V

ACKNOWLEDGEMENT

Praise be to ALLAH, and peace and blessing on his noble prophet and his family and companions.

All praises be to ALLAH whose graces on me cant be counted. Overall, if this study is successful,

it is from my ALLAH. But, if it fails, it is from my mistakes and the devils.

With most gratitude, I would like to convey my heartfelt thanks to my supervisor Mr. Liban

Muhiadin Hussein, who tirelessly encouraged me and encouraged me to grow in research. This is

the reason for the success of this dissertation.

My sincere gratitude goes to the Management of Mogadishu University for offering me a fellowship

that helped me to undertake this study. Mr. A/kadir Abobakar Sh. Hassan, the Dean Faculty of

Economics and Management Science, A/kafi Hashi Sh. Farah, and A/qadir Ali Tifow deserve

special thanks. Your untiring efforts to motivate and consistent reminders to complete in time did

not land in deaf ears.Lots of appreciation goes to my lecturers and facilitators. Imagine studying without your

mentorship! You are the reason that I am now finalizing my course with this dissertation. To all of

you Allah bless you. Thank you for the knowledge you unreservedly offered to me. I promise to put

it to proper use.

To the BA of Accounting class of 2011/2012, my success is measured against our overall

performance. You contributed a lot to my skills and knowledge development. Many thanks to you,

especially A/qadir Moed Nor, Ali Salah Mooud, and Said Hassan A/qasim. I commend the spirit

to which we genuinely operated to the completion of the course. Those many discussions we had

are a living testimony in my life of the willpower for the course.

Finally, and most importantly, I say thanks to my family. My sisters, Zahra and Naima, and my

brothers Moed, A/qadir, Ismail, Ishaq, Yaqub, Yunus, and Yusuf, with whom I cannot remember

ever exchanging a cross word since our petty childhood arguments, have always been a source of

great encouragement and kindness. And for greater mother one could not hope. From a very young

age Mum with great motivation, understanding and hope. She encouraged me to think

independently, to believe in myself, to be tolerant and accepting and to do the very best in whatever

endeavor or challenge is presented. To my family, a most heartfelt and loving thank you.

Allah blesses you all.


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VI

Table of Contents

Approval.......II

Declaration..III

Dedication...IV

Acknowledgement...V

Table of Contents...VI

List of Tables...X

List of FiguresXII

Abstract.XIV

CHPTER ONE

INTRODUCTION ....................................................................................................... 11.1 Background of the Study.......................................................................................... 1

1.1.1 Historical Background ..................................................................................... 1

1.1.2 Theoretical Background ................................................................................... 2

1.1.3 Operational Definitions of Key Terms .............................................................. 4

1.2 Problem of the Statement ......................................................................................... 41.3 Purpose of the Study ................................................................................................ 51.4 Research Objectives ................................................................................................. 51.4.1 General Objectives ................................................................................................ 5

1.4.2 Specific Objectives: .............................................................................................. 5

1.5 Research Questions .................................................................................................. 5

1.6 Significance of the Study ......................................................................................... 61.7 Scope of the Study ................................................................................................... 61.8 Theoretical and Conceptual Frameworks ................................................................. 6

1.8.1 Theoretical Framework .................................................................................... 6

1.8.2 Conceptual Framework .................................................................................... 7

CHAPTER TWO

LITERATURE REVIEW .............................................................................................. 72.0 Introduction ............................................................................................................. 8


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2.1 Accounting Policies ................................................................................................. 82.1.1.1 Factors Affecting the Selection Accounting Policy ........................................ 8

2.1.1.2 Different Accounting Policies by Different Companies ................................. 9

2.1.1.3 Change in Accounting Policy ........................................................................ 9

2.1.1.4 Disclosure of Change .................................................................................... 9

2.1.2.1 Valuation of Inventories .............................................................................. 10

2.1.2.2 Types of Inventories .................................................................................... 10

2.1.2.3 Inventory Systems ....................................................................................... 10

2.1.2.4 What is Included in Inventory ..................................................................... 11

2.1.2.5 Inventory Cost Flow Assumptions ............................................................... 11

2.1.3.1 Accounting for Depreciation ....................................................................... 12

2.1.3.2 Measuring Cost Allocation .......................................................................... 132.1.3.3 Depreciation ................................................................................................ 13

2.1.3.4 Straight-Line Method .................................................................................. 14

2.1.3.5 Accelerated Method .................................................................................... 14

2.1.3.6 Sum-of-the-Years Digits (SYD) ................................................................. 14

2.1.3.7 Units-of-Production..................................................................................... 15

2.1.4 Fixed Assets .................................................................................................... 15

2.1.4.1 Types of Fixed Assets ................................................................................. 15

2.1.4.2 Valuation of Fixed Assets ........................................................................... 16

2.2 Financial Statements .............................................................................................. 172.2.1 Balance Sheet Statement ................................................................................. 17

2.2.2 Disclosure Notes ............................................................................................. 18

2.2.3 Income Statement ........................................................................................... 18

2.2.4 Cash Flow Statement ...................................................................................... 19

2.2.4.1 Classification of Cash Flow ......................................................................... 19

2.3 Changing Accounting Policy and Financial Statements .......................................... 202.3.1 Inventory Valuation and Financial Statement .................................................. 20

CHAPTER THREE

METHODOLOGY ...................................................................................................... 213.1 Research Design .................................................................................................... 21


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3.2 Population and Sampling ....................................................................................... 213.2.1 Target Population ............................................................................................ 21

3.2.2 Sample ............................................................................................................ 21

3.2.3 Sampling Techniques ...................................................................................... 22

3.3 Research Instrument .............................................................................................. 223.5 Data Analysis ........................................................................................................ 23

CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION .......................................................... 244.1 Demographical Characteristics of the Respondent ................................ .................. 244.3 Accounting Policies Applied by Petroleum Merchandisers .................................... 294.4 Financial Statement of Petroleum Merchandisers in Mogadishu ............................. 34

4.5 Impact of Changing Accounting Policy on Financial Statement ............................. 39

CHAPTER FIVE

DISCUSSION ............................................................................................................. 435.1 Characteristics of the Respondents ......................................................................... 435.2 Accounting Policies Applied by Petroleum Merchandisers .................................... 435.3 Financial Statement of Petroleum Merchandisers in Mogadishu ............................. 44 5.4 Impact of Changing Accounting Policy on Financial Statement ............................. 44

CHAPTER SIX

SUMMERY, CONCLUSION, AND RECOMMENDATION ..................................... 466.1 Summary of the Findings ....................................................................................... 46

6.1.1 Characteristics of the Respondents .................................................................. 46

6.1.2 Accounting Policies Applied by Petroleum Merchandisers .............................. 46

6.1.3 Financial Statement of Petroleum Merchandisers in Mogadishu ...................... 46

6.1.4 Impact of Changing Accounting Policy on Financial Statement....................... 47

6.2 Conclusion............................................................................................................. 476.2.1 Accounting Policies Applied by Petroleum Merchandisers .............................. 47



6.3 Recommendation ................................................................................................... 48


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6.3.1 Characteristics of the Respondents .................................................................. 48

6.3.2 Accounting Policies Applied by Petroleum Merchandisers .............................. 48



6.4 Areas for Further Research .................................................................................... 48References ................................................................................................................... 49APPENDICES............................................................................................................. 51

QUESIONNAIRE ................................................................................................... 51

Section one: Demographic Characteristics of the Respondents ................................ 51

Section Two: The Impact of Changing Accounting Policy on Financial Statement .. 52


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List of Tables

Table 3.1: Respondents of the Study.22

Table 4.1: Age of the Respondents....24

Table 4.2: Gender of the Respondent.....25

Table 4.3: The Level of the Respondents Experience...26

Table 4.4: The Level of the Respondents Education....27

Table 4.5: The Occupation of the Study.....28

Table 4.6: Your company follows the accounting assumptions of going concern concept and

consistency in accounting policies.......29

Table 4.7: Your company follows the accounting assumptions of going concern concept and

consistency in accounting policies....30

Table 4.8: You always make physical verification at the end of the year............................31

Table 4.9: When you retire a fixed asset from active use and held for disposable, you show it

separately as part of other current assets...............................................................................32

Table 4.10: Your company follows straight line method for depreciation its fixed assets...33

Table 4.11: Additions to fixed assets is depreciated independent of the original asset based on the

assessment of its useful life....................................................................................................34

Table 4.12: Depending upon the principal activity of the enterprise, the classification of items in the

cash flow is appropriately made into operating, financing, and investment

activities..................................................................................................................................35

Table 4.13: You make a disclosure for transactions and events that have importance for evaluating a

companys financial statement................................................................................................36

Table 4.14: You use a single step income statement for preparing financial

statement.....37

Table 4.15: The method you use in evaluating your inventory have effect in your balance

sheet....38

Table 4.16: You expense all costs that you incur after the purchase of the fixedasset...............................................................................................................39

Table 4.17: You only change your accounting policy In order to present the financial statements in a

manner so as to present a true and fair view of the state of affairs of the

enterprises...40


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Table 4.18: There is no need for a clearly distinction for the extraordinary items of income

statement from the ordinary activities of the company.....41

Table 4.19: You always revaluate your fixed asset if there is a significant decline in market value of

that fixed asset.....................................................................................................................42


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List of Figures

Figure 3.1: Conceptual Framework......7

Figure 3.1: Age of the Respondents..24

Figure 3.1: Gender of the Respondent......25

Figure 4.1: The Level of the Respondents Experience....26

Figure 4.2: The Level of the Respondents Education.27

Figure 4.3: The Occupation of the Study..28

Figure 4.6: Your company follows the accounting assumptions of going concern concept and

consistency in accounting policies..29

Figure 4.7: Your company follows the accounting assumptions of going concern concept and

consistency in accounting policies..30

Figure 4.8: You always make physical verification at the end of the year .......................31

Figure 4.9: When you retire a fixed asset from active use and held for disposable, you show it

separately as part of other current assets.............................................................................32

Figure 4.10: Your company follows straight line method for depreciation its fixed assets.33

Figure 4.11: Additions to fixed assets is depreciated independent of the original asset based on the

assessment of its useful life..................................................................................................34

Figure 4.12: Depending upon the principal activity of the enterprise, the classification of items in

the cash flow is appropriately made into operating, financing, and investment

activities.................................................................................................................................35

Figure 4.13: You make a disclosure for transactions and events that have importance for evaluating

a companys financial statement...........................................................................................36

Figure 4.14: You use a single step income statement for preparing financial statement .37

Figure 4.15: The method you use in evaluating your inventory have effect in your balance

sheet...38

Figure 4.16: You expense all costs that you incur after the purchase of the fixed

asset......................................................................................................... ..39Figure 4.17: You only change your accounting policy In order to present the financial statements in

a manner so as to present a true and fair view of the state of affairs of the

enterprises...40


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Figure 4.18: There is no need for a clearly distinction for the extraordinary items of income

statement from the ordinary activities of the company....41

Figure 4.19: You always revaluate your fixed asset if there is a significant decline in market value

of that fixed asset.....................................................................................................................42


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ABSTRACTThis Thesis investigated the impact of changing accounting policy on financial statement. The study

followed the following objectives: (1) To determine the demographic characteristics of the

respondents in terms of age, gender, level of education (2) To find out the level accounting policies

applied by merchandising companies in Mogadishu, (3) To determine the degree of financial

statement of merchandising companies in Mogadishu, and (4) To establish if there is a significant

relationship between the extent of changing accounting policy and financial statement of

merchandising companies in Mogadishu.

The problem statement was: in Somalia, there are no governmental institutions which supervise the

accounting systems and procedures that the companies apply. Because of that, most of them use

their own policies and procedures which may or may not be accurate. Using their own policies, the

result is always a changing accounting policy year after year without consistence in a singleaccounting policy. Thus, this study tries to find if there is an impact of changing accounting policy

on financial statement.

Primary data was collected form managers, accountants, cashiers, and other staff of Kaah Petroleum

Companies in Mogadishu and the secondary data from the Mogadishu Library, internet, and eBooks

based on the positive accounting theory authorized and developed by Ross, R. & Jerold, Z. (1986).

Structured Questionnaires were used to collect data from the respondents. The questionnaire was a

closed-ended questions. The researcher used stratified random sampling. The researcher stratified

respondents according to their department and then used systematic random sampling to select

respondents in each department, basing on their numbers in each.

The basic findings suggest that: there is major impact of changing accounting policy on financial

statement. The method you use in valuing your inventory, the depreciation method employed, and

how is valued the fixed assets have a great impact on the bottom line and financial position of your

company.

The study, therefore, recommended that managers should always find ways and means of

implementing such an accounting policy which maximizes their profit as well as the owners wealth

and well-being.


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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

1.1.1 Historical Background

International accounting literature provides evidence that accounting quality has

economic consequences, such as costs of capital, efficient of capital allocation, and

international capital mobility. Despite the importance of good accounting policy, a

number of small and medium companies in the developing world are faced with

accounting challenges. In Vietnam, small and medium companies are faced with

financial management and accounting challenges which impact negatively on their

financial statement. In emerging markets, like Taiwan and China, inefficient accounting

policy has damaged small and medium companies financial statements (Bushman,

2006).

In Kenya, weakness in corporate governance practice, lack of pressure from the users of

financial for high quality information, and the general absence of transparency in the

corporate sector, pervade the accounting processes and policies in most of the small and

medium companies. The fact that small and medium companies fail, and the auditedfinancial statements do not provide early warning signals about these failures, has raised

concerns among the general public about the quality of accounting and auditing in the

country. (Ankunda, 2010)

In Uganda, small and medium business which contribute about 60% of the Gross

Domestic Product (GDP) do not reach their fifth birthday due to a number of factors

among which are poor accounting policies and procedures. Because of their internal

management systems are poorly set up, they cant show their financial statements interms of inflows and outflows (Ankunda, 2010).

In Somalia, defining the problem of small and medium companies may begin with

consideration of the typical characteristics of management. Most of them do not appoint


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professional accountants to be in charge of the financial statement of the company.

Usually, most owner-managers control financial matters of the company. However, most

of them have no formal training in financial management. Lack of knowledge in basic

accounting policies combined uncertainty of the business environment often leads them

to serious problem. If a convenient accounting policy is not applied, the financial

statement of the company wont give good picture of the company. Consequently,

financial statements of the small and medium companies in Somalia havent given their

fair picture because of their inefficient accounting policy.

1.1.2 Theoretical Background

The most popular and widely researched explanation is provided by 'positive accounting

theory'. Positive accounting theory developed as an application of agency theory after

affirmative evidence on the efficient markets hypothesis (Watts & Zimmerman, 1986).

Evidence on the efficient markets hypothesis (Ball & Brown, 1968) suggested that

reported earnings had no systematic effect on share prices due to the existence of

alternative information sources. This led to a demand for an explanation of why

managers sought to change policies that altered reported earnings when they had no

effect on share prices. Positive accounting theory states that financial reporting data is

used by other economic agents who can affect organization cash flows and hence share

prices. Thus, agency costs and hence cash flows will vary amongst different financial

reporting procedures (Watts & Zimmerman, 1986). The agency costs occur due to

nonzero contracting and information costs.

Under positive accounting theory, managers are assumed to act as rational utility

maximizers. Due to agency costs differing amongst financial reporting policies,

management can transfer wealth between contracting parties. Under positive accounting

theory, it assumed that managers act opportunistically in selecting financial reporting

policies to allocate agency costs that maximize their own utility. It states that managers

will use any discretionary control they have over financial reporting policies to increase

their own welfare.


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Most research into positive accounting theory has polarized the definition of utility into

economic terms. Thus, management are assumed to maximize their economic self

interest (Watts & Zimmerman, 1986) Management calculate how different financial

reporting policies will affect their wealth. Researchers examine the effect of financial

reporting policies on financial statements and the effect of financial statements on

management wealth. This has led to hypotheses that predict the choice of method by

management, given economic information about their position and the organization.

This information includes the existence of debt covenants, management compensation

plans and the political visibility of the organization. In summary, management assess the

relative income effects of financial reporting procedures and select financial reporting

policies that maximize their economic self interest (Williams, 1989). Positive accounting

theory draws heavily on neo-classical economics and in particular, 'Chicago School

Economics'. The central assumption of neo-classical economics is that every individual

makes decisions to maximize their utility. This assumption has been criticized as

unrealistic. It has been suggested that it is not possible, practical or logically possible to

maximize utility (Boland & Gordon, 1992).

The use of 'positive' has been strongly criticized as merely rhetoric (Ball & Brown,

1968). Mouck [1990] evaluates the scientific basis of positive accounting theory. Hesuggests that the theory does not meet the falsification criteria of Popper. Positive

accounting theorists are criticized for methodological intolerance in refusing to question

the central assumptions on which their theory is based (Mouck,, 1990). Watts and

Zimmerman [1990] respond by suggesting that all research is value laden and is very

difficult to prescribe 'best' research policies.

Positive accounting research is also said to suffer from a logical flaw in design. This

occurs because management utility is often defined in terms of accounting variables.Positive accounting theory suggests that management self interest determines

preferences amongst financial reporting policies. Management preferences determine the

choice of financial reporting policies. The financial reporting policies used determine

accounting measures. Due to the difficulties in observing self interest, positive


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accounting researchers often use accounting measures as proxy variables. Thus,

accounting measures, determined by financial reporting policies, are used to explain

financial reporting policies. Accounting variables are the phenomenon that management

utility is trying to explain. This produces a tautologies statement of the form; existing

accounting measures affect existing accounting measures. This can be minimized by

avoiding a reliance on accounting measures to proxy for self interest. In addition,

existing accounting measures can be controlled for the policies that generate them

(Williams, 1989).

1.1.3 Operational Definitions of Key Terms

Accounting Policies: are the specific principles, bases, conventions, rules and practices

applied by an entity in preparing and presenting financial statements.

Demographic Characteristics of the respondents: are attributes in terms of gender,

age, qualifications, and number of years business experience.

Financial Statements: are balance sheet statement (Statement of financial position),

income statement (Statement of Operations), statement of owners equity (Changes in

capital), and statement of cash flows (Cash inflows and outflows)

1.2 Problem of the Statement

In Somalia, there are no governmental institutions which supervise the accounting

systems and procedures that the companies apply. Because of that, most of them use

their own policies and procedures which may or may not be accurate. Using their own

policies, the result is always a changing accounting policy year after year without

consistence in a single accounting policy. Thus, this study tries to find if there is an

impact of changing accounting policy on financial statement.


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1.3 Purpose of the Study

The following are the reasons of why this study was proposed:

1. to test if there is a significant relationship between the variables in this study

2. to generate new information based on the findings of this study

3. to filter the existing information about the variables in this study

4. to produce useful information about the variables to successor researchers

1.4 Research Objectives

1.4.1 General Objectives

To investigate the relationship between accounting policy and companys financial

statements of some selected Kaah Petroleum Companies in Mogadishu, Somalia.

1.4.2 Specific Objectives:

1. To determine the demographic characteristics of the respondents in terms of age,

gender, level of education.

2. To find out the level accounting policies applied by Kaah Petroleum Companies in

Mogadishu, Somalia

3. To determine the degree of financial statement of Kaah Petroleum Companies inMogadishu, Somalia.

4. To establish if there is a significant relationship between the extent of changing

accounting policy and financial statement of Kaah Petroleum Companies in

Mogadishu

1.5 Research Questions

The following research questions will guide this study:

1. What are the demographic characteristics of the population in terms of age, gender,

and level of education?

2. What is the level of accounting policies applied by Kaah Petroleum Companies in

Mogadishu?


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3. What is the degree of financial statement of Kaah Petroleum Companies in

Mogadishu?

4. Is there a significant relationship between the extent of changing accounting policy

and financial statement of Kaah Petroleum Companies in Mogadishu?

1.6 Significance of the Study

The study will benefit the managers of selected Kaah Petroleum Companies

experiencing nowadays accounting practice problem and improving their understanding

towards the impact of the changing policies on financial statement.

This study will contribute additional knowledge to the previously existing facts about

the impact of changing policies on financial statement to future researchers who are

interested accounting practice for further research.

1.7 Scope of the Study

Geographical Scope: The research environment of this study was in Mogadishu city

especially in Kaah Petroleum Companies.

Content Scope: The study examined the accounting policy variables, financial statement,

and relationship between changing accounting policy and financial statement.

Theoretical Scope: This study was guided by the Theory of Positive Accounting Theory

authorized and developed by Ross, R. & Jerold, Z. (1986).

1.8 Theoretical and Conceptual Frameworks

1.8.1 Theoretical Framework

This study was guided by the Theory of Positive Accounting Theory authorized and

developed by Ross, R. & Jerold, Z. (1986).


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1.8.2 Conceptual Framework

The selection of certain accounting policy has an impact of the financial statement of

your business. For example, different inventory valuation methods have different impact

on financial statement. Also, different depreciation methods will affect the financial

statement differently.

Source: Primary Data, 2012

Accounting Policy

(IV)

Inventory valuation

Financial statement

(DV)

Depreciation methods

Fixed asset valuation

Effectiveness

of the internal

control

Management

knowledge of

accounting

Culture of its

accounting

departmaent

EV


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CHAPTER TWO

LITERATURE REVIEW

Concepts, Ideas, Opinions from Authors/Experts

2.0 Introduction

Accounting Policies are the specific principles, bases, conventions, rules and practices

applied by an entity in preparing and presenting financial statements (Day, 2008).

Accounting policies, accounting procedures, and accounting methods refers the same

meaning. Accounting procedure is a particular way of accomplishing something and

established way of doing things. It is a series steps followed in a definite order (David,

1989).

2.1 Accounting Policies

2.1.1.1 Factors Affecting the Selection Accounting Policy

While adopting a particular accounting policy, the main consideration should be to

prepare financial statements so as to represent true and fair view of the state affairs of

the enterprises. For this purpose the following factors should be taken:

Prudence: prudence is the inclusion of a degree of caution in the exercise of judgment

needed in making estimates required under conditions of uncertainty. By exercising

prudence, a company does not recognize profits on the basis of anticipation. These are

recognized only when realized not necessarily cash. (International Accounting Standards

Board, 2003)

Substance over form: Substance of transactions and events should be given more

importance than legal formal. It implies that suitable alterations maybe made in legal

form of presentation if it is desired to disclose substance in a true and fair manner.

(International Accounting Standards Board, 2003)

Materiality: Omissions or misstatements of items are material if they could (by their

size or nature, individually or collectively) influence the economic decisions of users


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taken on the basis of the financial statements (International Accounting Standards

Board, 2003).

2.1.1.2 Different Accounting Policies by Different Companies

According to AS-1 (Accounting Standards-one), there are certain accounting policies

which may be adopted by different companies. These are: (1) methods of depreciation,

depletion, and amortization, (2) treatment of expenditures during construction, (3)

conversion of translation of foreign currency items, (4) valuation of inventories, (5)

treatment of goodwill, (6) valuation of investments, (7) treatment of retirement benefits,

(8) recognizing of profits on long-term contracts, (9) valuation of fixed assets, and (10)

treatment of contingent liabilities

2.1.1.3 Change in Accounting Policy

According to accounting principles, every company has the right to choose any

accounting policy which suits to its environment to report its fair picture. But once

chosen one policy, a companys various accounting practice must remain the same from

one year to another- as the consistency concept suggests. However, if a change is

necessary due to the following circumstances, change in accounting policy may be

made:

1. In order to present the financial statements in a manner so as to present a true and fairview of the state of affairs of the enterprises

2. Due to change in accounting standard

3. Due to change in low

2.1.1.4 Disclosure of Change

According to AS-1 (Accounting Standards-one), any change in the accounting policies

which have material effect in the current period or which are reasonably expected to

have material effect in later periods should be disclosed. In the case of a change in

accounting policies which have material effect in the current period, the amount by

which any item in the financial statements is affected by such change should also be

disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or

in part, the fact should be indicated.


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2.1.2.1 Valuation of Inventories

Any change in inventory and assets means a dramatic impact on your bottom line, so

accurate reporting, classification and appraisal of inventories are critical. These

inventory and accounting policies and procedure templates will help you maintainguidelines to ensure a proper inventory process is in place. The inventory and assets

procedures will also guarantee efficient methods for inventory counting, fixed assets

control and handling customer inventory (jones & S., 2005).

2.1.2.2 Types of Inventories

The inventory is divided based on two classes of businesses. Wholesale and retail

companies purchase goods that are primarily in finished form. These companies are

intermediaries in the process of moving goods from the manufacturer to the end-user.The cost of merchandise inventory includes the purchase price plus any other costs

necessary to get the goods in condition and location for sale (Spiceland, Sepe, &

Tomassisni, 2007)

In manufacturing, companies actually produce the goods they sell to the wholesaler,

retailer or other manufacturers. These companies normally have three inventories. The

first is raw materials, which makes up the items that will be used in the production

process. The second inventory is work-in-process that consists of items being workedon, but not yet complete. Work-in-process inventory includes the cost of raw materials

used, the cost of labor that can be directly traced to the goods in process, and the

allocated portion of other manufacturing costs, called manufacturing overhead.

Overhead costs include electricity and other utility costs, depreciation of manufacturing

equipment, and many other manufacturing costs that cannot be directly linked to the

production of specific goods. The third is finished goods inventory which consists of

items that are available for sale (Spiceland, Sepe, & Tomassisni, 2007).

2.1.2.3 Inventory Systems

There two inventory systems available to record inventory transactions. The most

common system is the perpetual inventory system, which is used by the majority of

companies. In the perpetual inventory system, inventory is continuously updated every


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time a purchase of an item for resale occurs and every time a sale to a customer took

place. An important feature of a perpetual system is that it is designed to track inventory

quantities from their acquisition to their sale. (Spiceland, Sepe, & Tomassine, 2003)

In theperiodic inventory system, it cant be determined cost of goods sold until the end

of the accounting cycle which is usually at the end of the month or the end of the year.

In the perpetual inventory system, cost of goods sold is recorded each time a sale is

made to a customer (Spiceland, Sepe, & Tomassine, 2003).

2.1.2.4 What is Included in Inventory

As a general rule, inventory should include all costs necessary to purchase the inventory

item and get it to its intended location. All goods owned by the company should be

included in inventory. There is a problem with goods in transit (goods that are in route

from the supplier to our company). Technically, ownership of the goods depends upon

whether they are shipped FOB shipping point or FOB destination. When goods are

shipped FOB shipping point, title to the goods transfers when the goods are given to the

common carrier and are owned by the buyer. When goods are shipped FOB destination,

the goods are owned by the seller until received by the buyer. Company A may have

inventory out on consignment with another company. The consigned inventory still is

owned by Company A and should be included in inventory (Spiceland, Sepe, &

Tomassine, 2003). An item of inventory should include its invoice price plus any freight

for transportation to our business. It is reduced the cost of the inventory items by any

purchase returns and allowances or purchase discounts.

2.1.2.5 Inventory Cost Flow Assumptions

Specific Identification Method: It sometimes possible for each unit sold during the

period or each unit on hand at the end of the period to be matched with its actual cost,

actual costs can be determined by reference to the invoice representing the purchase ofthe item. This method is used frequently by companies selling unique, expensive

products with low sales volume which makes relatively easy and economically feasible

to associate each item with its actual cost. If the items in inventory are homogeneous in

nature, it is not necessary for the seller to use specific identification method. Rather, the


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seller may follow the more convenient, using a cost follow assumptions (Spiceland,

Sepe, & Tomassisni, 2007).

Average Cost Method: When average cost method is in use, the average cost of all

units in the inventory is computed after every purchase. This average cost is computed

by dividing the total cost of goods available for sale by the number of units in the

inventory. (Meigs, Meigs, & Wittington, 1996).

First-In, First-Out: The first-in, First-out method, often called FIFO, is based on the

assumption that first merchandise purchased is the first merchandise sold. It uses actual

purchase cost, rather than an average cost. Thus, if the inventory has been purchased at

several different costs, the inventory will include several different layers. Also, the cost

of goods sold for a given sells transaction may involve several different layers. (Meigs,

Meigs, & Wittington, 1996).

Last-In, First-Out: The last-in, first-out, commonly known as LIFO, is among the most

widely used methods of determining the cost of goods sold and valuing inventory. As

the name suggest, the most recently purchased merchandise is assumed to be sold first.

The last-in, first-out method uses actual purchase cost, rather than an average cost. Thus,

inventory may have several different cost layers. If a sale includes more units than are

included in the most recent cost layer, some of the goods sold are assumed to come from

the next most recent layers (Meigs, Meigs, & Wittington, 1996)

2.1.3.1 Accounting for Depreciation

The matching principle requires that part of the acquisition cost of property, plant, and

equipment and intangible assets be expensed in periods when the future revenues are

earned. A portion of an assets cost is moved from the balance sheet to the income

statement each period.

Depreciation, depletion, and amortization are cost allocation processes. The cost of the

asset is allocated to expense over its useful life in some rational and systematic manner.

The unused portion of the assets cost appears on the balance sheet. We allocate a


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portion of the cost to expense on the income statement each accounting period.

Accumulated depreciation represents the depreciation taken on the asset since its

purchase, and is deducted from the assets cost on the balance sheet (Spiceland, Sepe, &

Tomassine, 2003).

Depreciation, depletion, or amortization of an asset used in manufacturing a product is a

part of the product cost that is included in inventory. The depreciation, depletion, or

amortization does not immediately become an expense, but is expensed as part of cost of

goods sold when the product is sold. Depreciation is term used for the cost allocation

process for the plant and equipment category. Land is not depreciated. Depletion is the

cost allocation process for natural resources, and amortization refers to the allocation of

intangible asset costs. Depreciation, depletion, and amortization are processes used for

cost allocation, not valuation. Accumulated depreciation is a contra-asset account and is

subtracted from the assets cost to determine book value. Net property, plant, &

equipment is the undepreciated cost (book value) of plant assets. Book value is not

equal to market value (Spiceland, Sepe, & Tomassine, 2003).

2.1.3.2 Measuring Cost Allocation

Regardless of the method used to calculate the amount of cost allocated to a period, we

must have three items of information: (1) the estimated useful life of the asset; (2) the

allocation base which is the cost of the asset less its estimated residual value at the end

of its useful life, and (3) the allocation method (Spiceland, Sepe, & Tomassisni, 2007).

2.1.3.3 Depreciation

There are two general approaches to depreciation: time-based methods and activity

based methods. The most commonly used time-based method is the straight-line method

that results in an equal amount of depreciation in each period. The other time-based

methods are referred to as accelerated methods because they result in a greater amountof depreciation in the earlier years of an assets life. Sum-of-the-years digits and

declining balance are two accelerated methods.


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Activity-based methods use a measure of an assets output in a period for the

depreciation computation. Units-of-production is an activity-based method. It will be

examined each of these methods with examples as we study depreciation (Spiceland,

Sepe, & Tomassisni, 2007).

2.1.3.4 Straight-Line Method

The straight-line method is the most widely used and the most easily understood method

of depreciation. It results in an equal amount of depreciation in each year of an assets

useful life. The annual depreciation is determined by dividing the assets cost less its

estimated residual value by the assets estimated useful life in years. The book value is

equal to the estimated residual value at the end of the assets useful life. We want this to

be true regardless of the method we use (Spiceland, Sepe, & Tomassisni, 2007).

2.1.3.5 Accelerated Method

Accelerated methods result in more depreciation in the early years of an assets useful

life and less depreciation in later years of an assets useful life. The total amount of

depreciation over the assets useful life is the same as the straight-line method

(Spiceland, Sepe, & Tomassisni, 2007).

2.1.3.6 Sum-of-the-Years Digits (SYD)

Sum-of-the-years-digits depreciation is calculated by multiplying cost minus residual

value times a fraction that declines each year of an assets useful life. The numerator of

the fraction is a number equal to the remaining useful life of the asset. For an asset with

a four-year life, the numerator would be four for the first year, three for the second year,

two for the third year and one for the fourth year. The denominator of the fraction is

constant. It is the sum of the digits in the assets life from one to n, where n is the

number of years in the assets life. For example, if the estimated life is four years, the

sum of the digits is 1 plus 2 plus 3 plus 4, a total of 10.

=[ ( + ) ]


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The formula above is a more efficient way of computing the sum-of-the-years digits.

For the same asset with a four year life, the computation is 4 plus 1 equals 5, times 4

equals 20, divided by 2 equals 10, the same result as summing the individual digits


Notice that depreciation is less each succeeding year of the assets life. Accumulated

depreciation increases by each year by the amount of the depreciation expense. The

book value is equal to the estimated residual value at the end of the assets useful life.

We want this to be true regardless of the method we use (Spiceland, Sepe, &

Tomassisni, 2007).

2.1.3.7 Units-of-Production

The units-of-production depreciation computation is much like the straight-line method.

We divide cost minus residual value by estimated useful life in both methods. However,

the useful life is measured in units of output using the units-of-production method,

resulting in a depreciation rate per unit of production. Once we compute the depreciation

rate per unit of output, we may calculate depreciation for the period by multiplying the

depreciation rate per unit times the number of units produced in the current period. We

will use the same information for the units-of-production method, but for this example

we will add the number of units produced for the first year (Meigs, Meigs, & Wittington,

1996).

2.1.4 Fixed Assets

2.1.4.1 Types of Fixed Assets

Long-lived, revenue producing assets are assets that are used actively in the business,

and that are expected to benefit the operations into the future (Spiceland, Sepe, &

Tomassine, 2003).

There are two major categories of these assets. Tangible assets have physical substance.

Included in this category are land, buildings, equipment, machinery, vehicles, and

natural resources such as oil, gas, and mineral deposits. Intangible assets are assets


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without physical substance. Included in this category are patents, copyrights,

trademarks, franchises, and goodwill (Spiceland, Sepe, & Tomassine, 2003).

Long-lived, revenue-producing assets may be acquired in a number of ways. Regardless

of the method of acquisition, the assets are recorded at their original cost. The recorded

cost includes the purchase price and all expenditures necessary to bring the asset to its

desired condition and location for use (Spiceland, Sepe, & Tomassine, 2003).

Equipment The costs to be capitalized for equipment include: the net purchase price, less

discounts; taxes; transportation costs; installation costs; modification to a building

necessary to install the equipment; and testing and trial runs (Spiceland, Sepe, &

Tomassine, 2003).

Land The cost of land includes: the purchase price; real estate commissions; attorneys

fees; title search; title transfer fees; title insurance premiums; and the cost of making

the land ready for its intended use, including the cost of removing old buildings

(Spiceland, Sepe, & Tomassine, 2003).

Unlike other long-lived, revenue-producing assets in the fixed assets category, land is

not depreciated. Land improvements are enhancements to property such as driveways,

parking lots, fencing, landscaping, and private roads. These are separately identifiable

costs that are recorded in the land improvement asset account rather than in the land

account. Unlike land, land improvements are depreciated (Spiceland, Sepe, &

Tomassine, 2003).

Building The cost of buildings includes: the purchase price; real estate commissions;

attorneys fees; and reconditioning costs to get the building ready for use (Spiceland,

Sepe, & Tomassine, 2003).

2.1.4.2 Valuation of Fixed Assets

In summary, the accounting treatment of both tangible and intangible fixed assets is the

initial recognition and measurement of such assets, the need for depreciation and how to

handle changes that occur over time, including impairment. Some countries in the world


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require the use of historical cost accounting, but others are used to permit upward

revaluations of fixed assets under its mixed measurement approach (Lewis & Pendrill,

2004).

The financial reporting standards relating to fixed assets are very flexible at a

fundamental level while they are more rigid at the operational level. Thus companies

may choose whether or not to capitalize borrowing costs and, perhaps much more

seriously, may choose whether to show their various classes of fixed assets on the basis

of historical cost or at current values. The choices which they make may lead to

enormous differences between financial statements in practice and hence raise serious

questions about the comparability of financial statements (Lewis & Pendrill, 2004).

2.2 Financial Statements

There are major financial statements: Balance Sheet Statement, Income Statement, and

Cash Flow Statement.

2.2.1 Balance Sheet Statement

The purpose of the balance sheet is to report a companys financial position on a

particular date. It is a freeze frame or snapshot of financial position at the end of a

particular day marking the end of an accounting period. A limitation of the balance sheet

is that assets minus liabilities, measured according to generally accepted accounting

principles, is not likely to be representative of the market value of the entity. Many

assets, like land and buildings, are measured at their historical costs rather than their

market values. Relatedly, many company resources including its trained employees, its

experienced management team, and its reputation are not recorded as assets at all.

However, despite these limitations, the balance sheet does have significant value. The

balance sheet provides information useful for assessing future cash flows, liquidity, and

long-term solvency. The three primary elements of the balance sheet are assets,

liabilities and owners equity (Spiceland, Sepe, & Tomassisni, 2007).


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2.2.2 Disclosure Notes

The full-disclosure principle requires that financial statements provide all material,

relevant information concerning the reporting entity. The summary of significant

accounting policies conveys valuable information about the companys choices fromamong various alternative accounting methods. For example, management chooses

whether to use accelerated or straight-line depreciation and whether to use first-in, first-

out; last-in, first-out; or weighted average to measure inventories. Typically, this first

disclosure note consists of a summary of significant accounting policies that discloses

the choices the company makes (Spiceland, Sepe, & Tomassisni, 2007).

A subsequent event is a significant development that takes place after the companys

fiscal year-end but before the financial statements are issued. Examples include the

issuance of debt or equity securities, a business combination or the sale of a business, the

sale of assets, an event that sheds light on the outcome of a loss contingency, or any

other event having a material effect on operations (Spiceland, Sepe, & Tomassisni,

2007).

Some transactions and events occur only occasionally, but when they do occur are

potentially important to evaluating a companys financial statements. In this category

are related party transactions, errors and irregularities, and illegal acts (Spiceland, Sepe,

& Tomassisni, 2007).

2.2.3 Income Statement

Income from continuing operations includes revenues, expenses, gains and losses that

will probably continue in future periods. Revenues are inflows of resources resulting

from providing goods or services to customers. Expenses are outflows of resources

incurred in generating revenues. Gains and losses are increases or decreases in equity

from peripheral or incidental transactions of an entity. Income tax expense is reportedseparately because of its importance and size (Spiceland, Sepe, & Tomassisni, 2007).

A distinction is often made between operating and nonoperating income. Operating

income includes revenues and expenses directly related to the principal revenue-


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generating activities of the company. Nonoperating income includes gains and losses

and revenues and expenses related to peripheral or incidental activities of the company


No specific standards dictate how income from continuing operations must be displayed,

so companies have flexibility. However, there are two general approaches: the single-

step format and the multiple-step format. A single-step income statement format groups

all revenues and gains together and all expenses and losses together. An advantage of the

single-step format is its simplicity. The multiple-step income statement format includes

a number of intermediate subtotals before arriving at income from operations. However,

notice that the net income is the same no matter which format is used. A primary

advantage of the multiple-step format is that, by separately classifying operating and

nonoperating items, it provides information that might be useful in analyzing trends.

Similarly, the classification of expenses by function also provides useful information


2.2.4 Cash Flow Statement

The purpose of the statement of cash flows is to provide information about the cash

receipts and cash disbursements of an enterprise that occurred during a period. The

statement of cash flows helps investors and creditors assess future net cash flows,

liquidity, and long-term solvency. A statement of cash flows is required for each income

statement period presented.

2.2.4.1 Classification of Cash Flow

Operating activities are inflows and outflows of cash related to the transactions entering

into the determination of net operating income. The difference between the inflows and

the outflows is called net cash flows from operating activities. This is equivalent to net

income if the income statement had been prepared on a cash basis rather than an accrualbasis (Spiceland, Sepe, & Tomassine, 2003).

Two generally accepted formats can be used to report operating activities, the direct

method and the indirect method. By the direct method, the cash effect of each operating


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activity is reported directly in the statement of cash flows. By the indirect method, cash

flow from operating activities is derived indirectly by starting with reported net income

and adding or subtracting items to convert that amount to a cash basis (Spiceland, Sepe,

& Tomassine, 2003).

Investing activities involve the acquisition and sale of (1) long-term assets used in the

business and (2) nonoperating investment assets (Spiceland, Sepe, & Tomassine, 2003).

Financing activities involve cash inflows and outflows from transactions with creditors

and owners. Significant investing and financing transactions not involving cash also are

reported. For example, a significant investing and financing activity would be

acquisition of equipment (an investing activity) by issuing a long-term note payable (a

financing activity) (Spiceland, Sepe, & Tomassine, 2003).

2.3 Changing Accounting Policy and Financial Statements

2.3.1 Inventory Valuation and Financial Statement

LIFO matches the current $ amount of sales revenue with the most current $ amount of

cost of goods sold. This means that the matching of revenues and expenses on the

income statement is currently realistic. However, the inventory of asset on the balance

sheet will be stated in unrealistically low $ terms, compared to current replacement costs

(Istvan & Avery, 1979).

FIFO matches the current $ amount of sales revenue with older $ mount of cost of goods

sold. This may make the matching of revenues and expenses on the income statement

unrealistic. However, the inventory asset on the balance sheet will be stated in most

current $ cost, compared to current replacement costs (Istvan & Avery, 1979).

WEIGHTED AVERAGE is a sort of compromise that does not match current sales

revenue $s with current cost of goods sold $s or provide a current $ cost of inventory for

balance sheet purposes (Istvan & Avery, 1979)


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CHAPTER THREE

METHODOLOGY

3.1 Research DesignThis study employed descriptive correlation design. Correlation is a research design is

where the researcher collects data from two quantifiable variables from the same group

of subjects and then compares how they vary. It will be used to describe the relationship

between changing accounting policy and financial statement of Kaah Petroleum

Companies in Mogadishu, because correlation design will enable the researcher to

determine whether, and to what degree, a relationship exist between the variables of the

study.

3.2 Population and Sampling

3.2.1 Target Population

The population of this study was all managers, accountants, cashiers, and other staffs in

Kaah Petroleum Companies in Mogadishu. Since the population was too large to attain,

the researcher chose an accessible or target population of five companies; eleven

managers, fifteen accountants, ten cashiers, and fourteen other staffs.

3.2.2 Sample

Based on the fifty respondents as the target population of this study, the researcher

sampled forty four (45) of whom ten are managers, thirteen are accountants, nine are

cashiers, and the remaining thirteen are the other staffs in that companies. To reach the

minimum sample size, the researcher used Slovens formula as follows:

=

Where:

n=is the minimum sample size required

N= is the target population

e=is the level of significant, it is assumed to be 5%


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So,

=

(.) =44.4444444

=45 (approximately)

Table 3.1 on the below shows the sample size of the respondents

Table 3.1: Respondents of the Study

Sample Companies Frequency Percentage

Nationwide Petroleum Company 7 15.56%

Deeqa Petroleum Company 10 22.22%

Basra Petroleum Company 9 20%

Alla-Magan Petroleum Company 10 22.22%

Bagdaad Petroleum Company 9 20%

Total 45 100%


3.2.3 Sampling Techniques

To select the forty five Respondents, the researcher used stratified random sampling.

The researcher stratified respondents according to their department and then used

systematic random sampling to select respondents in each department, basing on their

numbers in each

3.3 Research Instrument

The researcher used questionnaires as the major data collection instrument.Questionnaire was divided into four selections such as profile of respondents,

accounting policy used, the level of financial statement, and the impact of changing

accounting policy on financial statement.


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3.5 Data Analysis

Frequencies and percentages distribution was used to analyze data on the profile of the

respondents. Means and standard deviations were used to determine the impact of

changing accounting policy on financial statement. The Pearsons linear correlationscoefficient was used to describe the relationship between accounting policy and financial

statement.

The researcher used Pearsons Linear Correlation Coefficient (PLCC) to analyze the

relationship between changing accounting policy and financial statement. A correlation

study is a statistical technique that enables the researcher to measure and describe the

relationship between two variables X and Y. After the researcher had collected the data,

it was stored manually in SPSS worksheet.

Statistical package for social science (SPSS version 17) was used to tabulate and cross

tabulate the data. Thereafter, the researcher had made an interpretation of the frequency

tables and accordingly made a summary of findings, conclusions and recommendation.

To interpret the obtained data from the respondents, the following numerical value and

description were used:

Mean Range Description

3.26-4.00 Very good

2.51-3.25 Good

1.76-2.50 Fair

1.00-1.75 Poor


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CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION

4.1 Demographical Characteristics of the RespondentTable 4.1 Age of the Respondents

Respondent Age Frequency Percent Cumulative Percent

20-30 14 31.1 31.1

30-45 18 40.0 71.1

45 and above 13 28.9 100.0

Total 45 100.0

Mean=1.9778 Std. Deviation=0.78303 Variance=0.613


The highest number of respondent 18 (40%) were aged in between (30-45) years, while

14 (31.1%) were aged between (20-30) years, and 13 (28.9%) were aged (45 and above)

years. This shows that more than 70% of respondents were aged 45 years or less.


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Table 4.2 Gender of the Respondents

Sex Frequency Percent Cumulative Percent

Male 30 66.7 66.7

Female 15 33.3 100.0

Total 45 100.0



From table 4.2 and the figure below showed that 66.7% of the respondents were male, so

as usual and as many researches showed male dominate in Mogadishu markets and

Petroleum markets are not exceptional as this research indicates.


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Table4.3 The Level of the Respondents' Experience

Experience Frequency Percent Cumulative Percent

Less than one year 10 22.2 22.2

1-2 years 11 24.4 46.7

3-4 years 14 31.1 77.8

5 or more 10 22.2 100.0

Total 45 100.0


About 77.8% of the respondents had an experience of 4 years or less. This is a well

indication that there are new comers who enter in the market and the old ones disappear

after a short time (often 4 years or less). The graph below also shows the same

information.


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Table 4.4 The Level of the Respondents' Education

Education Frequency Percent Cumulative Percent

Secondary 6 13.3 13.3

Bachelor 10 22.2 35.6

Master 7 15.6 51.1

Informal 16 35.6 86.7

Others 6 13.3 100.0

Total 45 100.0



From the table 4.4 and figure 4.4 it can be understood that 35.6% of the respondent were

educated informally, so there can be understood that there is no more educational

background as required.


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Table 4.5 The Occupation of the Respondents

Status Frequency Percent Cumulative Percent

Manager 10 22.2 22.2

Accountant 13 28.9 51.1

Cashier 9 20.0 71.1

Others 13 28.9 100.0

Total 45 100.0



Table 4.5 and the figure below show that 71.1% of the respondents were managers,cahiers, or accountants and hence any information they provide can be relied as their

companies accounting policy.


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4.3 Accounting Policies Applied by Kaah Petroleum Companies

Table 4.6 Your company follows the accounting assumption of going concern concept

and consistent in accounting policy

Frequency Percent Cumulative Percent

Agree 17 37.8 37.8

Strongly Agree 8 17.8 55.6

Disagree 11 24.4 80.0

Strongly Disagree 9 20.0 100.0

Total 45 100.0



From the table 4.6, 37.8% of the respondents agreed that their company uses the

accounting concept of going concept and consistent in accounting policy, 24.4%

disagreed, 20% strongly disagreed, and 17.8% strongly agreed.

9

11

8

17


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Table 4.7 Inventories is valued at lower of cost and net realizable value


Agree 9 20.0 20.0


Disagree 10 22.2 82.2


Total 45 100.0

` Mean=2.3778 Std. Deviations=1.00654 Variance=1.013


Table 4.7 and figure 4.7 indicate that 60% of the respondents are at least agreed that they

value their inventory at lower of cost and net realizable value where 17.8% (8

respondents out of 45) of them are strongly disagreed, and the remaining 22.2% have

doubts whether they use this method or not.

8

10

18

9


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Table 4.8 You always make physical verification at the end of the year


Agree 12 26.7 26.7


Disagree 11 24.4 77.8


Total 45 100.0



The table above indicates that only 24(53.3%) of all respondents make year end physical

verification and the remaining 21 (46.7%) disagreed that they make physical verification

at the end of the year.

1011

1212


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Table 4.9 When you retire a fixed asset from active use and held for disposable, you

show it separately as part of the other current asset


Agree 14 31.1 31.1


Disagree 9 20.0 82.2


Total 45 100.0



Table 4.9 with the figure below showed 14 (31.1%) of the respondents agreed that they

show the fixed assets separately as part of the other current assets, when they retire it

from active use and held for disposable, 14 (31.1%) strongly agreed, 9 (20%) disagreed,

and only 8 (17%) strongly disagreed.

89

1414


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Table 4.10 Your company follows straight line method for depreciation its fixed assets


Agree 9 20.0 20.0


Disagree 11 24.4 73.3


Total 45 100.0



As the table 4.10 indicated 20% of the respondents agreed that they use the straight line

method of depreciation for their fixed assets, 28.9% strongly agreed, 26.7% disagreed,

and 26.7% strongly disagree.

1211

13

9


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4.4 Financial Statement of Kaah Petroleum Companies in Mogadishu

Table 4.11 Additions to fixed assets is depreciated independent of the original asset

based on the assessment of its useful life


Agree 14 31.1 31.1




Total 45 100.0



From table 4.11, 31.1% of the respondents agreed that Additions to fixed assets is

depreciated independent of the original asset based on the assessment of its useful life,

26.7% strongly agreed, 17.8% disagreed and 24.4% strongly disagreed.

11

8

1214


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Table 4.12 Depending on the principal activity of the enterprise, the classification of the

items in cash flow is appropriately made into operating, financing, and investment

activities


Agree 15 33.3 33.3




Total 45 100.0



From table 4.12, 33.33% of the respondents agreed that Depending on the principal

activity of the enterprise, the classification of the items in cash flow is appropriately

made into operating, financing, and investment activities, 24.4% strongly agreed, 20%

disagreed and 22% strongly disagreed.

109

11

15


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Table 4.13 You make a disclosure for transactions and events that have importance for

evaluating a company's financial statement


Agree 14 31.1 31.1


Disagree 13 28.9 82.2


Total 45 100.0



From table 4.13, 31.1% of the respondents agreed that they make disclosure for

transactions and events that have importance for evaluating a company's financial

statement, 22.2% strongly agreed, 28.9% disagreed, and 17.8% strongly disagreed.

8

13

10

14


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Table 4.14 You use a single step income statement for preparing financial statement


Agree 13 28.9 28.9




Total 45 100.0



From table 4.14, 28.9% of the respondents agreed that they use a single step income

statement for preparing financial statement, 24.4% strongly agreed, 17.8% disagreed,

and 28.9% strongly disagreed.

13

8

11

13


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Table 4.15 The method you use in evaluating your inventory have effect in your balance

sheet


Agree 15 33.3 33.3


Disagree 13 28.9 77.8


Total 45 100.0



From table 4.15, 33.3% of the respondents agreed that the method they use in evaluating

have an effect in their balance sheet, 15.6% strongly agreed, 28.9% disagreed, and

22.2% strongly disagreed.

10

13

7

15


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4.5 Impact of Changing Accounting Policy on Financial Statement

Table 4.16 You expense all cost you incur after the purchase of the fixed asset


Agree 19 42.2 42.2




Total 45 100.0



From table 4.16, 42.2% of the respondents agreed that they expense all cost they incur

after the purchase of the fixed asset, 28.9% strongly agreed, 15.6% disagreed, and 13.3%

strongly disagreed.

67

13

19


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Table 4.17 You only change your accounting policy in order to present the financial

statement in a manner so as to present a true and fair view of the state of affairs of the

enterprise


Agree 14 31.1 31.1


Disagree 13 28.9 84.4


Total 45 100.0



From table 4.17, 31.1% of the respondents agreed that they only change their accounting

policy in order to present the financial statement in a manner so as to present a true and

fair view of the state of affairs of the enterprise, 24.4% strongly agreed, 28.9%

disagreed, and 15.6% strongly disagreed.

7

13

11

14


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Table 4.18 There is no need for a clear distinction for the extraordinary items of the

income statement from the ordinary items of the company


Agree 5 11.1 11.1


Disagree 11 24.4 73.3


Total 45 100.0



From table 4.18, 11.1% of the respondents agreed that there is no need for a clear

distinction for the extraordinary items of the income statement from the ordinary items

of the company, 37.8% strongly agreed, 24.4% disagreed, and 26.7% strongly disagreed.

1211

17

5


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Table 4.19 You always revaluate your fixed assets if there is a significant decline in the

market value of that fixed asset


Agree 16 35.6 35.6




Total 45 100.0



From table 4.19, 35.6% of the respondents agreed that they always revaluate their fixed

assets if there is a significant decline in the market value of that fixed asset, 22.2%

strongly agreed, 17.8% disagreed, and 24.4% strongly disagreed.

11

8

10

16


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CHAPTER FIVE

DISCUSSION

5.1 Characteristics of the Respondents

This part presents the background information of the respondents who participated in the

study. The purpose of this background information was to find out the characteristics of

the respondents and show the distribution of respondents in the study.

The findings of the study showed that the majority of the respondents represented, 40%,

were in the age bracket 30-45, 66.7% were male, 31.1%, served their companies for a

period between 3 and 4 years, 35.6%, was educated informally, and Accountants

represented the most respondents, 28.9%.

5.2 Accounting Policies Applied by Kaah Petroleum Companies

The second objective of this study was to identify the accounting policies applied by

Kaah Petroleum Companies in Mogadishu. Based on the analysis from chapter four, the

researcher found that a great portion of Kaah Petroleum Companies in Mogadishu use

both accounting concepts of going concern and consistence in accounting policy their

mean, 2.3, assigned to be fair as pointed in chapter 3. The majority of these companiesdo not use the lower of cost and net realizable value. So, it seems that their financial

statements do not give a true picture of their situation. However, their mean, 2.4,

suggests a fair. Most of them make physical verification at the end of the year. Evert

organization is required to make physical count of their inventories at least once a year.

Most of the Kaah Petroleum Companies show their fixed assets separately as part of the

other current assets when they retire it and held for disposable. It is a good behavior not

to mislead the users of financial statement by writing a fixed asset which is going to be

disposed in a moment and also couldnt fit by the definition of fixed asset. Yet their

mean, 2.2, showed to be fair. Approximately half of these companies use a straight line

method for depreciating their fixed assets. Since there is no tax to be avoided, using a


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straight line method is more convenience than any other method and their mean, 2.6,

showed a good indication.

5.3 Financial Statement of Kaah Petroleum Companies in Mogadishu

The third objective of this study was to identify the degree of financial statement used by

Kaah Petroleum Companies in Mogadishu. Most of the petrol merchandisers in

Mogadishu depreciate their new fixed assets independently from the old ones based on

their useful life to make their financial statement reflect the true picture of their

situation. This is not an accidently application, there is an accounting theory calls for

depreciating each fixed asset independent from others. But their mean, 2.4, shows a fair

indication. These companies classify their cash flows into operating, financing, and

investment activity. As pointed in chapter 2, cash flow statement is classified as they do,

however, their mean, 2.3, is a fair indication. Majority of them disclose transactions and

events that have importance for evaluating a companys financial statement. Disclosure

is one of financial statemen

The Impact of Changing Accounting Policy on Financial Statement

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