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MOGADISHU UNIVERSITY

FACULTY OF ECONOMICS AND MANAGEMENT SCIENCE


DEPARTMENT OF ACCOUNTING

Title of the Thesis
The impact of changing
account ing pol icy on f inancial
st at ement
(kaah pet r ol eum companies)


Supervisor Student
Mr. Liban Muhiadin Hussein Ahmed Omar M. Moed


Academi c year 2011-2012

II



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


M ogadishu U niversit y
Academic year: 2011-2012

For Graduat e Commi t t ee
_____________________________
_____________________________
_____________________________
_____________________________


D ean of t he Facul t y of Economi cs and M anagement Sci ence
__________________________________
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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 kind of support during the time of study.
May Allah reward you abundantly.
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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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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 ....................................................................................................... 1
1.1 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 ......................................................................................... 4
1.3 Purpose of the Study ................................................................................................ 5
1.4 Research Objectives ................................................................................................. 5
1.4.1 General Objectives ................................................................................................ 5
1.4.2 Specific Objectives: .............................................................................................. 5
1.5 Research Questions .................................................................................................. 5
1.6 Significance of the Study ......................................................................................... 6
1.7 Scope of the Study ................................................................................................... 6
1.8 Theoretical and Conceptual Frameworks ................................................................. 6
1.8.1 Theoretical Framework .................................................................................... 6
1.8.2 Conceptual Framework .................................................................................... 7

CHAPTER TWO
LITERATURE REVIEW .............................................................................................. 7
2.0 Introduction ............................................................................................................. 8
VII



2.1 Accounting Policies ................................................................................................. 8
2.1.1.1 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 .......................................................................... 13
2.1.3.3 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 .............................................................................................. 17
2.2.1 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 .......................................... 20
2.3.1 Inventory Valuation and Financial Statement .................................................. 20
CHAPTER THREE
METHODOLOGY ...................................................................................................... 21
3.1 Research Design .................................................................................................... 21
VIII



3.2 Population and Sampling ....................................................................................... 21
3.2.1 Target Population ............................................................................................ 21
3.2.2 Sample ............................................................................................................ 21
3.2.3 Sampling Techniques ...................................................................................... 22
3.3 Research Instrument .............................................................................................. 22
3.5 Data Analysis ........................................................................................................ 23

CHAPTER FOUR
DATA ANALYSIS AND INTERPRETATION .......................................................... 24
4.1 Demographical Characteristics of the Respondent .................................................. 24
4.3 Accounting Policies Applied by Petroleum Merchandisers .................................... 29
4.4 Financial Statement of Petroleum Merchandisers in Mogadishu ............................. 34
4.5 Impact of Changing Accounting Policy on Financial Statement ............................. 39
CHAPTER FIVE
DISCUSSION ............................................................................................................. 43
5.1 Characteristics of the Respondents ......................................................................... 43
5.2 Accounting Policies Applied by Petroleum Merchandisers .................................... 43
5.3 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 ..................................... 46
6.1 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............................................................................................................. 47
6.2.1 Accounting Policies Applied by Petroleum Merchandisers .............................. 47
6.2.2 Financial Statement of Petroleum Merchandisers in Mogadishu ...................... 47
6.1.4 Impact of Changing Accounting Policy on Financial Statement....................... 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
6.3.3 Financial Statement of Petroleum Merchandisers in Mogadishu ...................... 48
6.3.4 Impact of Changing Accounting Policy on Financial Statement....................... 48
6.4 Areas for Further Research .................................................................................... 48
References ................................................................................................................... 49
APPENDICES............................................................................................................. 51
QUESIONNAIRE ................................................................................................... 51
Section one: Demographic Characteristics of the Respondents ................................ 51
Section Two: The Impact of Changing Accounting Policy on Financial Statement .. 52




X



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 fixed
asset...............................................................................................................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......................................................................................................... ..39
Figure 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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ABSTRACT
This 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 single
accounting 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.
1

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 audited
financial 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 in
terms 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. He
suggests 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.


5


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 in
Mogadishu, 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).
7



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
8


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
9


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 fair
view 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 maintain
guidelines 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 worked
on, 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 the periodic 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 of
the 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
12


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
13


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 amount
of depreciation in the earlier years of an assets life. Sum-of-the-years digits and
declining balance are two accelerated methods.
14


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.
Sum uI the Years
i
Dtgtts =
[ UseIul Ltve ( UseIul Ltve + 1) ]
2

15


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
(Spiceland, Sepe, & Tomassisni, 2007).
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
16


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
17


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).
18


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 from
among 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 reported
separately 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-
19


generating activities of the company. Nonoperating income includes gains and losses
and revenues and expenses related to peripheral or incidental activities of the company
(Spiceland, Sepe, & Tomassisni, 2007).
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
(Spiceland, Sepe, & Tomassisni, 2007).
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 accrual
basis (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
20


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)

21


CHAPTER THREE
METHODOLOGY
3.1 Research Design
This 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:
n =
N
1+Ne
2
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%
22


So,
n =
5
1+5( .5)
2
=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%
Source: Primary Data, 2012
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.

23


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 correlations
coefficient 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
24


CHAPTER FOUR
DATA ANALYSIS AND INTERPRETATION
4.1 Demographical Characteristics of the Respondent
Table 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
Source: Primary Data, 2012
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.

25


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
Mean=1.3333 Std. Deviation=0.47673 Variance=0.227
Source: Primary Data, 2012
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.

26


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
Mean=2.5333 Std. Deviation=1.07872 Variance=1.164
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.

27


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
Mean=3.1333 Std. Deviation=1.28982 Variance=1.1664
Source: Primary Data, 2012
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.


28


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
Mean=3.0444 Std. Deviation=1.60900 Variance=2.589
Source: Primary Data, 2012
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.

29


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
Mean=2.2667 Std. Deviation=1.17551 Variance=1.382
Source: Primary Data, 2012
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
30


Table 4.7 Inventories is valued at lower of cost and net realizable value
Frequency Percent Cumulative Percent
Agree 9 20.0 20.0
Strongly Agree 18 40.0 60.0
Disagree 10 22.2 82.2
Strongly Disagree 8 17.8 100.0
Total 45 100.0
` Mean=2.3778 Std. Deviations=1.00654 Variance=1.013
Source: Primary Data, 2012
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
31


Table 4.8 You always make physical verification at the end of the year
Frequency Percent Cumulative Percent
Agree 12 26.7 26.7
Strongly Agree 12 26.7 53.3
Disagree 11 24.4 77.8
Strongly Disagree 10 22.2 100.0
Total 45 100.0
Mean=2.4222 Std. Deviation=1.11781 Variance=1.249
Source: Primary Data, 2012
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.



10
11
12
12
32


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
Frequency Percent Cumulative Percent
Agree 14 31.1 31.1
Strongly Agree 14 31.1 62.2
Disagree 9 20.0 82.2
Strongly Disagree 8 17.8 100.0
Total 45 100.0
Mean=2.2444 Std. Deviation=1.09036 Variance=1.189
Source: Primary Data, 2012
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.


8
9
14 14
33


Table 4.10 Your company follows straight line method for depreciation its fixed assets
Frequency Percent Cumulative Percent
Agree 9 20.0 20.0
Strongly Agree 13 28.9 48.9
Disagree 11 24.4 73.3
Strongly Disagree 12 26.7 100.0
Total 45 100.0
Mean=2.5778 Std. Deviation=1.09729 Variance=1.204
Source: Primary Data, 2012
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.



12
11
13
9
34


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
Frequency Percent Cumulative Percent
Agree 14 31.1 31.1
Strongly Agree 12 26.7 57.8
Disagree 8 17.8 75.6
Strongly Disagree 11 24.4 100.0
Total 45 100.0
Mean=2.3556 Std. Deviation=1.17077 Variance=1.371
Source: Primary Data, 2012
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
12
14
35


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
Frequency Percent Cumulative Percent
Agree 15 33.3 33.3
Strongly Agree 11 24.4 57.8
Disagree 9 20.0 77.8
Strongly Disagree 10 22.2 100.0
Total 45 100.0
Mean=2.3111 Std. Deviation=1.16428 Variance=1.356
Source: Primary Data, 2012
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.

10
9
11
15
36


Table 4.13 You make a disclosure for transactions and events that have importance for
evaluating a company's financial statement
Frequency Percent Cumulative Percent
Agree 14 31.1 31.1
Strongly Agree 10 22.2 53.3
Disagree 13 28.9 82.2
Strongly Disagree 8 17.8 100.0
Total 45 100.0
Mean=2.3333 Std. Deviation=1.10782 Variance=1.227
Source: Primary Data, 2012
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
37


Table 4.14 You use a single step income statement for preparing financial statement
Frequency Percent Cumulative Percent
Agree 13 28.9 28.9
Strongly Agree 11 24.4 53.3
Disagree 8 17.8 71.1
Strongly Disagree 13 28.9 100.0
Total 45 100.0
Mean=2.4667 Std. Deviation=1.19848 Variance=1.436
Source: Primary Data, 2012
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
38


Table 4.15 The method you use in evaluating your inventory have effect in your balance
sheet
Frequency Percent Cumulative Percent
Agree 15 33.3 33.3
Strongly Agree 7 15.6 48.9
Disagree 13 28.9 77.8
Strongly Disagree 10 22.2 100.0
Total 45 100.0
Mean=2.4000 Std. Deviation=1.17551 Variance=1.382
Source: Primary Data, 2012
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
39


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
Frequency Percent Cumulative Percent
Agree 19 42.2 42.2
Strongly Agree 13 28.9 71.1
Disagree 7 15.6 86.7
Strongly Disagree 6 13.3 100.0
Total 45 100.0
Mean=2.00000 Std. Deviation=1.06600 Variance=1.136
Source: Primary Data, 2012
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.

6
7
13
19
40


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
Frequency Percent Cumulative Percent
Agree 14 31.1 31.1
Strongly Agree 11 24.4 55.6
Disagree 13 28.9 84.4
Strongly Disagree 7 15.6 100.0
Total 45 100.0
Mean=2.2889 Std. Deviation=1.07919 Variance=1.165
Source: Primary Data, 2012
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
41


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
Frequency Percent Cumulative Percent
Agree 5 11.1 11.1
Strongly Agree 17 37.8 48.9
Disagree 11 24.4 73.3
Strongly Disagree 12 26.7 100.0
Total 45 100.0
Mean=2.6667 Std. Deviation=1.000000 Variance=1.000
Source: Primary Data, 2012
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.


12
11
17
5
42



Table 4.19 You always revaluate your fixed assets if there is a significant decline in the
market value of that fixed asset
Frequency Percent Cumulative Percent
Agree 16 35.6 35.6
Strongly Agree 10 22.2 57.8
Disagree 8 17.8 75.6
Strongly Disagree 11 24.4 100.0
Total 45 100.0
Mean=2.3111 Std. Deviation=1.20269 Variance=1.446
Source: Primary Data, 2012
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
43


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 companies
do 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
44


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 statements and it seems to be an importance part of it. It shows the
non-monetary assets of the company, accounting policies adopted extra ordinary events
and transactions, probable contracts, budgets, etc. The majority of these companies use a
single step income statement which seems to be improper for many reasons. It doesnt
show the managers where the weakness and strength came from. Are the costs of sales
high? Are operating expenses low? The single step income statement doesnt give you a
solution for these questions, and also their mean shows a poor condition. A great number
of them agreed that the method they use in evaluating their inventory have effect in their
balance sheet which is a good indication.
5.4 Impact of Changing Accounting Policy on Financial Statement
The fourth objective of this study was to find the impact of changing accounting policy
on financial statement of Kaah Petroleum Companies in Mogadishu. Most of these
companies expense all cost they incur after the purchase of their fixed assets. This policy
has a great impact on the fairness of the financial statement. Any cost incurred after the
purchased of the fixed assets must be dealt with awareness. If these costs add a value to
45


fixed asset or increases the productivity and efficiency must be capitalized and any other
cost that neither add a value to the fixed asset nor increase the efficiency are expensed.
These companies agreed that they change their financial statement in order to present
their financial statement a true and fair view of the state of affairs, and this a fair
conditions as their mean suggests. Most of these companies didnt agree if there is no
need for clear distinction for the extraordinary items of income statement from ordinary
items of the company. Their mean suggests for a good condition. Finally, the majority of
these companies revaluate their fixed assets if there is a significance market decline in
their market value. This is not what is special for these companies. The prudence
concept in accounting (also known as conservatism) encourages revaluation the fixed
assets if their market value declines to save financial statement users from hurt.

46


CHAPTER SIX
SUMMERY, CONCLUSION, AND RECOMMENDATION
6.1 Summary of the Findings
This study was guided by four objectives which consisted as follows: (1) to determine
the demographic characteristics of the population in terms of: age, gender, experience,
level of education, and the status of the selected Kaah Petroleum Companies (2) to
determine the accounting policy they apply (3) to determine their financial statements
(4) to determine the impact of changing accounting policy on financial statement.
6.1.1 Characteristics of the Respondents
The descriptive statistics showed frequencies and percentages indicating the
characteristics of the respondents. The study showed that the majority of the respondents
in Kaah Petroleum Companies in Mogadishu are male, between 30 and 45 years, have
experience 3 to 4 years, have informal education, and are accountants.
6.1.2 Accounting Policies Applied by Kaah Petroleum Companies
Based on the analysis of chapter 4, the findings revealed that the majority of these
companies use both accounting concepts of going concern and consistence in accounting
principles; do not use the lower of cost and net realizable value in evaluating their
inventories; make physical verification at the end of the year; shows their fixed assets
separately as party of other current assets when they held for disposable; and use straight
line method of depreciation.
6.1.3 Financial Statement of Kaah Petroleum Companies in Mogadishu
As regard to financial statement, the study found that most of these companies
depreciate their new fixed assets independently from the old ones; classify their cash
flows into operating, financing, and investing activities; disclose events and transactions
that have importance for evaluating companys financial statement; use a single step
income statement; and agreed that the method they use in evaluating their inventory
have effect in their financial statement.
47


6.1.4 Impact of Changing Accounting Policy on Financial Statement
The study found that changing accounting policy has great impact on financial statement
of Kaah Petroleum Companies in Mogadishu, because the study found that most of these
companies change their accounting policy in order to present a true and fair view of the
state of affairs of the enterprise.
6.2 Conclusion
6.2.1 Accounting Policies Applied by Kaah Petroleum Companies
From the study, the majority of the Kaah Petroleum Companies in Mogadishu make use
of consistence in accounting policy and going concern concept. They also make physical
verification at the end of the year. This minimizes the fraud made by employees along
with using perpetual inventory system.
6.2.2 Financial Statement of Kaah Petroleum Companies in Mogadishu
From the study, the Kaah Petroleum Companies classify their cash flow into operating,
financing, and investing activities. This makes easy to analyse their cash flow statement.
The study also showed that they use a single step income statement which is improper in
the normal business.
6.1.4 Impact of Changing Accounting Policy on Financial Statement
From the study, the researcher found that a significant impact and effect of changing
accounting policy on financial statement. Thus, it can be concluded that there is an
impact of changing accounting policy on financial statement of Kaah Petroleum
Companies in Mogadishu.

48


6.3 Recommendation
6.3.1 Characteristics of the Respondents
The study showed that the most of the respondents were educated informally and at the
same time were the accountants. The researcher recommends these companies to employ
professional accountants to run their business well and to rescue in the long run.
6.3.2 Accounting Policies Applied by Kaah Petroleum Companies
The study showed that these companies make physical verification at the end of the year.
The researcher recommends to make physical verification at the end of each month and
to use a perpetual inventory system because of the susceptibility of their inventory to be
fraud.
6.3.3 Financial Statement of Kaah Petroleum Companies in Mogadishu
Based on the findings of the study, the researcher recommends Kaah Petroleum
Companies to use a multiple step income statement to find easily where they expend
more; the cost of sales, operating expenses, or other expenses.
6.3.4 Impact of Changing Accounting Policy on Financial Statement
Form the study, the researcher found that there is an impact of changing accounting
policy on financial statement. So, based on those findings, the researcher recommends
these companies to choose the policy which maximizes their profit and wealth as the
positive accounting theory suggests.
6.4 Areas for Further Research
The role of prudence concept in asset valuation
The impact of inventory valuation on financial statement

49


References
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APPENDICES
QUESIONNAIRE
Dear Respondent,
This questionnaire focuses on about the impact of changing accounting policy on
financial statement in of Nationwide Petroleum Company. This questionnaire has been
designed purposely for data collection on the above topic. You have been identified as
the potential person who can provide useful and reliable data that will help the
researcher to undertake his research graduation.
This research is purely for academic purpose for the award of the degree of Bachelor in
Accounting at Mogadishu University. Please contribute kindly toward this research by
answering the attached questionnaire. I would appreciate honest opinion. I expect to
receive the questionnaire back within five days from the data of its receipt.
Best wishes,
Ah med Oma r M.

Section one: Demographic Characteristics of the Respondents
Please use tick () to fill this questionnaire
1- Age:
a) 20-30 b) 30-45 c) 45 and above
2- Sex:
a) Male b) Female
3- Level of experience:
a) Less than one year b) 1-2years
c) 3-4years c) 5 or more
52




4- Level of education:
a) Secondary b) Bachelor
c) Master d) Informal e) Others
5- Occupation:
a) Manager b) accountant c) customer
d) Cashier e) Others
Section Two: The Impact of Changing Accounting Policy on Financial Statement
Response mode score
Agree (agree with minor doubt) 1
Strongly agree (agree with no doubt at all) 2
Disagree (disagree with minor doubt) 3
Strongly disagree (disagree with no doubt at all) 4
No. Question 1 2 3 4
1 Your company follows the accounting assumptions of going concern concept and
consistency in accounting policies

2 Inventories is valued at lower of cost and net realizable value
3 You always make physical verification at the end of the year
4 When you retire a fixed asset from active use and held for disposable, you show
it separately as part of other current assets

53


5 Your company follows straight line method for depreciation its fixed assets
6 Additions to fixed assets is depreciated independent of the original asset based on
the assessment of its useful life

7 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

8 You make a disclosure for transactions and events that have importance for
evaluating a companys financial statement

9 You use a single step income statement for preparing financial statement
10 The method you use in evaluating your inventory have effect in your balance
sheet

11 You expense all costs that you incur after the purchase of the fixed asset
12 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

13 There is no need for a clearly distinction for the extraordinary items of income
statement from the ordinary activities of the company

14 You always revaluate your fixed asset if there is a significant decline in market
value of that fixed asset

T hanks f or Y our Cont ri but i on