Effective factors in the selection of accounting methods for inventory of materials and goods and its effect on the quality of profitability of companies admitted to the stock exchange.

Dissertation for Master's Degree

Orientation: Accounting

Abstract

The present research and research work in order to determine the effective factors in the selection of material and goods inventory accounting methods and its effect on the quality of profitability of companies listed on the stock exchange. This thesis is a framework for analyzing managers' choice of inventory accounting policy and the impact that these choices have on the quality of profitability in listed companies. It puts securities in the stock exchange and describes the relationship between the company's specific characteristics such as size, debt-to-capital ratio, working capital, and type of industry, and the selection policies of managers from inventory accounting and the times that lead to an increase/decrease in the quality of profit. The results of the hypothesis analysis indicate that there is no significant relationship between the choice of inventory accounting methods and company size, debt-to-capital ratio, and the amount of working capital. Also, the results indicate the existence of a relationship between inventory accounting choices and the type of industry, and finally, there is no significant relationship between inventory accounting choices (FIFO) and profitability.

Introduction

Accounting methods used in companies have economic consequences and are effective on the distribution of wealth. People invest in joint stock companies hoping to increase their wealth. The accounting methods used have an effect on the wealth of investors. The choice of accounting methods is used to increase the welfare of shareholders and maximize the welfare of management. Accounting literature includes studies that test the relationships between company-specific variables and the policy of accounting choices by managers. Most of these studies rely on cross-sectional studies or experimental designs of paired comparisons and emphasize the relationship between the accounting selection method and various company-specific characteristics. Choosing among the different assumptions of inventory valuation and the effect it has on the profitability quality of the business unit is an example of accounting choices.

Accounting methods[1] used in companies have economic consequences[2] and are effective on the distribution of wealth. People invest in joint stock companies hoping to increase their wealth. The accounting methods used affect the wealth of investors. The choice of accounting methods is used to increase the well-being of shareholders and maximize the well-being of management. Accounting literature includes studies that test the relationships between company-specific variables and the policy of accounting choices by managers. Most of these studies rely on cross-sectional studies or experimental designs of paired comparisons and emphasize the relationship between the accounting selection method and various company-specific characteristics. Choosing among different assumptions for inventory valuation and the impact it has on the quality of profitability [3] of the business unit is an example of accounting choices. One of the most important factors that the Gradient analytical group has considered in evaluating the quality of profit is the inventory of materials and goods. The quality of measuring the company's inventory directly depends on the conservatism [4] and impartiality [5] in calculating the cost of goods sold. In particular, if a company's cost of goods sold is understated, then the company's profitability is overstated, and vice versa. When evaluating the quality of inventory measurement, the most important things that should be considered and reviewed are: the level and change in total inventory compared to sales, the trend of sales margin, the method of evaluating inventory and how it affects the reported profit, the relationship between different types of inventory accounts such as raw materials, goods in progress and manufactured goods, the company's method of measuring and presenting inventory compared to other companies in the industry. Measure the decisions of management in the selection of inventory accounting methods and test the effect of that choice on the quality of profit.

The specific characteristics of the company are tested in this research with the following meanings:

Company size[6]: Net sales of the company

Leverage ratio[7]: Dividing total liabilities into equity

Working capital ratio[8]: The difference between current assets and current liabilities

Industry type [9]: classification of companies admitted to the stock exchange

2-1 Study history

Researches conducted abroad are briefly described in the table below.

The specific characteristics of the company with the following meanings are tested in this research:

Company size[6]: Net sales of the company

Leverage ratio[7]: Dividing total liabilities to equity

Working capital ratio[8]: Difference between current assets and current liabilities

Industry type[9]: Classification of listed companies

2-1 Study history

Researches conducted abroad are briefly described in the following table:

Table 1-1 Summary of empirical studies on the selection of inventory accounting methods

Study

Methodology

Study period

Results: significant variables, non-significant variables Dar (NS)

Algeston et al (1976)

Pair comparisons using the chi-square test

1971-1946

Changes in management S, industry S auditing S

Hagerman and Zmijewski

Mann Whitney U test

1975

Net sales NS, total assets NS, risk NS, management compensation plan NS, capitalization S, concentration ratio NS

Biddle 1980

Paired comparison study using Wilcoxon and Sine tests

1975-1972

Estimated tax savings S, size S, industry classification S, average inventory growth rate S

Zmijewski and Hagerman 1981

Mann-Whitney U test

1975

Size S, concentration ratio S, management bonus plan S, total debt to total assets S, risk S, leverage NS

Morse and Ricardi 1983

Time series and inter-industry comparison using the T test

1938-1978

Tax benefit S, company size S, profit growth S, dividend payout ratio NS, ratio of net tangible assets to long-term debt NS, profit to interest expense ratio NS

Abdul Khaliq 1985

Analysis by regression method

1974

Management bonus plan NS

Hunt 1985

Paired comparison study Using parametric and non-parametric test

1974-1975

S leverage, NS concentration plan, NS dividend payment, NS current ratio, NS interest coverage, NS corporate control

Lee and Hesse 1985

Analysis of FIFO versus LIFO using T test

1960-1980

Accounting profit volatility NS, debt-to-equity ratio NS, price volatility S, inventory volatility S, firm size NS, capital concentration S, inventory turnover S, industry members for publishing industry, for other industries NS

Coster and Simon 1986

Analysis using logit

1983

Net operating loss carried forward S, NS leverage, line of business S, fiscal year S, method of accounting for depreciation and creditor tax investment S

Lee and Petrozzi 1989

Wilcoxon and Mann Whitney 1989 test

1969-1980

Variability of cost of goods sold S, repetition of inventory liquidity S, concentration of inventory liquidity S, inventory volatility S

Lindahl 1989

Dynamic Marco Model - Time Series

1962-1981

S factor prices, size S, industry membership S, stability S, volatility NS, tax loss NS, liquidity cost NS, contractual obligation NS, relative inventory size NS, turnover ratio NS, discount rate NS

Nayhos 1989

Logit test and Chi-square

1980

Level of managerial ownership S, foreign ownership concentration S, size NS, inventory volatility S, leverage NS, food electronics and publishing industries S, wood manufacturing industries NS

Shiu 1990

Mann Whitney U test

Taiwan 1988

NS size, NS leverage

R Kloss Veternholm 1991

T-test

Canada 1984

Size S, concentration ratio S, capitalization S, risk NS, stock level NS, foreign ownership NS, management compensation plan NS, dividend requirements NS, leverage S

Cashing Leclerc

T test and chi-square

Estimated tax reserve S, amount of inventory S, average tax loss carried forward to future periods NS, volatility of inventory S, volatility of inventory S, company size S, current ratio leverage S

Ko 1993

Logit and T test

1988

Leverage S, size S, capitalization NS, managerial ownership NS

Salah Ko Albukhait 1998

Mann-Whitney test and univariate and multiple regression

Arabia Ascendant 1994

NS size, NS leverage, NS debt-to-equity ratio, NS management compensation plans, NS current ratio, NS inventory-to-sales ratio, industry type S

3-1 Statement of the problem

According to the accepted methods, the managers have the authority to make accounting choices, which redistribute the wealth among the parties of the contract, in this case, it is said that the managers may act opportunistically.