TCA 321 UNLV Hotel Manager Skills Discussion

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nn1231

Business Finance

TCA 321

University of Nevada Las Vegas

TCA

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Assignment Instruction from the professor:

Based on what you have learned in this class (i.e., CH1-CH5), explain how you would use the knowledge and skills obtained from this class for your future career.

Format/Submission Instruction:

  • Your assignment should be typed using MS Word (One page, double-spaced; font size: 12).
  • In the upper left corner of your assignment, type your name. Do not need to include the course name or professor's name.
  • One point will be deducted per grammar error.

* I will upload the lecture Powerpoints and the handouts that we learned in class (Ch.1-Ch.5). All I learned in this class will be on the PowerPoints and the handouts. Please look over the slides and handouts before write this paper. My future career will be a general manager at the dining restaurant, but I am not quite sure. You can choose any career to write this paper, but it should be related to the hospitality field.

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Chapter 1 Introduction to Managerial Accounting Hospitality Industry Managerial Accounting 8th Edition TCA 321 Dr. Jungsun (Sunny) Kim Key leaning outcomes from this chapter 1. Describe characteristics of the hospitality industry and identify the major function of hospitality accounting. 2. Apply generally accepted accounting principles (GAAP) to hospitality situations. 3. Distinguish between cash basis accounting and accrual basis accounting. 4. Explain the fundamental accounting equation and identify debit and credit accounts. 5. Explain the steps in the accounting cycle. 1     ➢ - Seasonality of Business (p. 6) Short distribution chain and time span (Less than 5% of total assets as inventory for resale) Labor intensive (20-50% of total revenue) Major investment in fixed assets (55-85% of total assets) (why?) What accounting does in our industry? Provide financial information, statements, and reports to various users (Who are users?) - External users: Lenders and investors Internal users: managers, executives, shareholders 2 2.Generally Accepted Accounting Principles (GAAP) (pp. 10-15) (1) Cost: When a transaction is recorded, it is the transaction price or cost that establish the accounting value for the product. - Ashley recorded a hotel building at the purchase price of $1,500,000 when the market value is $1,750,000. (2) Business entity: Accounting and financial statements are based on the concepts that (1) each business is a business entity that maintains its own set of accounts, and (2) these accounts are separate from the other financial interests of the owners. - Kevin, a restaurant owner, decided to take some sushi home for his dinner. He has to record the cost of the sushi as a withdrawal. (3) Continuity of the business unit: We do not assume that we will shut down (liquidate) our business next year - Robert purchased a new limo. The cost is $50,000, however, the resale value will be $30,000. The limo recorded at cost and will be written off over the next five years rather than written down immediately. 3 2.Generally Accepted Accounting Principles (GAAP) (4) Unit of measurement: The financial value stated in financial statements should represent a stable unit of value (e.g., US$). - If we had huge inflation (e.g.,$1 in 2006 → $5 in 2008), you need to show current replacement cost in footnotes of your financial statements. (5) Objective evidence: Accounting transactions and the resulting accounting records should be based as much as possible on objective evidence - Kim contributed her Accord to her restaurant. She strongly believes her car is worth of $20,000, but the business records it with its Blue-Book (appraiser’s) value of $18,000. (6) Full disclosure: The financial statements must provide information on all the facts relevant to the interpretation of the financial statements. - Mr. Park’s hotel describes its depreciation method and inventory valuation method in the footnotes of the financial statements. 4 2.Generally Accepted Accounting Principles (GAAP) (7) Consistency: Once an accounting method has been adopted, it should be followed in future accounting periods unless a change is warranted and disclosed. - If Starbucks used a straight-line depreciation method in 2007, the company must use the same depreciation method in 2008 unless a change was warranted and disclosed. (8) Matching: Expenses should be matched with revenues they generated. → Related to Accrual basis accounting - Credit card fees of $10 should be recorded as expenses during the accounting period in which the generated sale of $200 is recorded. (9) Conservatism: Recognizing expenses as soon as possible, but delaying the recognition of revenues until they are ensured. - Kristine, a restaurant owner, reduces its tomato inventory value of $1000 (original cost) to $800 in order to reflect the market value. 5 2.Generally Accepted Accounting Principles (GAAP) (10) Materiality: Events must be recorded if they make a difference as determined by standard of comparison. - Spencer, a hotel manager, replaced ten frames ($10/frame) in his office and recorded his spending of $100 as “expense”, not as “equipment” because the value was too low to be recorded as fixed assets. The company set a $1,000 limit for recording expenditures as fixed assets. - Companies generally establish this limit by rules of thumb (e.g., 5% of net income or 1% of total assets) 6 7 3.Cash VS. Accrual • Cash basis accounting: recognizes accounting transactions at the point of cash inflow or outflow • Accrual basis accounting: recognizes “revenues” when earned and “expenses” when incurred, regardless of when cash actually changes hands (e.g., wages expense, insurance expense) http://www.youtube.com/watch?v=3RxJFyUPu_o • You purchased 50 bottles of wine Aug1, 2012 and sold them in your restaurant during August. You received a bill of $500 on Aug 23, but you will pay it on Sep 1. At the end of this month, you will record the expense of $500 when you use accrual basis. 8 4. The Six Branches of Accounting • Financial accounting (Preparing and distributing report) • Cost accounting (concerning with recording, allocating, and reporting current and future costs) • Managerial accounting (preparing performance reports, including comparisons to budget; providing in-depth information as a basis for management decisions) • Tax accounting (performed by specialists) • Auditing (providing opinions on reports/ by certified public firms) • Accounting systems (Review information systems) 9 5. Fundamental Accounting Equation Assets = Liabilities + Owners’ Equity (What my company has) (How my company got them) (1) A: Cash, Account receivables, Inventory, Building, Equipment, and Land (2) L: Payables, and Accrued payroll (wage) (3) OE : Permanent = Capital stock and Retained earning : Temporary = Revenue and Expenses A = L + POE + R - E 10 6. Normal Account Balances (Debit/Credit) (p.17-18) Let’s assume you are a hotel manager. Asset — debit (+) (What your company own) Liability — credit (+) (What your company owes to third parties) Owners’ Equity Permanent — credit (+) (What your company owe to the company’s investors) Owners’ Equity Revenue — credit (+) (It increases owners’ equity) Owners’ Equity Expense — debit (+) (It decreases owners’ equity) Contra asset accounts generally show a credit balance • • Accumulated Depreciation Allowance for Doubtful Accounts. 11 6. Normal Account Balances (1) Which of following account types normally has a debit balance? a. Liability b. Revenue c. Owner’s equity d. Asset (2) Permanent owner’s equity accounts have what kind of normal balance? 12 13  Try Problem 13 (#1 - #3) AGAIN… 14 Chapter 5 Ratio Analysis Dr. Sunny Kim TCA 321 0 © 2006, Educational Institute Topics we will cover in this chapter 1. Identify standards against which the results of ratio analysis may be compared. 2. Explain the purposes of ratio analysis. 3. Identify 5 common classes of ratios and describe the general purpose of each. 4. Calculate common liquidity and solvency rations and describe how creditors, owners, and managers view them. (ability to meet short-term and long-term obligation, debts). 6. Calculate common activity, profitability, and operating ratios and describe how creditors, owners, and managers view them. 7. Summarize the limitations of ratio analysis. 1 © 2006, Educational Institute (continued) 1. Potential Ratio Standards ALONE - RATIOS ARE NEUTRAL MUST COMPARE - TO BE AN INDICATOR  Ratios from a past period  Industry averages  Direct competitors’ ratios  Budgeted or planned ratios 2 © 2006, Educational Institute 2. Purposes of Ratio Analysis  Managers use ratios to monitor operating performance and evaluate their success in meeting goals.  Creditors use ratios to evaluate the solvency of a business and to assess the risk of future loans.  Investors and potential investors use ratios to evaluate the performance of a business and the business’s ability to generate profits for the investors.  Ratios reveal important information that may not be obvious or apparent in the financial statements. 3 © 2006, Educational Institute Creditors, Investors, Managers  All want something different from ratio analysis.  Each has needs that may contradict the others.  KEEP THIS IN MIND! (You will want to know what each is looking for as this will be part of the next exam!) 4 © 2006, Educational Institute 3. Five Classes of Ratios  Liquidity- ability to meet short-term obligations  Solvency- ability to meet long-term debts  Activity- how well management is using the company’s assets  Profitability- how much “profit” is being made  Operating- detailed analysis of operating departments 5 © 2006, Educational Institute (1). Common Liquidity Ratios 1. Current ratio 2. Acid-test ratio (quick ratio) 3. Accounts receivable turnover (ART) 4. Average collection period 5. Working capital turnover 6 © 2006, Educational Institute (1-1). Current Ratio  Current Assets/Current Liabilities ❖ Owners (=shareholders) normally prefer a low current ratio (=Low CA & High CL) to a high one because investments in most current assets are less productive than those in noncurrent assets. ❖ Creditors want a high current ratio, as this provides assurance that the company can make payments on debt. ❖ Managers are in the middle. 7 © 2006, Educational Institute (1-2). Acid-Test (Quick) Ratio  Measures liquidity by only considering “quick assets” Cash+ Marketable securities + Accounts receivable Current liabilities  Inventory and Prepaid expenses are not used: It can make lots of differences between this ratio and current ratio. ❖ Owners prefer low ratio (less than 1) ❖ Creditors prefer high ❖ Managers are in the middle 8 © 2006, Educational Institute (1-3). Accounts Receivable Turnover (ART) • Measures the speed of the conversion of accounts receivable (A/R) to cash • Revenue/Average accounts receivable ➢ Average accounts receivable = (A/R from the last year + A/R from this year)/2 ❖ Owners like a HIGH ART means A/R is being managed well. ❖ Creditors like a HIGH ART as it means the company will likely have more cash readily available to pay debt. ❖ Managers like a LOWART since offering credit helps maximize sales. 9 © 2006, Educational Institute (1-4). Average Collection Period  365days/Accounts Receivable Turnover  This conversation simply translates the turnover into a more understandable result.  Generally, the time allowed for average payment should not exceed the terms of sales by more then 7-10 days. E.g., If the terms of sales are n/30 (entire amount is due 30 days), the maximum allowable average collection period is 3740 days. 10 © 2006, Educational Institute (1-5). Working Capital Turnover (WCT) • Working capital (WC) = Current Assets – Current Liabilities • Revenue/Average Working Capital • E.g., Working capital turnover of 17 means that working capital was used 17 times to generate sales during this year. • How effectively is the company using its working capital to generate sales? ❖ Owners prefer a HIGH working capital turnover ratio ❖ Creditors prefer a LOW working capital turnover ratio (High WC) ❖ Management falls in between once again 11 © 2006, Educational Institute (2). Common Solvency Ratios     Measures the “cushion” that is available to absorb any losses Used primarily by lenders Lenders prefer less risk Leverage refers to how much long-term debt financing is being used by a company:  “High Leverage” = Lots of long-term debt  “Low Leverage” = Little long-term debt 1. Solvency ratio 2. Debt-equity ratio 3. Long-term debt to total capitalization ratio 4. Number of times interest earned ratio 5. Operating cash flows to total liabilities ratio 12 © 2006, Educational Institute (2-1). Solvency Ratio  Total Assets/Total Liabilities  Greater the leverage, the lower the solvency ratio. ❖ Owners want a LOW solvency ratio as that means greater return from leveraging (Note: “Total Liabilities” is the denominator). ❖ Creditors want a HIGH solvency ratio as that means less risk to their investment. ❖ Managers are neutral. 13 © 2006, Educational Institute (2-2). Debt-Equity Ratio  Total Liabilities/Total Owners Equity  Most common Solvency Ratios.  Compares the companies debt to its net worth (Net worth = Owners Equity).  Shows ability to meet long-term debts.  Owners want a HIGH debt-equity ratio as that means greater return from leveraging (Note: “Total Liabilities” is the numerator)  Creditors want a LOW debt-equity ratio as that means lest risk to their investment 14 Managers are neutral © 2006, Educational Institute (2-3). Long-Term Debt to Total Capitalization Ratio  Long-term Debts/(Long-term Debts + Owners Equities)  Current liabilities excluded in the numerator because current assets usually can cover them. ❖ Owners prefer HIGH because of they want high returns through leverage (Note: “Long-term debts” is the numerator). ❖ Creditors want LOW. ❖ Managers are in the middle! 15 © 2006, Educational Institute (2-4). Number of Times Interest Earned Ratio  EBIT / Interest Expense  EBIT (Earning before Interest and Taxes) in Income Statement = Operating Revenue – Operating Expenses + any additional gains = Net income + Income taxes + Interest expense  Greater the number of times interest is earned, the greater the safety for creditors.  E.g., The result of 5.8 times shows that a hotel could cover its interest expense by over five times.  All (owners, investors, managers) prefer high ratio 16 © 2006, Educational Institute (2-5). Operating Cash Flow to Total Liabilities Ratio  Operating Cash Flow/Average Total Liabilities  All users prefer a high ratio.  The cash flow from operating activities should be high as this is where the majority of cash inflows come from. 17 © 2006, Educational Institute (3). Common “Activity” Ratios  They measure management effectiveness in using its resources.  Management is entrusted (delegated) with the assets of the company so this is a way owners and creditors can evaluate their performance. 1. Inventory turnover 2. Paid occupancy percentage 3. Average occupancy per room 4. Seat turnover 18 © 2006, Educational Institute (3-1). Inventory Turnover  Cost of food (beverage) used /Avg. Food (beverage) Inventory  Shows how quickly the inventory is being used.  Quicker inventory turnover equals less spoilage and less inventory expense to maintain.  Food and Beverage is calculated separately. ❖ All wants high food and beverage turnover : However, increasing turnover rate may cause low stock problems. Guests may hear “we ran out”… 19 © 2006, Educational Institute (3-2). Occupancy related ratios  Managers’ success is measured by how well they sell their products!  Paid Occupancy percentage = (# of paid rooms occupied/# of available rooms) × 100 (Available rooms per year = # of rooms available per day × 365days)  Seat turn-over rate is used in restaurants = # of people served /(# of seats × # of days open) • Average occupancy per room (Unit=guests) = (# of guests/ # of rooms occupied by guests) = (# of paid guests + # of guests in complimentary rooms)/(# of rooms sold + # of complimentary rooms occupied) • 20 All (creditors, investors, and managers) want HIGH ratios. © 2006, Educational Institute (4). Profitability Ratios  The primary function of most organizations is to generate profit.  Owners and Investors want to increase their wealth through dividends and through increase prices in stocks.  Managers want high profits as it reflects their efforts in the organization.  Low profits can equal poor management practices.  Low profits generally mean the owners will be looking for another manager!!! 1. Profit margin 2. Operating efficiency ratio 3. Return on owners’ equity (ROE) 21 4. Earnings per share © 2006, Educational Institute (4-1). Profit Margin  Net Income/Total Revenue  Measures management’s ability to generate sales and to control expenses  Poor pricing and low sales volume lower Profit Margin.  All parties want a HIGH profit margin. 22 © 2006, Educational Institute (4-2). Operating Efficiency Ratio  Gross Operating Profit/Total Revenue  Gross Operating Profit (GOP) = subtracting “Expenses controlled by management” from “Revenue”  All parties want a HIGH Operating Efficiency Ratio. 23 © 2006, Educational Institute (4-3). Return on Equity (ROE)  Net Income/Average Owners Equity  Measures managements ability to produce for the owners  Compares profits of the organization to owners investments  Owners want high ROE 24 © 2006, Educational Institute (4-4). Earnings Per Share (EPS)  Net Income/Average Common Shares Outstanding  All want a high ratio.  However, an increase in EPS is not always a good thing.  A rise in EPS can be the result of the company repurchasing its own stocks (treasury stock). -Treasury stock is capital stock of a corporation that the company has repurchased for future issuance → Making 25 common stock reduced. © 2006, Educational Institute 5. Common Operating Ratios • Management day to day ratios • Every expense divided by total revenue • Departmental revenue divided by total revenue 1. Mix of sales (departmental revenues) 2. Average room rate (ADR) 3. Revenue per available rooms (RevPAR) 4. Food cost percentage 5. Beverage cost percentage 6. Labor cost percentage 26 © 2006, Educational Institute (5-1). ADR (Average room rate, Average daily rate) & RevPAR (Revenue per available room)  ADR = Rooms revenue / # of rooms sold  Paid OCC% = (Paid Rooms Occupied/ # of available rooms)  RevPAR = Rooms Revenue/ # of available rooms = Paid occ% × ADR e.g., Hotel A: Paid occ % = 90% and ADR = $100 Hotel B: Paid occ % = 95% and ADR = $90 Which one is in the preferable condition? ❖ All (owners, investors, and management) want HIGH ratios! 27 © 2006, Educational Institute 4. Limitations of ratio analysis  Ratio analysis does NOT solve problems. Ratios only indicate that you may have a problem!  Ratio analysis does NOT determine the causes of variances between planned goals and actual results.  Ratios must be compared to something meaningful. Most useful when compared to: • Ratios from past periods • Industry averages (or competitors’ ratios) • A budgeted figure  Multiple ratio analysis is needed to truly understand the organization. 28 © 2006, Educational Institute Chapter 4 The Statement of Cash Flows Dr. Sunny Kim TCA 321 © 2006, Educational Institute Competencies for The Statement of Cash Flows 1. Explain the purposes of the statement of cash flows and how the statement is used by hospitality managers. 2. Identify cash flows as reported on the statement of cash flows in terms of operating activities, investing activities, and financing activities. 3. Describe the four-step approach to preparing the statement of cash flows. 1 © 2006, Educational Institute (continued) 1. What is Cash?  “Sources of cash”  “Uses of cash”  Cash is defined as both cash and cash equivalents.  Cash equivalents are short-term, highly liquid investments such as U.S. Treasury bills and Money Market Accounts (saving accounts offered by banks and credit unions) 2 © 2006, Educational Institute 2. Purpose of Statement of Cash Flow  Information regarding cash receipts and cash payment (I/S is prepared on an accrual basis → revenue does not equal to cash inflow!)  Assess financial flexibility  Assess dividend policy  Assess the effect of cash investing and financing  Assess a company’s ability to generate cash from operations 3 © 2006, Educational Institute 3. Cash Flow Classifications (p.158) A hospitality operation typically has cash inflows and outflows related to three activities:  Operating activities  Investing activities  Financing activities 4 © 2006, Educational Institute 4. Four-Step Approach to Preparing the SCF (P.159) 1. Determine the net cash flows from operating activities. 2. Determine the net cash flows from investing activities. 3. Determine the net cash flows from financing activities. 4. Present the cash flows by activity on the SCF. 5 © 2006, Educational Institute 5. Operating Activities  Cash transactions related to revenue (cash inflows, +) and expenses (cash outflows, -)  What about depreciation? Is it really cash outflow?  What about gain on sale of equipment? Is it really cash inflow?  Current account adjustments (+/-) → E.g., You need to subtract “values in 2010 B/S” from “values in 2011 B/S” to find changes in cash flow. Then adjust them in 2011 SCF © 2006, Educational Institute STEP 1: Cash Flows from Operating ActivitiesIndirect Method (p.159, 161)  Net Income (find this value from ______) + Depreciation & Amortization expenses (non-cash expenses) - Gains on sales of property , equipment, or investment (non-cash gains: Since gains were added to I/S, you need to subtract them in C/F) + Losses on sales of property, equipment, or investment - Increase in accounts receivable (accrued revenue: non-cash revenue) + Decrease in inventories (cost of goods sold: non-cash expenses) + Increase in accounts payable (e.g., accrued wages: non-cash expense) © 2006, Educational Institute CHANGES IN CURRENT ACCOUNTS  A decrease in a current asset is added to net income.  An increase in a current asset is deducted from net income.  (Exception: Marketable security goes to investing activities)  A decrease in a current liability is deducted from net income  An increase in a current liability is added to net income.  (Exceptions: (1) Current maturities- Long term debt (2) Dividends payable go to Financing Activities)  The amount of the Gain or Loss (sale price – book value) goes to Operating Activities  The Sale Price affects “Cash” goes to Investing Activities (e.g., proceeds from sale of equipment) © 2006, Educational Institute Problem 2 (page 181)  Handout 1.  Prepare the cash from operating activities section of the SCF. 9 © 2006, Educational Institute Next class: Step 2: Cash Flows from Investing Activities (p.173)  Purchase of Marketable Security or investment (Cash outflow)  Look at changes in non-current assets (property and equipment, investments).  Check “footnotes” of the financial statements regarding purchase or sale of equipment and investments (e.g., footnote #1, #2, #8).  Proceeds from sale of equipment (cash inflow) = “Cost of equipment sold” - “LOSS” (or plus “GAIN”) on sales of equipment © 2006, Educational Institute 7. Financing Activities  Cash flows from issuance (cash inflow) and retirement (cash outflow) of debt  Cash flow from issuance (cash inflow) and re- purchase (cash outflow) of capital stock.  Cash to pay out dividends (cash outflow) © 2006, Educational Institute Step 3: Cash Flows from Financing Activities  Payment of long-term debt (= Payment of current maturities of long-term debt): Cash outflow  Borrowing long-term debt: Cash inflow  Purchase of treasury stock: Cash outflow  Proceeds from sale of common stock: Cash inflow  Look at dividends paid (=payment of dividends) during the time period: Cash outflow  “Dividends Declared” are not cash activities. It is current liability.  These information are usually found in footnotes. © 2006, Educational Institute Use B/S and footnotes to calculate payment of dividends (p. 172-174) Dividends Payable Balance in 2006 (see B/S) + Dividends declared during 2007 (see the footnote #3) - Payment of dividends for 2007 = Dividends Payable Balance in 2007 (see B/S) © 2006, Educational Institute Step 4: Total and Review  If done correctly your SCF figure will match the cash section of the Balance Sheet!  A = L + Permanent OE + (Revenue- Expenses) → B/S  Net income = Revenue – Expenses → I/S  Retained Earnings on 12/31/11 = Retained Earnings on12/31/10 + Net income during 2011 – Dividends declared during 2011 B/S (Dec 31, 2010) Cash Other current assets Noncurrent assets Liabilities Contributed capital Retained Earnings SCF (Adjustment from net income to net cash flow) Retained Earning Net income from I/S © 2006, Educational Institute B/S (Dec 31, 2011) Cash Other current assets Noncurrent assets Liabilities Contributed capital Retained Earnings Problem solving  Handout 2: Problem 10 (p.185) 15 © 2006, Educational Institute Next Class  Quiz 2  Exam Review 16 © 2006, Educational Institute Chapter 3 The Income Statement Dr. Jungsun (Sunny) Kim TCA 321 Competencies for The Income Statement 1. Describe revenues, expenses, gains, and losses as presented on the income statement. 2. Describe the contents of an income statement based on the Uniform System of Accounts for the Lodging Industry (USALI). 3. Understand difference between USALI and USAR (Uniform System of Accounts for Restaurants) and know how to calculate Cost of Goods Sold 4. Interpret income statements using horizontal and vertical analysis. 1 (continued) 1. Revenue, Expense, Gain, and Loss  Revenue: the inflow of assets (e.g., A/R, cash), reduction of liabilities (e.g., unearned revenue), or both resulting from the sale of products and services.  Gain: an increase in assets, reduction in liabilities, or both resulting from an incidental transaction or a transaction that is neither a revenue nor an investment by owners (e.g., gain on disposal of equipment, building, or investments)  Expense : the outflow of assets (e.g., cash), increase of liabilities (e.g., A/P), or both incurred during the production and rendering of products and services.  Loss: a decrease in assets, increase in liabilities, or both resulting from an incidental transaction or a transaction that is neither an expense nor a distribution to owners (e.g., loss on disposal of equipment, building, or investments) 2 How can we calculate a gain or loss? (p.108)  Net book value = Cost – Accumulated Depreciation e.g., $600,000 - $450,000 = $150,000  Gain (Loss) = Cash received (Proceeds) from selling an asset item - Carrying value (net book value) of the asset item e.g., $200,000 – $150,000 = $ 50,000 Net equipment (B/S) 3 Cash (B/S) Gain on sale of Property (I/S) Try problem 1 (p. 124) 1. Selling price = $500  Original cost = $3,000  Acc. Depreciation = $2,700 2. Selling price = $3,500  Original cost = $20,000  Acc. Depreciation = $15,000 4 2. Definition and Formats (p. 116, 119)  A report of sales (revenues) and expenses for a defined period of time, resulting in net income (or loss) of the business  USALI (Uniform System Accounting for Lodging Industry)  Departmental Profit  Undistributed Operating Expenses category  Non-operating expenses (e.g., capacity costs)  EBITDA (Earnings Before Interest, Taxes, Deprecation, and Amortization expenses)  USAR (Uniform System of Accounts for Restaurants)  Cost of sales  Payroll and related expenses in labor expenses category  Prime Costs (= Total Cost of Sales + Total Labor costs)  Controllable and Non-Controllable expenses  Rent paid for the space the restaurant occupies is an example of noncontrollable costs by managers because the rent expense will be decided by the board of directors (see textbook pp.318-319)  Restaurant Operating Income 3. Operated departments at a hotel 6  Rooms  Food  Beverage  Golf Course and Pro Shop  Health Club/Spa  Parking  Other operated departments (e.g., gift shop) 4. Income statement for the Lodging industry (p. 116) Revenues (Rooms, F&B, and other operated departments) – All operated departments’ direct operating expenses (e.g., Cost of sales, Payroll and other direct expenses attached to each department) + Miscellaneous Income (e.g., cancellation fees, resort fees, commissions from third parties for services such as car rentals, revenue from the space rentals such as coffee kiosks) = Total operated departments Income – Total undistributed operating expenses (e.g., Administrative & General; Information & Telecommunications Systems; Sales & Marketing; Property operation & Maintenance; and Utilities) = Gross Operating Profit (GOP) – Management fees = Income before Non-operating Income and Expenses + Non-operating income (e.g., Income from billboards or antennas on the hotel building) – Non-operating expenses (e.g., Rent, Property taxes, Insurance expenses) +/– Other non-operating income and expenses (e.g., Gain (or Loss) on disposal of fixed assets) = Earnings Before Interest, Tax, Depreciation, & Amortization (EBITDA) – Interest expense –7 Depreciation and Amortization expense Non-Operating Income and Expenses  Management is responsible for revenues and expenses reported above the income statement’s GOP line.  Non-Operating Income and Expenses are seen to be outside of management’s direct control.  Any income listed here relates to decisions by owners, and not associated with operations or managed by the operator (e.g., income from billboards on a hotel, gain on disposal of fixed assets)  The expenses listed include capacity costs (e.g., rent, property taxes, and insurance) and loss on disposal of fixed assets 5. Cost of Sales Formula (p. 104) Beginning inventory on Jan 1, 2012 ($100,000 in Food inventory) + Inventory purchases during 2012 ($50,000 of Food purchases) = Goods available for sale ($150,000) – Ending inventory on Dec 31, 2012 ($ 70,000 in Food inventory) = Cost of goods consumed ($80,000) We did not sell this to our customers – Goods used internally (e.g., $30,000 of employee meals & free meals for customers) + Goods purchased internally ($10,000 of inventory transferred from the bar to the kitchen (e.g., wine and other alcohol used for a food preparation) = Cost of goods sold ($60,000) Question: If there was $5,000 of inventory transferred from the kitchen to the bar (e.g., juice and fruits), will you add or subtract this amount? 9 6. Problem 5 (p. 126) 10 Problem 5. To which department would each expense be charged?  Expense  1. Cost of food sold  2. Employee meals—GM  3. Department Food Department Admin. & General Employee meals—food department Department benefit account)  4. 11 Promotional meals Department Food (employee Marketing 7. Problem 13 (p. 132)  This format is recommended for commercial food service operations: the Uniform System of Accounts for Restaurant (USAR). (See Exhibit 14, Textbook p. 119)  Fill out the corresponding values in the excel spreadsheet.  Be careful while calculating “cost of sales” (= cost of goods sold)  Employee benefits = Fringe benefits (e.g., company car, health insurance, employee discounts)+ Employee meals + Payroll taxes  Prime costs = Total cost of goods sold + Total labor costs  Controllable Income = Total revenue – Prime costs – Total other controllable expenses  Restaurant operating income = Controllable income – Total non-controllable expenses  Net income before income taxes = Restaurant operating income – Interest expenses 12 Net income = Net income before income taxes – Income tax expense 8. Vertical Analysis  Also known as common-size income statement.  Using “total revenues (sales)” as a common denominator.  Used for comparing multiple companies We used “total assets” as a common denominator in B/S 9. Horizontal Analysis  Two Income Statements side by side: also known as comparative Income Statement.  Management analysis of the two figures included.  Absolute Changes: The change in dollars between two periods → e.g., ($value in 2012-$value in 2011)  Relative Changes (% change) divide the absolute change by the amount for the previous period. → e.g., {($value in 2012-$value in 2011)/$value in 2011}×100 10. Problem 18 (p. 136)  See Exhibit 11 (p. 116).  The format is based on the Uniform System of Accounts for the Lodging Industry (USALI).  Total Operated Departments Income = Room department income + Food      15 department income + Gift shop department income Total undistributed operating expenses = Administrative & General + Information & Telecom. Systems + Sales & Marketing + Property operation & Maintenance + Utilities Gross Operating Profit = Total Operated departments income – Total undistributed operating expenses EBITDA = Gross operating profit – Rent, Property taxes, & Insurance Income before income taxes = EBITDA – Interest expense – Depreciation and Amortization expenses Net income = Income before income taxes – Income taxes What is next?  SCF  Print and bring the survival kit handout and handout 1. 16 Chapter 2 The Balance Sheet TCA321 Dr. Sunny Kim Competencies for The Balance Sheet 1. Explain the purposes of the balance sheet. 2. Identify the limitations of the balance sheet. 3. Define the various elements of assets, liabilities, and owners’ equity as presented on the balance sheet. 4. Explain deferred income tax. 5. Interpret balance sheets using horizontal and vertical analysis. 1 © 2006, Educational Institute 1. Purpose of Balance Sheet  To reflect assets and to claim liabilities and owner’s equity  To balance at a GIVEN DATE : Usually at the end of year, December 31.  To convey information : the statement of financial position 2 © 2006, Educational Institute 2. Limitations of Balance Sheet • Appreciation is not shown: e.g., The land Bellagio bought 10 years ago, costs $500 million , now what? $3 billion. • Recruiting and training are not included. • Static nature: e.g., Keep $1 billion in cash till the end of this year and invest all in Jan next year • It is estimation, not exact: e.g., inventory (estimated current replacement cost); equipment (the cost less estimated depreciation) 3 © 2006, Educational Institute 3.Major Elements of the Balance Sheet (P.53) • Assets: current assets, investments, property and equipment, and other assets (p.50). • Liabilities: current and long term • Owners’ equity 4 © 2006, Educational Institute 3.1.Typical Components of Current Assets • Cash • Marketable securities (e.g., commercial paper, Treasury bills) • Receivables • Inventories • Prepaid expenses (e.g., prepaid rent, prepaid insurance, and prepaid interest)  Operating equipment - Current ✓ e.g., Linen, China, Glassware, Silver, and Uniforms ✓ When the estimated usage of these items is less than one year 5 © 2006, Educational Institute 3.2. Non-current Assets  Investments: e.g., real estate and bonds  Property & Equipment ➢ Relates to Tangible Assets ➢ Land is not depreciated ➢ Construction In Progress - All labor, materials & other expenses of construction - not depreciated ➢ Building, furniture & fixtures (e.g., office furniture, carpet, and floor coverings), and equipment (e.g., office equipment, computer equipment, gaming equipment, and vehicles) are depreciated 6 © 2006, Educational Institute 3.3. Typical Components of Other Assets • Intangible assets: e.g. trademark, customer data • Cash surrender value: The amount the company is entitled to receive on its cancellation of life insurance policy purchased for key employees • Deferred income taxes: tax deduction in the future • Preopening expenses: Security deposits • Franchise fee: Initial franchisee fees+ Other costs incurred to obtain the franchise. • Operating equipment - noncurrent or long-term: when useful lives greater than one year (e.g., bulk purchase of china) 7 © 2006, Educational Institute 3.4.Current Liabilities (due within 1 year) • Notes payable / Accounts payable • Accrued expenses (e.g., wage payable) • Income taxes payable • Current maturities of long-term debt • Deferred income taxes (delayed to be paid in the future tax return period) 8 © 2006, Educational Institute 3.5.Long-term Liabilities (Beyond next 12 months) • Notes payable • Mortgages payable • Lease obligation → Or you will simply see ‘Long-term debts’ • Deferred income taxes (related to non-current assets such as equipment) 9 © 2006, Educational Institute 4.Owner’s Equity  Capital stock  Common stock: generally allows its holders to have voting rights  Preferred stock: provides preferential treatment on dividends, but no voting rights  Additional paid-in capital: Payments for capital stock in excess of the par value of the capital stock: e.g., cash of $50 received from the sale of common stock with a par value of $10 → Record $10 to common stock ; $40 to additional paid-in cap.  Retained earnings: undistributed earnings  Treasury stock: the property’s own capital stock that has been repurchased but not retired. © 2006, Educational Institute Problem 2: Handout 1  Vertical analysis (to reduce values to percentage) = common-size B/S →Formula: ($ value in each account / Total assets) × 100  How much the company had in the G. Day Capital account on Dec 31, 2008?  What percentage of the company’s total assets was total liabilities on Dec 31, 2008?  What percentage of the company’s total assets was total owners’ equity on Dec 31, 2008? 11 © 2006, Educational Institute Why we are doing the vertical analysis?  Internal use: It permits the comparison of amount relative to a base within each period. (Look at Exhibit 9, page 60)  E.g., MGM Resorts International:  Cash at the end of year 2010 = $499,000,000  Cash at the end of year 2011 = $1,865,000,000  Cash at the end of year 2012 =$ 1,544,000,000  Cash at the end of year 2013 =$ 1,804,000,000  Did this company increase the Cash portion in its Total Assets from 12/31/2010 to 12/31/2011?  TA at the end of year 2010 = $18,961,000,000  TA at the end of year 2011= $27,766,000,000  TA at the end of year 2012 = $26,285,000,000  TA at the end of year 2013= $26,110,000,000  Cash/Total Assets on 12/31/10 = 2.63%  Cash/ Total Assets on 12/31/11 = 6.72%  Cash/ Total Assets on 12/31/12 = 5.87% 12  Cash/ Total Assets on 12/31/13 = 6.91% © 2006, Educational Institute Why we are doing the vertical analysis?  External use: It permits the comparison made against other companies’ financial statements  E.g., MGM Resorts International:  Cash/ Total Assets on 12/31/11 = 6.72%  Cash/ Total Assets on 12/31/12 = 5.87%  Cash/ Total Assets on 12/31/13 = 6.91%  E.g., Wynn Resorts:  Cash/ TA on 12/31/11 = 18.30%  Cash/ TA on 12/31/12 = 23.71%  Cash/ TA on 12/31/13 = 29.07%  LTD/ TA on 12/31/11 = 40.72%  LTD/ TA on 12/31/12 = 79.46%  LTD/ TA on 12/31/13 = 78.63%  E.g., Caesars Entertainment  Cash/ TA on 12/31/11 = 3.17%  Cash/ TA on 12/31/12 = 6.28%  Cash/ TA on 12/31/13 = 11.22%  LTD/ TA on 12/31/11 = 69.29%  Long-term debt/ Total Assets on 12/31/11 = 48.51%  LTD/TA on 12/31/12 = 51.70% 13  LTD/TA on 12/31/13 = 51.50% © 2006, Educational Institute  LTD/ TA on 12/31/12 = 73.33%  LTD/ TA on 12/31/13 = 84.73% Problem 13 (p.75): Handout 2!  Horizontal analysis (to compare changes from the last year to this year) = Comparative Balance Sheet → $ amount change formula: e.g., ($ in 2002 - $ in 2001 ) → % change formula: e.g., ($ in 2002 - $ in 2001 ) / ( $ in 2001) × 100  If the company had “investment” of $60,000 in 2001 and $80,000 in 2002, where will you add this account on the balance sheet?  (1) In the Current Assets section  (2) Between Current Assets and Property & Equipment, or  (3) In the Land, Property & Equipment section. 14 © 2006, Educational Institute Survival Kit for the Statement of Cash flows 1. Cash Flow provided by Operating Activities: Start with: Net Income (See Income Statement or Additional information) Add (Cash inflow): Depreciation expense Amortization expenses Loss on sale of Equipment/Buildings, Marketable securities, Investments (Proceeds – Carrying value) Decrease in Accounts Receivable Decrease in Inventories Decrease in Prepaid Expenses Increase in Accounts Payable Increase in Taxes Payable Increase in Accrued Expenses (e.g., Wages payable) Subtract (Cash outflow): Gain on sale of equipment, building, or investments Increase in A/R (Current Asset) Increase in Inventory (CA) Increase in Prepaid Expense (CA) Decrease in Accounts Payable (Current Liability) Decrease in Taxes Payable (CL) Decrease in Accrued Expenses (CL) A. Net Cash Flows (NCFs) from Operating Activities = Net income + Items in the “Add” section – Items in the “Subtract” section 2. Cash Flow provided by Investing Activities Add: Proceeds from sale of equipment, buildings, marketable securities, and investments (Proceeds from sale of Equipment/Buildings = Net book value + gain (or – loss)) (Proceeds from sale of Marketable securities/Investments = Cost + gain (or – loss) Subtract: Purchase of equipment, buildings, and investments B. Net Cash Flows from Investing activities = Items in the “Add” section – Items in the “Subtract” section 3. Cash Flow provided by Financing Activities Add: Borrowing long-term debt (LTD) Proceeds from sale of common stock Subtract: Payment of long-term debt or Current maturities of long-term debt Purchase of treasury stocks Payment of dividends (Dividends payable at the end of previous year + Dividends declared during this year – Payment of dividends = Dividends payable at the end of this year) C. Net Cash Flows from Financing activities = Items in the “Add” section – Items in the “Subtract” section (You will see the beauty of accounting at the end of your hard work!!) Net cash Increase or (Decrease) = A+ B + C = “Cash” in the current year B/S – “Cash” in the previous year B/S Dr. Sunny Kim TCA321 Chapter 4 The Statement of Cash Flows Dr. Sunny Kim TCA 321 © 2006, Educational Institute Competencies for The Statement of Cash Flows 1. Explain the purposes of the statement of cash flows and how the statement is used by hospitality managers. 2. Identify cash flows as reported on the statement of cash flows in terms of operating activities, investing activities, and financing activities. 3. Describe the four-step approach to preparing the statement of cash flows. 1 © 2006, Educational Institute (continued) 1. What is Cash?  “Sources of cash”  “Uses of cash”  Cash is defined as both cash and cash equivalents.  Cash equivalents are short-term, highly liquid investments such as U.S. Treasury bills and Money Market Accounts (saving accounts offered by banks and credit unions) 2 © 2006, Educational Institute 2. Purpose of Statement of Cash Flow  Information regarding cash receipts and cash payment (I/S is prepared on an accrual basis → revenue does not equal to cash inflow!)  Assess financial flexibility  Assess dividend policy  Assess the effect of cash investing and financing  Assess a company’s ability to generate cash from operations 3 © 2006, Educational Institute 3. Cash Flow Classifications (p.158) A hospitality operation typically has cash inflows and outflows related to three activities:  Operating activities  Investing activities  Financing activities 4 © 2006, Educational Institute 4. Four-Step Approach to Preparing the SCF (P.159) 1. Determine the net cash flows from operating activities. 2. Determine the net cash flows from investing activities. 3. Determine the net cash flows from financing activities. 4. Present the cash flows by activity on the SCF. 5 © 2006, Educational Institute 5. Operating Activities  Cash transactions related to revenue (cash inflows, +) and expenses (cash outflows, -)  What about depreciation? Is it really cash outflow?  What about gain on sale of equipment? Is it really cash inflow?  Current account adjustments (+/-) → E.g., You need to subtract “values in 2010 B/S” from “values in 2011 B/S” to find changes in cash flow. Then adjust them in 2011 SCF © 2006, Educational Institute STEP 1: Cash Flows from Operating ActivitiesIndirect Method (p.159, 161)  Net Income (find this value from ______) + Depreciation & Amortization expenses (non-cash expenses) - Gains on sales of property , equipment, or investment (non-cash gains: Since gains were added to I/S, you need to subtract them in C/F) + Losses on sales of property, equipment, or investment - Increase in accounts receivable (accrued revenue: non-cash revenue) + Decrease in inventories (cost of goods sold: non-cash expenses) + Increase in accounts payable (e.g., accrued wages: non-cash expense) © 2006, Educational Institute CHANGES IN CURRENT ACCOUNTS  A decrease in a current asset is added to net income.  An increase in a current asset is deducted from net income.  (Exception: Marketable security goes to investing activities)  A decrease in a current liability is deducted from net income  An increase in a current liability is added to net income.  (Exceptions: (1) Current maturities- Long term debt (2) Dividends payable go to Financing Activities)  The amount of the Gain or Loss (sale price – book value) goes to Operating Activities  The Sale Price affects “Cash” goes to Investing Activities (e.g., proceeds from sale of equipment) © 2006, Educational Institute Problem 2 (page 181)  Handout 1.  Prepare the cash from operating activities section of the SCF. 9 © 2006, Educational Institute Next class: Step 2: Cash Flows from Investing Activities (p.173)  Purchase of Marketable Security or investment (Cash outflow)  Look at changes in non-current assets (property and equipment, investments).  Check “footnotes” of the financial statements regarding purchase or sale of equipment and investments (e.g., footnote #1, #2, #8).  Proceeds from sale of equipment (cash inflow) = “Cost of equipment sold” - “LOSS” (or plus “GAIN”) on sales of equipment © 2006, Educational Institute 7. Financing Activities  Cash flows from issuance (cash inflow) and retirement (cash outflow) of debt  Cash flow from issuance (cash inflow) and re- purchase (cash outflow) of capital stock.  Cash to pay out dividends (cash outflow) © 2006, Educational Institute Step 3: Cash Flows from Financing Activities  Payment of long-term debt (= Payment of current maturities of long-term debt): Cash outflow  Borrowing long-term debt: Cash inflow  Purchase of treasury stock: Cash outflow  Proceeds from sale of common stock: Cash inflow  Look at dividends paid (=payment of dividends) during the time period: Cash outflow  “Dividends Declared” are not cash activities. It is current liability.  These information are usually found in footnotes. © 2006, Educational Institute Use B/S and footnotes to calculate payment of dividends (p. 172-174) Dividends Payable Balance in 2006 (see B/S) + Dividends declared during 2007 (see the footnote #3) - Payment of dividends for 2007 = Dividends Payable Balance in 2007 (see B/S) © 2006, Educational Institute Step 4: Total and Review  If done correctly your SCF figure will match the cash section of the Balance Sheet!  A = L + Permanent OE + (Revenue- Expenses) → B/S  Net income = Revenue – Expenses → I/S  Retained Earnings on 12/31/11 = Retained Earnings on12/31/10 + Net income during 2011 – Dividends declared during 2011 B/S (Dec 31, 2010) Cash Other current assets Noncurrent assets Liabilities Contributed capital Retained Earnings SCF (Adjustment from net income to net cash flow) Retained Earning Net income from I/S © 2006, Educational Institute B/S (Dec 31, 2011) Cash Other current assets Noncurrent assets Liabilities Contributed capital Retained Earnings Problem solving  Handout 2: Problem 10 (p.185) 15 © 2006, Educational Institute Next Class  Quiz 2  Exam Review 16 © 2006, Educational Institute Chapter 1 Introduction to Managerial Accounting Hospitality Industry Managerial Accounting 8th Edition TCA 321 Dr. Jungsun (Sunny) Kim Key leaning outcomes from this chapter 1. Describe characteristics of the hospitality industry and identify the major function of hospitality accounting. 2. Apply generally accepted accounting principles (GAAP) to hospitality situations. 3. Distinguish between cash basis accounting and accrual basis accounting. 4. Explain the fundamental accounting equation and identify debit and credit accounts. 5. Explain the steps in the accounting cycle. 1     ➢ - Seasonality of Business (p. 6) Short distribution chain and time span (Less than 5% of total assets as inventory for resale) Labor intensive (20-50% of total revenue) Major investment in fixed assets (55-85% of total assets) (why?) What accounting does in our industry? Provide financial information, statements, and reports to various users (Who are users?) - External users: Lenders and investors Internal users: managers, executives, shareholders 2 2.Generally Accepted Accounting Principles (GAAP) (pp. 10-15) (1) Cost: When a transaction is recorded, it is the transaction price or cost that establish the accounting value for the product. - Ashley recorded a hotel building at the purchase price of $1,500,000 when the market value is $1,750,000. (2) Business entity: Accounting and financial statements are based on the concepts that (1) each business is a business entity that maintains its own set of accounts, and (2) these accounts are separate from the other financial interests of the owners. - Kevin, a restaurant owner, decided to take some sushi home for his dinner. He has to record the cost of the sushi as a withdrawal. (3) Continuity of the business unit: We do not assume that we will shut down (liquidate) our business next year - Robert purchased a new limo. The cost is $50,000, however, the resale value will be $30,000. The limo recorded at cost and will be written off over the next five years rather than written down immediately. 3 2.Generally Accepted Accounting Principles (GAAP) (4) Unit of measurement: The financial value stated in financial statements should represent a stable unit of value (e.g., US$). - If we had huge inflation (e.g.,$1 in 2006 → $5 in 2008), you need to show current replacement cost in footnotes of your financial statements. (5) Objective evidence: Accounting transactions and the resulting accounting records should be based as much as possible on objective evidence - Kim contributed her Accord to her restaurant. She strongly believes her car is worth of $20,000, but the business records it with its Blue-Book (appraiser’s) value of $18,000. (6) Full disclosure: The financial statements must provide information on all the facts relevant to the interpretation of the financial statements. - Mr. Park’s hotel describes its depreciation method and inventory valuation method in the footnotes of the financial statements. 4 2.Generally Accepted Accounting Principles (GAAP) (7) Consistency: Once an accounting method has been adopted, it should be followed in future accounting periods unless a change is warranted and disclosed. - If Starbucks used a straight-line depreciation method in 2007, the company must use the same depreciation method in 2008 unless a change was warranted and disclosed. (8) Matching: Expenses should be matched with revenues they generated. → Related to Accrual basis accounting - Credit card fees of $10 should be recorded as expenses during the accounting period in which the generated sale of $200 is recorded. (9) Conservatism: Recognizing expenses as soon as possible, but delaying the recognition of revenues until they are ensured. - Kristine, a restaurant owner, reduces its tomato inventory value of $1000 (original cost) to $800 in order to reflect the market value. 5 2.Generally Accepted Accounting Principles (GAAP) (10) Materiality: Events must be recorded if they make a difference as determined by standard of comparison. - Spencer, a hotel manager, replaced ten frames ($10/frame) in his office and recorded his spending of $100 as “expense”, not as “equipment” because the value was too low to be recorded as fixed assets. The company set a $1,000 limit for recording expenditures as fixed assets. - Companies generally establish this limit by rules of thumb (e.g., 5% of net income or 1% of total assets) 6 7 3.Cash VS. Accrual • Cash basis accounting: recognizes accounting transactions at the point of cash inflow or outflow • Accrual basis accounting: recognizes “revenues” when earned and “expenses” when incurred, regardless of when cash actually changes hands (e.g., wages expense, insurance expense) http://www.youtube.com/watch?v=3RxJFyUPu_o • You purchased 50 bottles of wine Aug1, 2012 and sold them in your restaurant during August. You received a bill of $500 on Aug 23, but you will pay it on Sep 1. At the end of this month, you will record the expense of $500 when you use accrual basis. 8 4. The Six Branches of Accounting • Financial accounting (Preparing and distributing report) • Cost accounting (concerning with recording, allocating, and reporting current and future costs) • Managerial accounting (preparing performance reports, including comparisons to budget; providing in-depth information as a basis for management decisions) • Tax accounting (performed by specialists) • Auditing (providing opinions on reports/ by certified public firms) • Accounting systems (Review information systems) 9 5. Fundamental Accounting Equation Assets = Liabilities + Owners’ Equity (What my company has) (How my company got them) (1) A: Cash, Account receivables, Inventory, Building, Equipment, and Land (2) L: Payables, and Accrued payroll (wage) (3) OE : Permanent = Capital stock and Retained earning : Temporary = Revenue and Expenses A = L + POE + R - E 10 6. Normal Account Balances (Debit/Credit) (p.17-18) Let’s assume you are a hotel manager. Asset — debit (+) (What your company own) Liability — credit (+) (What your company owes to third parties) Owners’ Equity Permanent — credit (+) (What your company owe to the company’s investors) Owners’ Equity Revenue — credit (+) (It increases owners’ equity) Owners’ Equity Expense — debit (+) (It decreases owners’ equity) Contra asset accounts generally show a credit balance • • Accumulated Depreciation Allowance for Doubtful Accounts. 11 6. Normal Account Balances (1) Which of following account types normally has a debit balance? a. Liability b. Revenue c. Owner’s equity d. Asset (2) Permanent owner’s equity accounts have what kind of normal balance? 12 13  Try Problem 13 (#1 - #3) AGAIN… 14 Handout 2: CH2 Problem 11: Horizontal (Comparative) analysis KRS INC Comparative Balance sheet December 31, 2002 and 2001 Change from 2001 to 2002 2002 ($) 2001 ($) ASSETS Current Assets: Cash Marketable Securities Accounts receivable Inventories Prepaid insurance (prepaid expenses) Total current assets Property & Equipment: Land Buildings Operating Equipment (e.g., china, glass) Less: Accumulated depreciation Net Property & Equipment Total Assets LIABILITIES & OWNERS' EQUITY 20,768 10,496 11,618 18,554 3,874 65,310 Amount (absolute) change ($ in 2002-& in 2001) 16,634 10,396 16,105 14,554 4,158 61,847 Percentage (Relative) change (Amount change/$ in 2001)*100 4,134 100 -4,487 4,000 -284 3,463 24.85% 0.96% -27.86% 27.48% -6.83% 5.60% 116,435 1,207,090 84,934 -537,849 870,610 116,435 1,207,090 69,255 (453,263) 939,517 0 0 15,679 -84,586 -68,907 0.00% 0.00% 22.64% move to current assets 18.66% -7.33% 935,920 1,001,364 -65,444 -6.54% Current Liabilities: Accounts payable Accrued expenses Current portion of long-term debt Total Current Liabilities Long-Term Liabilities: Long-term debt Deferred Income taxes (noncurrent liability) Total Long-term Liabilities 12,945 1,039 20,060 34,044 13,265 2,047 20,407 35,719 0 -320 -1,008 -347 -1,675 -2.41% -49.24% -1.70% -4.69% 533369 7,927 541,296 553,429 8,163 561,592 -20,060 -236 -20,296 -3.62% -2.89% -3.61% Total Liabilities 575,340 597,311 -21,971 -3.68% 211200 211,200 0 0.00% 149,380 192,853 -43,473 -22.54% 360,580 404,053 -43,473 -10.76% 935,920 1,001,364 -65,444 -6.54% Owners' Equity: Common stock Retained Earnings Total Owners' Equity Total Liabilities and Owners' Equity Sunny Kim Chapter 3 The Income Statement Dr. Jungsun (Sunny) Kim TCA 321 Competencies for The Income Statement 1. Describe revenues, expenses, gains, and losses as presented on the income statement. 2. Describe the contents of an income statement based on the Uniform System of Accounts for the Lodging Industry (USALI). 3. Understand difference between USALI and USAR (Uniform System of Accounts for Restaurants) and know how to calculate Cost of Goods Sold 4. Interpret income statements using horizontal and vertical analysis. 1 (continued) 1. Revenue, Expense, Gain, and Loss  Revenue: the inflow of assets (e.g., A/R, cash), reduction of liabilities (e.g., unearned revenue), or both resulting from the sale of products and services.  Gain: an increase in assets, reduction in liabilities, or both resulting from an incidental transaction or a transaction that is neither a revenue nor an investment by owners (e.g., gain on disposal of equipment, building, or investments)  Expense : the outflow of assets (e.g., cash), increase of liabilities (e.g., A/P), or both incurred during the production and rendering of products and services.  Loss: a decrease in assets, increase in liabilities, or both resulting from an incidental transaction or a transaction that is neither an expense nor a distribution to owners (e.g., loss on disposal of equipment, building, or investments) 2 How can we calculate a gain or loss? (p.108)  Net book value = Cost – Accumulated Depreciation e.g., $600,000 - $450,000 = $150,000  Gain (Loss) = Cash received (Proceeds) from selling an asset item - Carrying value (net book value) of the asset item e.g., $200,000 – $150,000 = $ 50,000 Net equipment (B/S) 3 Cash (B/S) Gain on sale of Property (I/S) Try problem 1 (p. 124) 1. Selling price = $500  Original cost = $3,000  Acc. Depreciation = $2,700 2. Selling price = $3,500  Original cost = $20,000  Acc. Depreciation = $15,000 4 2. Definition and Formats (p. 116, 119)  A report of sales (revenues) and expenses for a defined period of time, resulting in net income (or loss) of the business  USALI (Uniform System Accounting for Lodging Industry)  Departmental Profit  Undistributed Operating Expenses category  Non-operating expenses (e.g., capacity costs)  EBITDA (Earnings Before Interest, Taxes, Deprecation, and Amortization expenses)  USAR (Uniform System of Accounts for Restaurants)  Cost of sales  Payroll and related expenses in labor expenses category  Prime Costs (= Total Cost of Sales + Total Labor costs)  Controllable and Non-Controllable expenses  Rent paid for the space the restaurant occupies is an example of noncontrollable costs by managers because the rent expense will be decided by the board of directors (see textbook pp.318-319)  Restaurant Operating Income 3. Operated departments at a hotel 6  Rooms  Food  Beverage  Golf Course and Pro Shop  Health Club/Spa  Parking  Other operated departments (e.g., gift shop) 4. Income statement for the Lodging industry (p. 116) Revenues (Rooms, F&B, and other operated departments) – All operated departments’ direct operating expenses (e.g., Cost of sales, Payroll and other direct expenses attached to each department) + Miscellaneous Income (e.g., cancellation fees, resort fees, commissions from third parties for services such as car rentals, revenue from the space rentals such as coffee kiosks) = Total operated departments Income – Total undistributed operating expenses (e.g., Administrative & General; Information & Telecommunications Systems; Sales & Marketing; Property operation & Maintenance; and Utilities) = Gross Operating Profit (GOP) – Management fees = Income before Non-operating Income and Expenses + Non-operating income (e.g., Income from billboards or antennas on the hotel building) – Non-operating expenses (e.g., Rent, Property taxes, Insurance expenses) +/– Other non-operating income and expenses (e.g., Gain (or Loss) on disposal of fixed assets) = Earnings Before Interest, Tax, Depreciation, & Amortization (EBITDA) – Interest expense –7 Depreciation and Amortization expense Non-Operating Income and Expenses  Management is responsible for revenues and expenses reported above the income statement’s GOP line.  Non-Operating Income and Expenses are seen to be outside of management’s direct control.  Any income listed here relates to decisions by owners, and not associated with operations or managed by the operator (e.g., income from billboards on a hotel, gain on disposal of fixed assets)  The expenses listed include capacity costs (e.g., rent, property taxes, and insurance) and loss on disposal of fixed assets 5. Cost of Sales Formula (p. 104) Beginning inventory on Jan 1, 2012 ($100,000 in Food inventory) + Inventory purchases during 2012 ($50,000 of Food purchases) = Goods available for sale ($150,000) – Ending inventory on Dec 31, 2012 ($ 70,000 in Food inventory) = Cost of goods consumed ($80,000) We did not sell this to our customers – Goods used internally (e.g., $30,000 of employee meals & free meals for customers) + Goods purchased internally ($10,000 of inventory transferred from the bar to the kitchen (e.g., wine and other alcohol used for a food preparation) = Cost of goods sold ($60,000) Question: If there was $5,000 of inventory transferred from the kitchen to the bar (e.g., juice and fruits), will you add or subtract this amount? 9 6. Problem 5 (p. 126) 10 Problem 5. To which department would each expense be charged?  Expense  1. Cost of food sold  2. Employee meals—GM  3. Department Food Department Admin. & General Employee meals—food department Department benefit account)  4. 11 Promotional meals Department Food (employee Marketing 7. Problem 13 (p. 132)  This format is recommended for commercial food service operations: the Uniform System of Accounts for Restaurant (USAR). (See Exhibit 14, Textbook p. 119)  Fill out the corresponding values in the excel spreadsheet.  Be careful while calculating “cost of sales” (= cost of goods sold)  Employee benefits = Fringe benefits (e.g., company car, health insurance, employee discounts)+ Employee meals + Payroll taxes  Prime costs = Total cost of goods sold + Total labor costs  Controllable Income = Total revenue – Prime costs – Total other controllable expenses  Restaurant operating income = Controllable income – Total non-controllable expenses  Net income before income taxes = Restaurant operating income – Interest expenses 12 Net income = Net income before income taxes – Income tax expense 8. Vertical Analysis  Also known as common-size income statement.  Using “total revenues (sales)” as a common denominator.  Used for comparing multiple companies We used “total assets” as a common denominator in B/S 9. Horizontal Analysis  Two Income Statements side by side: also known as comparative Income Statement.  Management analysis of the two figures included.  Absolute Changes: The change in dollars between two periods → e.g., ($value in 2012-$value in 2011)  Relative Changes (% change) divide the absolute change by the amount for the previous period. → e.g., {($value in 2012-$value in 2011)/$value in 2011}×100 10. Problem 18 (p. 136)  See Exhibit 11 (p. 116).  The format is based on the Uniform System of Accounts for the Lodging Industry (USALI).  Total Operated Departments Income = Room department income + Food      15 department income + Gift shop department income Total undistributed operating expenses = Administrative & General + Information & Telecom. Systems + Sales & Marketing + Property operation & Maintenance + Utilities Gross Operating Profit = Total Operated departments income – Total undistributed operating expenses EBITDA = Gross operating profit – Rent, Property taxes, & Insurance Income before income taxes = EBITDA – Interest expense – Depreciation and Amortization expenses Net income = Income before income taxes – Income taxes What is next?  SCF  Print and bring the survival kit handout and handout 1. 16 Chapter 1 Introduction to Managerial Accounting Hospitality Industry Managerial Accounting 8th Edition TCA 321 Dr. Jungsun (Sunny) Kim Key leaning outcomes from this chapter 1. Describe characteristics of the hospitality industry and identify the major function of hospitality accounting. 2. Apply generally accepted accounting principles (GAAP) to hospitality situations. 3. Distinguish between cash basis accounting and accrual basis accounting. 4. Explain the fundamental accounting equation and identify debit and credit accounts. 5. Explain the steps in the accounting cycle. 1     ➢ - Seasonality of Business (p. 6) Short distribution chain and time span (Less than 5% of total assets as inventory for resale) Labor intensive (20-50% of total revenue) Major investment in fixed assets (55-85% of total assets) (why?) What accounting does in our industry? Provide financial information, statements, and reports to various users (Who are users?) - External users: Lenders and investors Internal users: managers, executives, shareholders 2 2.Generally Accepted Accounting Principles (GAAP) (pp. 10-15) (1) Cost: When a transaction is recorded, it is the transaction price or cost that establish the accounting value for the product. - Ashley recorded a hotel building at the purchase price of $1,500,000 when the market value is $1,750,000. (2) Business entity: Accounting and financial statements are based on the concepts that (1) each business is a business entity that maintains its own set of accounts, and (2) these accounts are separate from the other financial interests of the owners. - Kevin, a restaurant owner, decided to take some sushi home for his dinner. He has to record the cost of the sushi as a withdrawal. (3) Continuity of the business unit: We do not assume that we will shut down (liquidate) our business next year - Robert purchased a new limo. The cost is $50,000, however, the resale value will be $30,000. The limo recorded at cost and will be written off over the next five years rather than written down immediately. 3 2.Generally Accepted Accounting Principles (GAAP) (4) Unit of measurement: The financial value stated in financial statements should represent a stable unit of value (e.g., US$). - If we had huge inflation (e.g.,$1 in 2006 → $5 in 2008), you need to show current replacement cost in footnotes of your financial statements. (5) Objective evidence: Accounting transactions and the resulting accounting records should be based as much as possible on objective evidence - Kim contributed her Accord to her restaurant. She strongly believes her car is worth of $20,000, but the business records it with its Blue-Book (appraiser’s) value of $18,000. (6) Full disclosure: The financial statements must provide information on all the facts relevant to the interpretation of the financial statements. - Mr. Park’s hotel describes its depreciation method and inventory valuation method in the footnotes of the financial statements. 4 2.Generally Accepted Accounting Principles (GAAP) (7) Consistency: Once an accounting method has been adopted, it should be followed in future accounting periods unless a change is warranted and disclosed. - If Starbucks used a straight-line depreciation method in 2007, the company must use the same depreciation method in 2008 unless a change was warranted and disclosed. (8) Matching: Expenses should be matched with revenues they generated. → Related to Accrual basis accounting - Credit card fees of $10 should be recorded as expenses during the accounting period in which the generated sale of $200 is recorded. (9) Conservatism: Recognizing expenses as soon as possible, but delaying the recognition of revenues until they are ensured. - Kristine, a restaurant owner, reduces its tomato inventory value of $1000 (original cost) to $800 in order to reflect the market value. 5 2.Generally Accepted Accounting Principles (GAAP) (10) Materiality: Events must be recorded if they make a difference as determined by standard of comparison. - Spencer, a hotel manager, replaced ten frames ($10/frame) in his office and recorded his spending of $100 as “expense”, not as “equipment” because the value was too low to be recorded as fixed assets. The company set a $1,000 limit for recording expenditures as fixed assets. - Companies generally establish this limit by rules of thumb (e.g., 5% of net income or 1% of total assets) 6 7 3.Cash VS. Accrual • Cash basis accounting: recognizes accounting transactions at the point of cash inflow or outflow • Accrual basis accounting: recognizes “revenues” when earned and “expenses” when incurred, regardless of when cash actually changes hands (e.g., wages expense, insurance expense) http://www.youtube.com/watch?v=3RxJFyUPu_o • You purchased 50 bottles of wine Aug1, 2012 and sold them in your restaurant during August. You received a bill of $500 on Aug 23, but you will pay it on Sep 1. At the end of this month, you will record the expense of $500 when you use accrual basis. 8 4. The Six Branches of Accounting • Financial accounting (Preparing and distributing report) • Cost accounting (concerning with recording, allocating, and reporting current and future costs) • Managerial accounting (preparing performance reports, including comparisons to budget; providing in-depth information as a basis for management decisions) • Tax accounting (performed by specialists) • Auditing (providing opinions on reports/ by certified public firms) • Accounting systems (Review information systems) 9 5. Fundamental Accounting Equation Assets = Liabilities + Owners’ Equity (What my company has) (How my company got them) (1) A: Cash, Account receivables, Inventory, Building, Equipment, and Land (2) L: Payables, and Accrued payroll (wage) (3) OE : Permanent = Capital stock and Retained earning : Temporary = Revenue and Expenses A = L + POE + R - E 10 6. Normal Account Balances (Debit/Credit) (p.17-18) Let’s assume you are a hotel manager. Asset — debit (+) (What your company own) Liability — credit (+) (What your company owes to third parties) Owners’ Equity Permanent — credit (+) (What your company owe to the company’s investors) Owners’ Equity Revenue — credit (+) (It increases owners’ equity) Owners’ Equity Expense — debit (+) (It decreases owners’ equity) Contra asset accounts generally show a credit balance • • Accumulated Depreciation Allowance for Doubtful Accounts. 11 6. Normal Account Balances (1) Which of following account types normally has a debit balance? a. Liability b. Revenue c. Owner’s equity d. Asset (2) Permanent owner’s equity accounts have what kind of normal balance? 12 13  Try Problem 13 (#1 - #3) AGAIN… 14 Chapter 2 The Balance Sheet TCA321 Dr. Sunny Kim Competencies for The Balance Sheet 1. Explain the purposes of the balance sheet. 2. Identify the limitations of the balance sheet. 3. Define the various elements of assets, liabilities, and owners’ equity as presented on the balance sheet. 4. Explain deferred income tax. 5. Interpret balance sheets using horizontal and vertical analysis. 1 © 2006, Educational Institute 1. Purpose of Balance Sheet  To reflect assets and to claim liabilities and owner’s equity  To balance at a GIVEN DATE : Usually at the end of year, December 31.  To convey information : the statement of financial position 2 © 2006, Educational Institute 2. Limitations of Balance Sheet • Appreciation is not shown: e.g., The land Bellagio bought 10 years ago, costs $500 million , now what? $3 billion. • Recruiting and training are not included. • Static nature: e.g., Keep $1 billion in cash till the end of this year and invest all in Jan next year • It is estimation, not exact: e.g., inventory (estimated current replacement cost); equipment (the cost less estimated depreciation) 3 © 2006, Educational Institute 3.Major Elements of the Balance Sheet (P.53) • Assets: current assets, investments, property and equipment, and other assets (p.50). • Liabilities: current and long term • Owners’ equity 4 © 2006, Educational Institute 3.1.Typical Components of Current Assets • Cash • Marketable securities (e.g., commercial paper, Treasury bills) • Receivables • Inventories • Prepaid expenses (e.g., prepaid rent, prepaid insurance, and prepaid interest)  Operating equipment - Current ✓ e.g., Linen, China, Glassware, Silver, and Uniforms ✓ When the estimated usage of these items is less than one year 5 © 2006, Educational Institute 3.2. Non-current Assets  Investments: e.g., real estate and bonds  Property & Equipment ➢ Relates to Tangible Assets ➢ Land is not depreciated ➢ Construction In Progress - All labor, materials & other expenses of construction - not depreciated ➢ Building, furniture & fixtures (e.g., office furniture, carpet, and floor coverings), and equipment (e.g., office equipment, computer equipment, gaming equipment, and vehicles) are depreciated 6 © 2006, Educational Institute 3.3. Typical Components of Other Assets • Intangible assets: e.g. trademark, customer data • Cash surrender value: The amount the company is entitled to receive on its cancellation of life insurance policy purchased for key employees • Deferred income taxes: tax deduction in the future • Preopening expenses: Security deposits • Franchise fee: Initial franchisee fees+ Other costs incurred to obtain the franchise. • Operating equipment - noncurrent or long-term: when useful lives greater than one year (e.g., bulk purchase of china) 7 © 2006, Educational Institute 3.4.Current Liabilities (due within 1 year) • Notes payable / Accounts payable • Accrued expenses (e.g., wage payable) • Income taxes payable • Current maturities of long-term debt • Deferred income taxes (delayed to be paid in the future tax return period) 8 © 2006, Educational Institute 3.5.Long-term Liabilities (Beyond next 12 months) • Notes payable • Mortgages payable • Lease obligation → Or you will simply see ‘Long-term debts’ • Deferred income taxes (related to non-current assets such as equipment) 9 © 2006, Educational Institute 4.Owner’s Equity  Capital stock  Common stock: generally allows its holders to have voting rights  Preferred stock: provides preferential treatment on dividends, but no voting rights  Additional paid-in capital: Payments for capital stock in excess of the par value of the capital stock: e.g., cash of $50 received from the sale of common stock with a par value of $10 → Record $10 to common stock ; $40 to additional paid-in cap.  Retained earnings: undistributed earnings  Treasury stock: the property’s own capital stock that has been repurchased but not retired. © 2006, Educational Institute Problem 2: Handout 1  Vertical analysis (to reduce values to percentage) = common-size B/S →Formula: ($ value in each account / Total assets) × 100  How much the company had in the G. Day Capital account on Dec 31, 2008?  What percentage of the company’s total assets was total liabilities on Dec 31, 2008?  What percentage of the company’s total assets was total owners’ equity on Dec 31, 2008? 11 © 2006, Educational Institute Why we are doing the vertical analysis?  Internal use: It permits the comparison of amount relative to a base within each period. (Look at Exhibit 9, page 60)  E.g., MGM Resorts International:  Cash at the end of year 2010 = $499,000,000  Cash at the end of year 2011 = $1,865,000,000  Cash at the end of year 2012 =$ 1,544,000,000  Cash at the end of year 2013 =$ 1,804,000,000  Did this company increase the Cash portion in its Total Assets from 12/31/2010 to 12/31/2011?  TA at the end of year 2010 = $18,961,000,000  TA at the end of year 2011= $27,766,000,000  TA at the end of year 2012 = $26,285,000,000  TA at the end of year 2013= $26,110,000,000  Cash/Total Assets on 12/31/10 = 2.63%  Cash/ Total Assets on 12/31/11 = 6.72%  Cash/ Total Assets on 12/31/12 = 5.87% 12  Cash/ Total Assets on 12/31/13 = 6.91% © 2006, Educational Institute Why we are doing the vertical analysis?  External use: It permits the comparison made against other companies’ financial statements  E.g., MGM Resorts International:  Cash/ Total Assets on 12/31/11 = 6.72%  Cash/ Total Assets on 12/31/12 = 5.87%  Cash/ Total Assets on 12/31/13 = 6.91%  E.g., Wynn Resorts:  Cash/ TA on 12/31/11 = 18.30%  Cash/ TA on 12/31/12 = 23.71%  Cash/ TA on 12/31/13 = 29.07%  LTD/ TA on 12/31/11 = 40.72%  LTD/ TA on 12/31/12 = 79.46%  LTD/ TA on 12/31/13 = 78.63%  E.g., Caesars Entertainment  Cash/ TA on 12/31/11 = 3.17%  Cash/ TA on 12/31/12 = 6.28%  Cash/ TA on 12/31/13 = 11.22%  LTD/ TA on 12/31/11 = 69.29%  Long-term debt/ Total Assets on 12/31/11 = 48.51%  LTD/TA on 12/31/12 = 51.70% 13  LTD/TA on 12/31/13 = 51.50% © 2006, Educational Institute  LTD/ TA on 12/31/12 = 73.33%  LTD/ TA on 12/31/13 = 84.73% Problem 13 (p.75): Handout 2!  Horizontal analysis (to compare changes from the last year to this year) = Comparative Balance Sheet → $ amount change formula: e.g., ($ in 2002 - $ in 2001 ) → % change formula: e.g., ($ in 2002 - $ in 2001 ) / ( $ in 2001) × 100  If the company had “investment” of $60,000 in 2001 and $80,000 in 2002, where will you add this account on the balance sheet?  (1) In the Current Assets section  (2) Between Current Assets and Property & Equipment, or  (3) In the Land, Property & Equipment section. 14 © 2006, Educational Institute Chapter 3 The Income Statement Dr. Jungsun (Sunny) Kim TCA 321 Competencies for The Income Statement 1. Describe revenues, expenses, gains, and losses as presented on the income statement. 2. Describe the contents of an income statement based on the Uniform System of Accounts for the Lodging Industry (USALI). 3. Understand difference between USALI and USAR (Uniform System of Accounts for Restaurants) and know how to calculate Cost of Goods Sold 4. Interpret income statements using horizontal and vertical analysis. 1 (continued) 1. Revenue, Expense, Gain, and Loss  Revenue: the inflow of assets (e.g., A/R, cash), reduction of liabilities (e.g., unearned revenue), or both resulting from the sale of products and services.  Gain: an increase in assets, reduction in liabilities, or both resulting from an incidental transaction or a transaction that is neither a revenue nor an investment by owners (e.g., gain on disposal of equipment, building, or investments)  Expense : the outflow of assets (e.g., cash), increase of liabilities (e.g., A/P), or both incurred during the production and rendering of products and services.  Loss: a decrease in assets, increase in liabilities, or both resulting from an incidental transaction or a transaction that is neither an expense nor a distribution to owners (e.g., loss on disposal of equipment, building, or investments) 2 How can we calculate a gain or loss? (p.108)  Net book value = Cost – Accumulated Depreciation e.g., $600,000 - $450,000 = $150,000  Gain (Loss) = Cash received (Proceeds) from selling an asset item - Carrying value (net book value) of the asset item e.g., $200,000 – $150,000 = $ 50,000 Net equipment (B/S) 3 Cash (B/S) Gain on sale of Property (I/S) Try problem 1 (p. 124) 1. Selling price = $500  Original cost = $3,000  Acc. Depreciation = $2,700 2. Selling price = $3,500  Original cost = $20,000  Acc. Depreciation = $15,000 4 2. Definition and Formats (p. 116, 119)  A report of sales (revenues) and expenses for a defined period of time, resulting in net income (or loss) of the business  USALI (Uniform System Accounting for Lodging Industry)  Departmental Profit  Undistributed Operating Expenses category  Non-operating expenses (e.g., capacity costs)  EBITDA (Earnings Before Interest, Taxes, Deprecation, and Amortization expenses)  USAR (Uniform System of Accounts for Restaurants)  Cost of sales  Payroll and related expenses in labor expenses category  Prime Costs (= Total Cost of Sales + Total Labor costs)  Controllable and Non-Controllable expenses  Rent paid for the space the restaurant occupies is an example of noncontrollable costs by managers because the rent expense will be decided by the board of directors (see textbook pp.318-319)  Restaurant Operating Income 3. Operated departments at a hotel 6  Rooms  Food  Beverage  Golf Course and Pro Shop  Health Club/Spa  Parking  Other operated departments (e.g., gift shop) 4. Income statement for the Lodging industry (p. 116) Revenues (Rooms, F&B, and other operated departments) – All operated departments’ direct operating expenses (e.g., Cost of sales, Payroll and other direct expenses attached to each department) + Miscellaneous Income (e.g., cancellation fees, resort fees, commissions from third parties for services such as car rentals, revenue from the space rentals such as coffee kiosks) = Total operated departments Income – Total undistributed operating expenses (e.g., Administrative & General; Information & Telecommunications Systems; Sales & Marketing; Property operation & Maintenance; and Utilities) = Gross Operating Profit (GOP) – Management fees = Income before Non-operating Income and Expenses + Non-operating income (e.g., Income from billboards or antennas on the hotel building) – Non-operating expenses (e.g., Rent, Property taxes, Insurance expenses) +/– Other non-operating income and expenses (e.g., Gain (or Loss) on disposal of fixed assets) = Earnings Before Interest, Tax, Depreciation, & Amortization (EBITDA) – Interest expense –7 Depreciation and Amortization expense Non-Operating Income and Expenses  Management is responsible for revenues and expenses reported above the income statement’s GOP line.  Non-Operating Income and Expenses are seen to be outside of management’s direct control.  Any income listed here relates to decisions by owners, and not associated with operations or managed by the operator (e.g., income from billboards on a hotel, gain on disposal of fixed assets)  The expenses listed include capacity costs (e.g., rent, property taxes, and insurance) and loss on disposal of fixed assets 5. Cost of Sales Formula (p. 104) Beginning inventory on Jan 1, 2012 ($100,000 in Food inventory) + Inventory purchases during 2012 ($50,000 of Food purchases) = Goods available for sale ($150,000) – Ending inventory on Dec 31, 2012 ($ 70,000 in Food inventory) = Cost of goods consumed ($80,000) We did not sell this to our customers – Goods used internally (e.g., $30,000 of employee meals & free meals for customers) + Goods purchased internally ($10,000 of inventory transferred from the bar to the kitchen (e.g., wine and other alcohol used for a food preparation) = Cost of goods sold ($60,000) Question: If there was $5,000 of inventory transferred from the kitchen to the bar (e.g., juice and fruits), will you add or subtract this amount? 9 6. Problem 5 (p. 126) 10 Problem 5. To which department would each expense be charged?  Expense  1. Cost of food sold  2. Employee meals—GM  3. Department Food Department Admin. & General Employee meals—food department Department benefit account)  4. 11 Promotional meals Department Food (employee Marketing 7. Problem 13 (p. 132)  This format is recommended for commercial food service operations: the Uniform System of Accounts for Restaurant (USAR). (See Exhibit 14, Textbook p. 119)  Fill out the corresponding values in the excel spreadsheet.  Be careful while calculating “cost of sales” (= cost of goods sold)  Employee benefits = Fringe benefits (e.g., company car, health insurance, employee discounts)+ Employee meals + Payroll taxes  Prime costs = Total cost of goods sold + Total labor costs  Controllable Income = Total revenue – Prime costs – Total other controllable expenses  Restaurant operating income = Controllable income – Total non-controllable expenses  Net income before income taxes = Restaurant operating income – Interest expenses 12 Net income = Net income before income taxes – Income tax expense 8. Vertical Analysis  Also known as common-size income statement.  Using “total revenues (sales)” as a common denominator.  Used for comparing multiple companies We used “total assets” as a common denominator in B/S 9. Horizontal Analysis  Two Income Statements side by side: also known as comparative Income Statement.  Management analysis of the two figures included.  Absolute Changes: The change in dollars between two periods → e.g., ($value in 2012-$value in 2011)  Relative Changes (% change) divide the absolute change by the amount for the previous period. → e.g., {($value in 2012-$value in 2011)/$value in 2011}×100 10. Problem 18 (p. 136)  See Exhibit 11 (p. 116).  The format is based on the Uniform System of Accounts for the Lodging Industry (USALI).  Total Operated Departments Income = Room department income + Food      15 department income + Gift shop department income Total undistributed operating expenses = Administrative & General + Information & Telecom. Systems + Sales & Marketing + Property operation & Maintenance + Utilities Gross Operating Profit = Total Operated departments income – Total undistributed operating expenses EBITDA = Gross operating profit – Rent, Property taxes, & Insurance Income before income taxes = EBITDA – Interest expense – Depreciation and Amortization expenses Net income = Income before income taxes – Income taxes What is next?  SCF  Print and bring the survival kit handout and handout 1. 16 Chapter 4 The Statement of Cash Flows Dr. Sunny Kim TCA 321 © 2006, Educational Institute Competencies for The Statement of Cash Flows 1. Explain the purposes of the statement of cash flows and how the statement is used by hospitality managers. 2. Identify cash flows as reported on the statement of cash flows in terms of operating activities, investing activities, and financing activities. 3. Describe the four-step approach to preparing the statement of cash flows. 1 © 2006, Educational Institute (continued) 1. What is Cash?  “Sources of cash”  “Uses of cash”  Cash is defined as both cash and cash equivalents.  Cash equivalents are short-term, highly liquid investments such as U.S. Treasury bills and Money Market Accounts (saving accounts offered by banks and credit unions) 2 © 2006, Educational Institute 2. Purpose of Statement of Cash Flow  Information regarding cash receipts and cash payment (I/S is prepared on an accrual basis → revenue does not equal to cash inflow!)  Assess financial flexibility  Assess dividend policy  Assess the effect of cash investing and financing  Assess a company’s ability to generate cash from operations 3 © 2006, Educational Institute 3. Cash Flow Classifications (p.158) A hospitality operation typically has cash inflows and outflows related to three activities:  Operating activities  Investing activities  Financing activities 4 © 2006, Educational Institute 4. Four-Step Approach to Preparing the SCF (P.159) 1. Determine the net cash flows from operating activities. 2. Determine the net cash flows from investing activities. 3. Determine the net cash flows from financing activities. 4. Present the cash flows by activity on the SCF. 5 © 2006, Educational Institute 5. Operating Activities  Cash transactions related to revenue (cash inflows, +) and expenses (cash outflows, -)  What about depreciation? Is it really cash outflow?  What about gain on sale of equipment? Is it really cash inflow?  Current account adjustments (+/-) → E.g., You need to subtract “values in 2010 B/S” from “values in 2011 B/S” to find changes in cash flow. Then adjust them in 2011 SCF © 2006, Educational Institute STEP 1: Cash Flows from Operating ActivitiesIndirect Method (p.159, 161)  Net Income (find this value from ______) + Depreciation & Amortization expenses (non-cash expenses) - Gains on sales of property , equipment, or investment (non-cash gains: Since gains were added to I/S, you need to subtract them in C/F) + Losses on sales of property, equipment, or investment - Increase in accounts receivable (accrued revenue: non-cash revenue) + Decrease in inventories (cost of goods sold: non-cash expenses) + Increase in accounts payable (e.g., accrued wages: non-cash expense) © 2006, Educational Institute CHANGES IN CURRENT ACCOUNTS  A decrease in a current asset is added to net income.  An increase in a current asset is deducted from net income.  (Exception: Marketable security goes to investing activities)  A decrease in a current liability is deducted from net income  An increase in a current liability is added to net income.  (Exceptions: (1) Current maturities- Long term debt (2) Dividends payable go to Financing Activities)  The amount of the Gain or Loss (sale price – book value) goes to Operating Activities  The Sale Price affects “Cash” goes to Investing Activities (e.g., proceeds from sale of equipment) © 2006, Educational Institute Problem 2 (page 181)  Handout 1.  Prepare the cash from operating activities section of the SCF. 9 © 2006, Educational Institute Next class: Step 2: Cash Flows from Investing Activities (p.173)  Purchase of Marketable Security or investment (Cash outflow)  Look at changes in non-current assets (property and equipment, investments).  Check “footnotes” of the financial statements regarding purchase or sale of equipment and investments (e.g., footnote #1, #2, #8).  Proceeds from sale of equipment (cash inflow) = “Cost of equipment sold” - “LOSS” (or plus “GAIN”) on sales of equipment © 2006, Educational Institute 7. Financing Activities  Cash flows from issuance (cash inflow) and retirement (cash outflow) of debt  Cash flow from issuance (cash inflow) and re- purchase (cash outflow) of capital stock.  Cash to pay out dividends (cash outflow) © 2006, Educational Institute Step 3: Cash Flows from Financing Activities  Payment of long-term debt (= Payment of current maturities of long-term debt): Cash outflow  Borrowing long-term debt: Cash inflow  Purchase of treasury stock: Cash outflow  Proceeds from sale of common stock: Cash inflow  Look at dividends paid (=payment of dividends) during the time period: Cash outflow  “Dividends Declared” are not cash activities. It is current liability.  These information are usually found in footnotes. © 2006, Educational Institute Use B/S and footnotes to calculate payment of dividends (p. 172-174) Dividends Payable Balance in 2006 (see B/S) + Dividends declared during 2007 (see the footnote #3) - Payment of dividends for 2007 = Dividends Payable Balance in 2007 (see B/S) © 2006, Educational Institute Step 4: Total and Review  If done correctly your SCF figure will match the cash section of the Balance Sheet!  A = L + Permanent OE + (Revenue- Expenses) → B/S  Net income = Revenue – Expenses → I/S  Retained Earnings on 12/31/11 = Retained Earnings on12/31/10 + Net income during 2011 – Dividends declared during 2011 B/S (Dec 31, 2010) Cash Other current assets Noncurrent assets Liabilities Contributed capital Retained Earnings SCF (Adjustment from net income to net cash flow) Retained Earning Net income from I/S © 2006, Educational Institute B/S (Dec 31, 2011) Cash Other current assets Noncurrent assets Liabilities Contributed capital Retained Earnings Problem solving  Handout 2: Problem 10 (p.185) 15 © 2006, Educational Institute Next Class  Quiz 2  Exam Review 16 © 2006, Educational Institute Chapter 5 Ratio Analysis Dr. Sunny Kim TCA 321 0 © 2006, Educational Institute Topics we will cover in this chapter 1. Identify standards against which the results of ratio analysis may be compared. 2. Explain the purposes of ratio analysis. 3. Identify 5 common classes of ratios and describe the general purpose of each. 4. Calculate common liquidity and solvency rations and describe how creditors, owners, and managers view them. (ability to meet short-term and long-term obligation, debts). 6. Calculate common activity, profitability, and operating ratios and describe how creditors, owners, and managers view them. 7. Summarize the limitations of ratio analysis. 1 © 2006, Educational Institute (continued) 1. Potential Ratio Standards ALONE - RATIOS ARE NEUTRAL MUST COMPARE - TO BE AN INDICATOR  Ratios from a past period  Industry averages  Direct competitors’ ratios  Budgeted or planned ratios 2 © 2006, Educational Institute 2. Purposes of Ratio Analysis  Managers use ratios to monitor operating performance and evaluate their success in meeting goals.  Creditors use ratios to evaluate the solvency of a business and to assess the risk of future loans.  Investors and potential investors use ratios to evaluate the performance of a business and the business’s ability to generate profits for the investors.  Ratios reveal important information that may not be obvious or apparent in the financial statements. 3 © 2006, Educational Institute Creditors, Investors, Managers  All want something different from ratio analysis.  Each has needs that may contradict the others.  KEEP THIS IN MIND! (You will want to know what each is looking for as this will be part of the next exam!) 4 © 2006, Educational Institute 3. Five Classes of Ratios  Liquidity- ability to meet short-term obligations  Solvency- ability to meet long-term debts  Activity- how well management is using the company’s assets  Profitability- how much “profit” is being made  Operating- detailed analysis of operating departments 5 © 2006, Educational Institute (1). Common Liquidity Ratios 1. Current ratio 2. Acid-test ratio (quick ratio) 3. Accounts receivable turnover (ART) 4. Average collection period 5. Working capital turnover 6 © 2006, Educational Institute (1-1). Current Ratio  Current Assets/Current Liabilities ❖ Owners (=shareholders) normally prefer a low current ratio (=Low CA & High CL) to a high one because investments in most current assets are less productive than those in noncurrent assets. ❖ Creditors want a high current ratio, as this provides assurance that the company can make payments on debt. ❖ Managers are in the middle. 7 © 2006, Educational Institute (1-2). Acid-Test (Quick) Ratio  Measures liquidity by only considering “quick assets” Cash+ Marketable securities + Accounts receivable Current liabilities  Inventory and Prepaid expenses are not used: It can make lots of differences between this ratio and current ratio. ❖ Owners prefer low ratio (less than 1) ❖ Creditors prefer high ❖ Managers are in the middle 8 © 2006, Educational Institute (1-3). Accounts Receivable Turnover (ART) • Measures the speed of the conversion of accounts receivable (A/R) to cash • Revenue/Average accounts receivable ➢ Average accounts receivable = (A/R from the last year + A/R from this year)/2 ❖ Owners like a HIGH ART means A/R is being managed well. ❖ Creditors like a HIGH ART as it means the company will likely have more cash readily available to pay debt. ❖ Managers like a LOWART since offering credit helps maximize sales. 9 © 2006, Educational Institute (1-4). Average Collection Period  365days/Accounts Receivable Turnover  This conversation simply translates the turnover into a more understandable result.  Generally, the time allowed for average payment should not exceed the terms of sales by more then 7-10 days. E.g., If the terms of sales are n/30 (entire amount is due 30 days), the maximum allowable average collection period is 3740 days. 10 © 2006, Educational Institute (1-5). Working Capital Turnover (WCT) • Working capital (WC) = Current Assets – Current Liabilities • Revenue/Average Working Capital • E.g., Working capital turnover of 17 means that working capital was used 17 times to generate sales during this year. • How effectively is the company using its working capital to generate sales? ❖ Owners prefer a HIGH working capital turnover ratio ❖ Creditors prefer a LOW working capital turnover ratio (High WC) ❖ Management falls in between once again 11 © 2006, Educational Institute (2). Common Solvency Ratios     Measures the “cushion” that is available to absorb any losses Used primarily by lenders Lenders prefer less risk Leverage refers to how much long-term debt financing is being used by a company:  “High Leverage” = Lots of long-term debt  “Low Leverage” = Little long-term debt 1. Solvency ratio 2. Debt-equity ratio 3. Long-term debt to total capitalization ratio 4. Number of times interest earned ratio 5. Operating cash flows to total liabilities ratio 12 © 2006, Educational Institute (2-1). Solvency Ratio  Total Assets/Total Liabilities  Greater the leverage, the lower the solvency ratio. ❖ Owners want a LOW solvency ratio as that means greater return from leveraging (Note: “Total Liabilities” is the denominator). ❖ Creditors want a HIGH solvency ratio as that means less risk to their investment. ❖ Managers are neutral. 13 © 2006, Educational Institute (2-2). Debt-Equity Ratio  Total Liabilities/Total Owners Equity  Most common Solvency Ratios.  Compares the companies debt to its net worth (Net worth = Owners Equity).  Shows ability to meet long-term debts.  Owners want a HIGH debt-equity ratio as that means greater return from leveragi...
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Hotel Manager Skills
As a hotel manager, I would do a functional analysis of costs. Analyzing costs will help to
determine the money spend on buying things such as drinks, foods, new beds and beddings in the
hotel. Once I have examined this kind of expenditure, I will find ways of making more sales
through the marketing of new and existing products and services. After doing this analysis, then I
will be able to make decisions on what to add to increase the profits.
Ensuring a clear definition of budgets is of importance. Budgets are best done when they
match the...


Anonymous
Excellent resource! Really helped me get the gist of things.

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