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.
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➢
-
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
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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 $30,000. The limo recorded at cost and will be written off
over the next five years rather than written down immediately.
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2.Generally Accepted Accounting Principles (GAAP)
(4) Unit of measurement: The financial value stated in financial
statements should represent a stable unit of value (e.g., US$).
- 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.
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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.
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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)
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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.
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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)
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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
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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.
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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?
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13
Try Problem 13 (#1 - #3) AGAIN…
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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.
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(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
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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.
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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!)
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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
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(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
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(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.
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(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
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(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.
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(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.
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(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
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(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
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(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.
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(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
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(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!
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(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
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(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.
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(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
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(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”…
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(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)
•
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All (creditors, investors, and managers) want HIGH ratios.
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(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)
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4. Earnings per share
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(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.
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(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.
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(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
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(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
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common stock reduced.
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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
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(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!
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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.
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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.
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(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)
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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
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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
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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.
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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
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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)
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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)
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Problem 2 (page 181)
Handout 1.
Prepare the cash from operating activities section
of the SCF.
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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
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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)
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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.
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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)
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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
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B/S (Dec 31, 2011)
Cash
Other current assets
Noncurrent assets
Liabilities
Contributed capital
Retained Earnings
Problem solving
Handout 2: Problem 10 (p.185)
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Next Class
Quiz 2
Exam Review
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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.
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(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)
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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)
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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.
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© 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)
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© 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.
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© 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!)
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© 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
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(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
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(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.
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© 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.
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© 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
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© 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.
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(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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