Lambton College

School of Business, Hospitality and Creative Design

CUSTOM COURSEWARE

Compiled By: Brett Golds

TABLE OF CONTENTS

UNIT #1 Overview of Financial Accounting and Reporting……….. 1 - 30 Financial Statement Analysis…………………………… 31 - 41

UNIT #1

OVERVIEW OF FINANCIAL ACCOUNDING AND REPORTING

OVERVIEW OF FINANCIAL ACCOUNTING AND REPORTING

What is Accounting? Accounting is the process of recoding, classifying, summarizing, and interpreting financial transactions of an economic entity. Accounting also includes communicating this financial information to interested users for the purpose of making economic decisions. Refer to exhibit A on page 14 for a chart-form depiction of this general definition.

This definition can be broken down into its components to gain a clearer picture of what accounting entails.

Financial Transactions – include buying and selling goods and services, acquiring equipment, using supplies and receiving and paying cash. A business may engage in anywhere from hundreds to tens of thousands of transactions during a month or year. Once these transactions have been recorded in the accounting records (also referred to as the “books”), they are usually classified and summarized into groups that have common characteristics. For example, all wage payments are grouped together, as are all sales transactions. This enables the business to obtain needed information about wages, sales, and other transactions that occur over a given period of time.

Economic Entity – represents a business organization that engages in financial transactions (i.e. the selling of products (food and beverages) or providing a service (accommodations)) with the goal of earning a profit. Note, however, that not all economic entities are profit-oriented business operations; others include charities, government agencies, and municipalities to name a few.

Communication – of financial information is necessary to provide interested users with the information that they need for decision-making purposes. This financial information is communicated to users by way of:

(a) Financial Statements – which report how well (or how badly) the business has performed during a given period and how healthy the business is. These financial statements provide users with information about the past that will improve their ability to make informed decisions about the future. Financial statements are discussed in detail on pages 8 to 13.

(b) Other Special Purpose Reports – such as budgets, cost reports, sales reports, and any other financial report deemed useful for making decisions.

The means by which financial information is communicated depends on who the interest user is and on what information is required by the user.

Users of Financial Information – consist of people who are interested in the financial information reported about a business enterprise. Interested users can be grouped into two major types:

(a) External Users – are those who are outside the organization that are not directly involved in operating the business. Major types of external users and the decisions they make include:

(i) Banks and Supplies – use information to evaluate the credit worthiness of the business in deciding to provide loans or extend credit. These users are also referred to as “creditors”.

(ii) Shareholders (Owners) and Potential Investors – use information to evaluate the financial health and performance of the business. This helps existing shareholders with decisions regarding whether or not to continue holding their investment in the business or to sell their ownership shares and invest elsewhere. With respect to potential investors, this financial information helps them to decide if they should invest in the business and become shareholders.

(iii) Government – use information to ensure tax compliance by the business.

(b) Internal Users – are those who are inside the organization that are directly involved in managing and operating some part of the business. Internal users consist of management of all functional areas who use information to assist in making short-term (day-to-day) and long-term operating, planning, and controlling decisions to improve business operations, profitability, and ensuring survival of the business into the future. These include foodservice managers, housekeeping supervisors, rooms division managers, and others

Major Branches of Accounting

From our broad definition of accounting, we can divide the function of accounting into two major categories:

(a) Financial Accounting – often times referred to as “score-keeping” activities. This involves the recording of business transactions and the preparation of this financial information primarily for external users. This financial information is communicated by way of the financial statements.

(b) Managerial Accounting – involves the preparation and analysis of financial information for internal users (management) to assist them in their managerial activities. This includes operational planning and control as well as providing support for analysis, decision-making and problem solving. This information is communicated by way of special purpose reports that are tailor-made to the needs of particular manager.

Your introduction to the terms and concepts of accounting will be from a financial accounting perspective as applicable to hospitality businesses. These concepts will provide a solid foundation on which analysis can be applied in various ways for making a variety of decisions in a managerial accounting and financial management capacity The Accounts When financial transactions of a business enterprise are recorded in the accounting records, six major categories of accounts are used to accumulate useful information. These categories are:

1) Assets – things of value owned by the business.

2) Liabilities – debts owed by the business to others.

3) Shareholders’ (or Owners’) Equity – the amount the shareholders (owners) have invested in the business plus all accumulated profits earned by the business that have not yet been distributed to the shareholders.

4) Revenues – arise as a result of selling products (i.e. goods) or services to customers.

5) Cost of Goods Sold – the “cost” specific to the products that has been sold.

6) Expenses – all other costs incurred in operating the business.

In the following sections, these categories of accounts will be expanded upon and the specific items and sub-classifications that fall within these major categories will be discussed.

1) Asset Accounts

Assets are things of value owned by the business, such as cash in the bank, inventory on hand, and equipment in use, to name only a few of many types of assets that a business may have. Given that a business can own several types of assets at any particular time, the general asset category is sub-divided into three groups of assets so that information about a business’s assets can be presented in a more meaningful way. In simple terms, assets are classified into one of three categories based on what normally happens to them:

(a) Current Assets – consist of cash and other asset items that are normally converted into cash within one year. Typical current assets include:

i) Cash – on hand, and on deposit in bank.

ii) Short-Term Investments – such as GIC’s, mutual funds, etc. owned by the business that can be sold to obtain cash on short notice. To be classified as such, it must be management’s intention to hold them for less than one year.

iii) Accounts Receivable – represents the collectible amount of money owed to the business by customers. Typically arising from sales to customers on credit.

iv) Inventory – products purchased by the business and held for sale to customers. This includes food, beverage, and other merchandise.

With respect to current assets, they are presented in the financial statements (i.e. the Balance Sheet – discussed later) in a specific order. They are to be listed in order of liquidity, which pertains to the speed and ease by which the asset will be converted into cash. Those current assets that are most liquid will be listed first followed by those that are less liquid. This ordering of current assets is useful to users in evaluating the ability of the company to pay its debts as they come due.

The current assets presented above are in order of liquidity.

(b) Fixed Assets – consist of asset items that are acquired to be used to provide support for the operation of the business. These assets are not bought to be sold. These assets will be held or used by the business for a period longer than one year. Fixed assets can be thought of as “long-term” assents. Typical fixed assets include:

i) Land and buildings ii) Furniture (i.e. tables, chairs, beds, etc.) iii) Equipment (i.e. appliances, computers, etc.) iv) China, glassware, silverware, linen, etc. v) Vehicles

An important feature of fixed assets (other than land) is that they have a limited life span in that they will eventually wear out and need to be replaced. Each year that a fixed asset is used and partially wears out, a portion of its cost is charged as an expense referred to as amortization expense. The values of each fixed asset (other than land) must be reduced by the accumulated amount of amortization expense claimed during their life.

The fixed asset category is often times referred to as “Property, Plant, and Equipment” or “Capital Assets”.

(c) Other Assets – consist of asset items that are not included in the first two categories.

This catchall group includes items such as copyrights and patents, which have value to the business but no physical form or substance

2) Liability Accounts

Liabilities are the debts and obligations that the business owes to others, such as amounts owing to banks, suppliers, employees, and the government among others. Given that a business can have several types of liabilities at any particular time, the general liability category is sub-divided into two groups of liabilities so that information about a business’s debts and obligations can be presented in a more meaningful way. Liabilities are classified into one of two categories according to when they are due to be paid off:

(a) Current Liabilities – consist of liability items that are due to be paid within one year. Typical current liabilities include:

(i) Accounts Payable – represents money owing to suppliers and others for goods (good, beverages, supplies, etc.) and/or services (repairs, legal, etc.) purchased on credit but not yet paid for. If you have such an unpaid bill, you have an account payable.

(ii) Wages Payable – represents money owing to employees relating to wages earned by the employees for work they have performed but have not yet been paid for. This current liability typically exists between payroll pay dates.

(iii) Income Taxes Payable – represents the business income taxes owing to the government but not yet paid for by the business.

(b) Long-Term Liabilities – consist of liability items that are not due to be repaid until after

one year. These types of debts and obligations usually continue for several years before they are fully paid off. Typical long-term liabilities include:

(i) Loans or Notes Payable – are loads repayable to banks or other lenders where payments are due sometime beyond one year.

(ii) Mortgage Payable – long-term loan-repayable to banks or other lending financial institutions where an asset of the business (usually land and buildings) is put up as collateral security for the loan. Terms of this type of debt require repayments over several years.

3) Shareholders’ Equity Accounts

Shareholders’ Equity (or sometimes referred to as Stockholders’ Equity) represents the owners’ financial interest in the business. In simple terms, equity consists of amounts that have been utilized by the business but belong to the owners (i.e. shareholders) and is essentially owing to them by the business. There are two categories of shareholders’ equity:

(a) Common Stock – represents the amount that the shareholders (owners) have invested into the business in return for a share of ownership of the business.

(b) Retained Earnings – reflects the accumulated amount of profits (less any losses) generated by the business from its inception that belongs to the shareholders but has not yet been paid out to them in the form of dividends. As will be discussed a little later, profits earned by the business belong to the owners (shareholders) of the business but may not always be paid out to owners. Instead, these profits are often reinvested back into the business (i.e. “retained” by the business) so that it may continue to grow.

4) Revenue Accounts

Revenue for a business primarily represents the dollar amount earned or billed to a customer when the business sells its products (i.e. food, beverages, merchandise) or provides its services (i.e. accommodations). Revenue is often times referred to as “Sales” or “Fees”.

Revenue may also be earned from other sources such as interest, rent, commissions, etc.

5) Cost of Goods Sold Accounts

Cost of Goods Sold represents the total cost of all the products (i.e. food, beverages, and merchandise) that have been sold during a period to generate revenue. It should be noted that this account will not be applicable if the business is engaged in providing services only. For these service businesses, there is no product being sold and therefore there will be no cost of goods sold amount. For businesses engaged in selling products, the cost of goods sold account represents one of the primary expenses of the business.

When a product item is first purchased by the business, say for $100, this cost amount is initially recorded to the inventory account (current asset) and will continue to be reflected in inventory cost balance as long as the item is on hand and available for sale. Once the product has been sold, its $100 cost amount will then be recorded to the Cost of Goods Sold account and removed from the inventory account balance.

Notice that only the cost amount of the item is recorded to this amount. The selling price (say $180) would be recorded to the Revenue account mentioned above.

It is easy to see that there is a clear relationship between the cost of inventory acquired (asset) and its eventual transformation into cost of goods sold (expense) when it has ultimately been sold.

6) Expense Accounts

Expense accounts are where expenses of running a business are recorded. These are the costs incurred in operating the business and are collectively referred to as “Operating Expenses”. Operating expenses are different from cost of goods sold in that they are not specifically associated with the cost of products purchased for resale but rather all other costs incurred during the period to provide for and maintain smooth operation of the business from day-to-day. Operating expenses are typically grouped into two main categories:

(a) Selling Expenses – are costs related to the business’s marketing activities and efforts to sell its products or services. Typical selling expenses include: advertising, promotion, salaries paid to sales staff, commissions paid to sales staff, delivery and distribution costs to name a few.

(b) General and Administrative Expenses – are all other operating expenses incurred to run and manage the business. Typical general and administrative expenses include: wages and salaries paid to office staff, insurance, interest, property taxes, rent, utilities, repairs and maintenance, amortization or fixed assets, and supplies used up, etc.

While substantially all of the expenses of a business fall under the classification of an Operating Expense (i.e. selling or general and administrative), there is one other type of expense that is classified separately outside of this category as it does not relate to the operating activities of the business. This separately classified expense is Income Taxes Expense, which is an expense levied by the government based on the amount of pre-tax profits earned by the business. Income Taxes Expense is an expense of the business over which management has little or no control.

Financial Statements From a financial accounting perspective, after all of the financial transactions of the business for the period have been recorded, classified, and summarized into the appropriate accounts (as outlined above), this collection of financial information needs to be presented in a set of financial statements so that it may be communicated in a summarized fashion to interested external users.

As mentioned earlier, financial statements are the means by which the business reports information relating to the results of its operations for a given period (i.e. how well the business has performed for a given period of time) as well as its financial position or condition (i.e. how healthy the business is at a given point in time). Three of the primary financial statements of a business are:

(a) Income Statement – reports the results of operations (revenues, costs and expenses, and

resulting profit or loss) of the business during a specific period of time. An Income Statement can cover a month, quarter, or an entire year as is commonly the case. This statement is useful to users (i.e. creditors and investors) so that they may make informed judgements about how much income the business is likely to make in future years.

(b) Balance Sheet – often times referred to as the Statement of Financial Position as it reports the financial position (assets, liabilities, and shareholders’ equity) of the business at a specific point in time. Think of a balance sheet as a snapshot or freeze-frame of a business as or a particular date. The reporting date for the Balance Sheet is the last day of the reporting period that the Income Statement covers (i.e. end of month, quarter, or year as appropriate). This statement is useful to users in evaluating the financial health of the business. Such as the type and value of the business assets, the amount of corresponding debt and when it is to be repaid, and the net worth of the owners’ financial interest in the business.

(c) Statement of Retained Earnings – is a small statement that reports how the Retained Earnings balance, reported in the Balance Sheet, has changed (as a result of profits (or losses) earned, and dividends paid) during a specific period of time. This statement acts as a bridge or link between the Income Statement and the Balance Sheet of the business for the reporting period. The reporting period covered by the Statement of Retained Earnings is the same as that covered by the Income Statement (a month, quarter, or year as appropriate).

These financial statements will now be illustrated and the presentation of the elements reported in them will be addressed.

The Income Statement Refer to exhibit B on page 15 for an illustration of an Income Statement for a business operating a hotel with restaurant. It would be useful to refer to it as you read through the following discussion explaining its elements.

As with any financial statement, they must be clearly titled. The standard format for a title of a financial statement comprises three lines (1) Name of the business (2) Name of the financial statement, and (3) The time period covered by the financial statement.

Notice that because the Income Statement covers a period of time, the third line of the title referencing the time period must contain the phrase “For the Year Ended” or “For the Month Ended” immediately before period ending date.

The Income Statement is divided into major components made up of the general account classifications that were discussed earlier. Revenues (i.e. Sales or fees) are reported first followed by the Cost of Goods Sold amount which is deducted from the total revenue amount to get what is called Gross Profit.

Gr7oss Profit – is not an account but rather a subtotal calculated on the Income Statement as [Revenues – Cost of Goods Sold]. This figure represents how much earnings the business has left after buying and selling its products. This is the amount of earnings available to cover (i.e. pay for) all other expenses of running the business.

Following the Gross Profit amount, all Operating Expenses are reported according to the appropriate classifications as either Selling Expenses or General and Administrative Expenses. Total Operating Expenses are then deducted from the Gross Profit amount to get what is called Income from Operations.

Income from Operations – is another subtotal calculated on the Income Statement as [Gross Profit – Operating Expenses]. This figure represents income earned from “core” business operating activities and excludes amounts that do not reflect normal operating activities such as income taxes expense as this is an expense over which management has no control.

This is an important figure for evaluating management’s performance as it reflects the performance results that are under the control of management and excludes those results that are not.

Following the Income from Operations amount, the final expense item, Income Taxes Expense, is reported. Income Taxes Expense is deducted from Income from Operations to get what is called Net Income.

Net Income – is the profit earned (or the loss suffered) by a business during the period, after all costs and expenses have been deducted from revenues. Net Income (or Net Loss) is commonly referred to as “The Bottom Line” as it is the last amount reported on the Income Statement. This total represents the profit amount that belongs to the shareholders (owners) of the business. It is a measure of how well the business did overall, for its owners

When revenues exceed costs and expenses, Net Income results; when costs and expenses exceed revenues, a Net Loss results.

The Net Income (or Net Loss) figure from the Income Statement is used in the preparation of the Statement of Retained Earnings that will be discussed next.

The Statement of Retained Earnings Refer to exhibit C on page 16 for an illustration of a standard Statement of Retained Earnings for any business. It would be useful to refer to it as you read through the following discussion explaining its elements

The Statement of Retained Earnings is similar to the Income Statement in that it covers a period of time. Accordingly, the third line of the title referencing the time period must also contain the phrase “For the Year Ended” or “For the Month Ended” immediately before the period ending date.

The Statement of Retained Earnings builds up to the balance of the Retained Earnings amount to be reported on the Balance Sheet at the end of the reporting period. This is accomplished by starting with the Retained Earnings balance at the beginning of the reporting period and reporting the following amounts that result in a change to Retained Earnings during the period:

(a) Addition of Net Income or Deduction of Net Loss – This is the amount reported on the Income Statement for the period. The profits earned (or losses suffered) by the business belong to the shareholders (owners) but are initially retained by the business. Since these amounts belong to the shareholders, they are included with the Retained Earnings balance to update the accumulated amount of undistributed earnings owed to the shareholders.

(b) Deduction of Dividends Paid – dividends declared and paid to the shareholders during the period represent a distribution of a portion of the accumulated earnings of the business. Dividends are deducted from the Retained Earnings balance as they represent an amount of previously retained earnings that is no longer owing to the shareholders.

It is important to understand that dividends are NOT an expense of the business and will never appear on the Income Statement as they do not pertain to a cost of operating the business. Dividends are distributions of previously earned profits to the shareholders (owners). A business first determines its revenues and expenses and then computes net income or net loss. It is at this point, that a business may decide to distribute a dividend to the owners.

It is also important to note that retained earnings are NOT a balance of cash that is awaiting distribution to shareholders. It represents the balance of earnings that belong to the shareholders but for the time being have been reinvested back into the business. In essence, the retained earnings balance is, for the most part, represented by (or tied up in) various assets of the business. It is entirely possible for a profitable business to have a significant retained earnings balance while at the same time having very little cash in the bank.

After adjusting the beginning Retained Earnings balance for these items, the balance of Retained Earnings at the end of the reporting period can be calculated. The ending Retained Earnings figure from this statement is used in the preparation of the Balance Sheet, which is discussed next.

The Balance Sheet Refer to exhibit D on page 17 for an illustration of a Balance Sheet for a business operating a hotel with restaurant. It would be useful to refer to it as you read through the following discussion explaining its elements.

Unlike the Income Statement and the Statement of Retained Earnings, the Balance Sheet reports financial information at a specific point in time rather than for a period of time. As such, there is no period reference in the third line of the title. Instead, the phrase “As at” is included immediately before the date of the Balance Sheet.

The Balance Sheet is divided into major sections corresponding to the general account classifications (and the related sub-classifications that were discussed earlier. Assets are presented first followed by Liabilities and finally Shareholders’ Equity.

The Asset section is presented in three separate categories, each with an appropriate heading, and subtotal: (1) Current Assets (in order of liquidity), (2) Fixed Assets, and (3) Other Assets. The subtotals for each of these asset categories are then added together to determine the Total Assets figure to be reported.

The Liability section is presented in two separate categories, each with an appropriate heading, and subtotal: (1) Current Liabilities, and (2) Long-Term Liabilities. The subtotals for each of these liability categories are then added together to determine the Total Liabilities figure to be reported.

The Shareholders’ Equity section is presented as a single section with two components: (1) Common Stock, and (2) Retained Earnings. Recall that the Retained Earnings amount to be reported on the Balance Sheet is the same amount that is reported as the ending balance on the Statement of Retained Earnings for the period. These equity components are added together to determine the Total Shareholders’ Equity figure to be reported.

As a final step in the preparation of the Balance Sheet, we must prove that the statement does in fact “balance” and that the underlying fundamental accounting equation has been satisfied. This fundamental accounting equation forms the basis of the balance sheet and is as follows:

ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY

The Asset section of the Balance Sheet already reflects the Total Assets figure as described above. This amount must equal the sum of the Total Liabilities and the Total Shareholders’ Equity amounts. As a final step, add these two totals and present the Total Liabilities and Shareholders’ Equity figure as the last line on the Balance Sheet. If this amount does not equal the Total Assets figure the accounting equation has not been satisfied and there must be an error contained in the financial statements that must be corrected.

As a final point on Financial Statements, it is important to realize that although the three statements discussed have separate and distinct purposes as to what they are trying to communicate, they are very much interrelated in respect of the financial information they are reporting for the business enterprise as a whole. Exhibit E on page 18 illustrates this interrelationship between the financial statements of a business

A good understanding of accounting from the standpoint of the account terminology and classifications as well as the financial statements is critical to be able to read, interpret, and analyze a set of financial statements. The ability to analyze financial statements of a business and assess its operating performance and financial health is an important skill for any user of financial statements (internal or external) as this is the basis for making key economic decisions.

Exhibit A

WHAT IS ACCOUNTING?

Communicated  to  

Transactions   Transactions  

ECONOMIC  ENTITY  (BUSINESS)  

RECORDING,  CLASSIFYING,  SUMMARIZING  

FINANCIAL  STATEMENTS  

INTERESTED  USERS  

BANKS  &  LENDERS   GOVERNMENT  

SHAREHOLDERS  (OWNERS)  

INFO  USED  FOR  DECISION  MAKING  

Exhibit B – Income Statement

HWR Eat & Sleep Ltd. Income Statement

For the Year Ended December 31, 2008

REVENUE $ 340,000 Room Sales 230,000 Food and Beverage Sales $ 570,000

Total Revenue COST OF GOODS SOLD Food and Beverage 190,000

GROSS PROFIT 380,000 OPERATING EXPENSES SELLING EXPENSES

Salaries for Salespeople $ 30,000 Advertising 18,000 Sales Promotion 14,000

Total Selling Expenses 62,000 GENERAL AND ADMINISTRATIVE EXPENSES

Wages and Employee Benefits 142,000 Supplies Used 6,000 Insurance 10,000 Telephone 7,000 Interest 10,000 Utilities 24,000 Amortization 11,500 Maintenance and Housekeeping 19,500

Total General and Administrative Expenses 230,000

TOTAL OPERATING EXPENSES 292,000 INCOME FROM OPERATIONS 88,000 Income Taxes Expense 23,700

NET INCOME $ 64,300

Exhibit C – Statement of Retained Earnings

HWR Eat & Sleep Ltd. Statement of Retained Earnings

For the Year Ended December 31, 2008

Retained Earnings, January 1, 2008 $ 187,700

Add: Net Income for the year 64,300

252,000

Less: Dividends Declared during the year 59,000

Retained Earnings, December 31, 2008

$ 193,000

Exhibit D – Balance Sheet

HWR Eat & Sleep Ltd. Balance Sheet

As at December 31, 2008 ASSETS

CURRENT ASSETS Cash $ 8,500 Short-term Investments 35,000 Accounts Receivable 3,500 Inventory 19,000 Total Current Assets $ 66,000 FIXED ASSETS Land $ 60,000 Building 400,000 Less: Accumulated Amortization – Building (125,000) Furniture & Equipment 245,000 Less: Accumulated Amortization – Furniture & Equipment (74,000) Silverware & Linens 90,000 Less: Accumulated Amortization – Silverware & Linens (48,000) Total Net Fixed Assets $ 548,000 OTHER ASSETS Goodwill $ 20,000 Patents and Copyrights 80,000 Total Other Assets $ 100,000 TOTAL ASSETS $ 714,000

LIABILITIES CURRENT LIABILITIES Accounts Payable $ 27,000 Salaries and Wages Payable 6,000 Income Taxes Payable 18,000 Total Current Liabilities $ 51,000 LONG-TERM LIABILITIES Mortgage Payable $ 250,000 Notes Payable 120,000 Total Long-Term Liabilities $ 370,000

TOTAL LIABILITIES $ 421,000 SHAREHOLDERS’ EQUITY

Common Stock $ 100,000 Retained Earnings, December 31, 2008 193,000 TOTAL SHAREHOLDERS’ EQUITY $ 293,000

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $714,000

Exhibit E

Illustration of the Interrelationship between the Major Financial Statements

BALANCE SHEET

ASSETS $ 10,000 LIABILITIES $ 3,000 SHAREHOLDERS’ EQUITY

Common Stock $ 2,000 Retained Earnings $ 7,000 $ 10,000

STATEMENT OF RETAINED EARNINGS

Retained Earnings, Beginning of year

$ 4,000

Add: Net Income for the year

Less: Dividends

2,000

Retained Earnings, End of year

INCOME STATEMENT

Revenues $ 40,000 Cost of Goods Sold 22,000 Gross Profit 18,000 Expenses 15,000

A

L

+

SE

HAT2084 Hospitality and Tourism Accounting

Overview of Financial Accounting and Reporting In-Class Example Problem – Preparation of Financial Statements

The Bates Motel Ltd. operates as a 25 room hotel with a small bar and restaurant. The company has just completed its operations for the year ending December 31, 2008. It is not time for the financial information relating to the 2008 fiscal year to be compiled in a set of financial statements and distributed to the shareholders of the company as well as the bank. The company’s bookkeeper has recorded all of the business transactions for 2008 into the accounting records and has summarized them into the account balances that appear below.

Required:

PART 1: Using the data from the following list of accounts and balances, prepare the Income Statement (in good form) for the Bates Motel Ltd. for 2008.

Account

Account Balance

Advertising expense $ 20,000 Amortization expense 23,000 Equipment rent expense 7,000 Food and beverage costs (served) 40,000 Income taxes expense 4,300 Insurance expense 17,000 Interest expense 6,000 Maintenance and housekeeping expense 12,000 Property taxes expense 8,000 Sales – food and beverage 75,000 Sales – lodging 200,000 Sales promotion expense 11,000 Salesperson commission expense 4,000 Utilities expense 25,000 Wages expense 80,000

{continued on next page}

HAT2084 Hospitality and Tourism Accounting

Overview of Financial Accounting and Reporting In-Class Example Problem – Preparation of Financial Statements (continued)

PART 2: (a) Using the data from the following list of accounts and balances, prepare the

Balance Sheet (in good form) for The Bates Motel Ltd. at the end of the 2008 fiscal year.

Account

Account Balance

Accounts payable $ 7,000 Accounts receivable 8,000 Accumulated amortization – building 45,000 Accumulated amortization – china, glassware, silver 16,200 Accumulated amortization – furniture 22,000 Building 100,000 Cash 5,000 China, glassware, silver 25,000 Common stock 10,000 Furniture 40,000 Inventory – food and beverage 6,000 Land 20,000 Mortgage payable (over 20 years) 72,000 Wages payable 800 (b) Based on the information provided above could you complete the Balance Sheet?

What information are you missing?

PART 3: (a) Using the data from the following list of accounts and balances, as well as any

required information from the Income Statement prepared in part 1 on the previous page, prepare the Statement of Retained Earnings (in good form) for The Bates Motel Ltd. for 2008.

Account

Account Balance

Dividends declared and paid $ 12,000 Retained earnings, January 1, 2008 25,300 (b) Now go back and complete the Balance Sheet that you started in Part 2 above.

(c) To facilitate a smooth and easy preparation of financial statements at the end of an operating period, in what order should the financial statements be prepared?

HAT2084 Hospitality and Tourism Accounting Worksheet for Practice Problem – Texas Steak house Inc. Requirement: Parts #1 & #2

Account Balance

Major Fin. Stmt.

Classification

Financial Statement

Reported On Accounts payable $ 24,500 Accounts receivable $ 4,000 Accum. Amort’n – building $ 15,000 Accum. Amort’n – furniture & equipment $ 25,000 Advertising expense $ 5,500 Bank loan payable (over 5 years) $ 34,000 Building $ 60,000 Cash $ 34,000 Common stock $ 40,000 Cost of food sold $ 42,000 Cost of liquor sold $ 11,000 Amortization expense $ 5,500 Dividends $ 20,000 Food sales $ 120,000 Furniture and equipment $ 52,000 Income taxes expense $ 2,000 Income taxes payable $ 1,500 Insurance expense $ 3,600 Interest expense $ 3,000 Inventory $ 7,000 Kitchen fuel expense $ 2,400 Land $ 30,000 Laundry and dry cleaning expense $ 2,100 Liquor sales $ 50,000 Patents $ 4,000 Property taxes expense $ 1,500 Rent expense $ 6,000 Repairs and maintenance expense $ 1,900 Retained earnings, June 1, 2007 $ 63,000 Salaries and wages expense $ 55,000 Sales promotion expense $ 4,400 Short-term investments $ 8,000 Supplies used $ 5,300 Utilities expense $ 3,800 Wages payable $ 1,000

HAT2084 Hospitality and Tourism Accounting

Overview of Financial Accounting and Reporting Practice Problem (2) – Income Statement Preparation Falls Tours Ltd. is a business that provides scenic bus and helicopter tours at Niagara Falls. The business has just finished its fiscal year that started on November 1, 2007. The following account balances have been compiled from the accounting records and pertain to the fiscal year just completed. Account

Balances Radio communication expenses $ 10,000 Insurance 18,000 Garage and hangar rent 19,000 Bus tour fees 115,000 Fuel and oil 135,000 License 2,000 Interest expense 20,000 Helicopter tour fees 265,000 Repairs and maintenance 25,000 Office supplies used 3,000 Wages 55,000 Advertising 7,000 Telephone 8,000 Amortization 80,000 Promotional supplies used 5,000 Required:

Prepare, in good form, the Income Statement for Fall Tours Ltd. to report the results of the operations for the fiscal year just completed.

FINANCIAL STATEMENT ANALYSIS