Hospitality Finance

Accounting Statements

Virginia Stipp Lawrence, MHM

Three Major Financial Statements

• Balance Sheet-statement of financial position at a given date. Account balances for assets, liabilities, and owner’s equity

• Income Statement-report on profitability of operations, including revenues earned and expenses incurred in generating the revenues for the period of time covered by the statement 1.      Profit & Loss (P&L)2.      Operating StatementStatement of Cash Flows (SCF)-explains the change in cash for the accounting period by showing the effects on cash of a business’s operating, investing, and financing activities for the accounting period. Cash is cash in house banks, cash in checking and savings, and certificates of deposit

The Fundamental Accounting Equation

Assets = Liabilities + Owners’ Equity• Assets-owned by the operation (cash, inventory,

receivables, tangible items)• Liabilities-obligations to outside parties

(payables)• Owners Equity-residual claims owners have on

assets– Permanent-not closed at the end of the accounting

period (capital stock and retained earnings)– Temporary-closed at the end of the accounting period

(revenue and expense accounts)

The Accounting Cycle

• 1.Record transactions in journals. • 2.Post amounts from journals to ledger

accounts.• 3.Prepare a trial balance.• 4.Prepare adjusting entries. • 5.Post adjusting entries.• 6.Prepare an adjusted trial balance. • 7.Prepare the financial statements. • 8.Close the revenue and expense accounts. • 9.Prepare the post-closing trial balance.

Accounts & Ledgers

Account - 5 categories (A, L, OE, R, E)

An element for classifying and summarizing business transactions

A basic storage unit for data

Ledger - “Book of final entry”

•    A group of accountsGeneral ledger = ‘master’ group of accounts

Chart of accounts = complete listing

Journal = “Book of original entry”

Intermediate step in recording transactions

“Journalizing” = recording a transaction in a journal

General journal ()Posting

Transferring $ amounts from the general journal to the ledger accounts

BALANCE SHEET• REFLECTS ASSETS AND CLAIMS CALLED

LIABILITIES AND OWNER’S EQUITY• BALANCE AT A GIVEN DATE• CONVEYS INFORMATION

BALANCE SHEET-Assets

ASSETS• CURRENT ASSETS• NON CURRENTS ASSETS• UNIQUE CATEGORIES

LIQUIDITY

• “Liquid” versus “Illiquid” versus “Insolvent”

• Liquid = Plenty of cash, or the ability to convert assets to cash

• Illiquid = Little cash, or difficulty converting assets to cash

• Insolvent = unable to meet your obligations to lenders & vendors

Property & Equipment• Relates to Tangible Assets• Land is not depreciated (land is unique)• Construction In Progress - All labor,

materials & other expenses of construction - not depreciated

• Leasehold Improvements - renovations & remodeling expenses on leased space

• China, Glassware, Linen, Uniforms

Other Assets• Generally are Intangible items; as a result,

they are amortized over time (amortized-The depreciation (or repayment) of an (usually) intangible asset (eg. loan, mortgage) over a fixed period of time.

• Goodwill - excess of purchase price over net book value of a business

• Deferred franchise fees• Preopening expenses• Organization costs

BALANCE SHEET-Liabilities

• LIABILITIES

• CURRENT LIABILITIES

• LONG TERM DEBT– Note Payable, Mortgage, Bond

• UNIQUE CATEGORIES– Commitments and Contingencies

Liquidity Ratios & Working Capital

• Current Ratio = Current Assets____

Current Liabilities

• Quick Ratio = Cash + Acct. Receivable

Current Liabilities

• Working Capital =

Current Assets - Current Liabilities

Retained Earnings

• Retained Earnings = Cumulative Net Income that has NOT been distributed as dividends (ignoring adjustments); Net Losses reduce Retained Earnings

• Sole Proprietorships and Partnerships do NOT have retained earnings!!! All of their income is paid out to partners.

BALANCE SHEET-Owner’s Equity

• OWNER’S EQUITY

• CAPITAL STOCK

• PAID IN CAPITAL

• RETAINED EARNINGS

• TREASURY STOCK

INCOME STATEMENT• DEFINED• A report of sales and expenses for a defined

period of time, resulting in net income (loss) of the business

• Between two balance sheet dates

FORMAT• INTERNAL

– Lots of detail by department• EXTERNAL

– Summary information only

Revenue, Expense, Gain and Loss

Revenue—the inflow of assets, reduction of liabilities, or both resulting from the sale of products and services.

• Expense—the outflow of assets, increase of liabilities, or both incurred during the production and rendering 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.

• 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.

Income Statement FormatRevenues

– Direct Operating Expenses

Departmental Operating Income

– Overhead Expenses

Net Income

Cost of Sales Formula

Beginning inventory• – Inventory purchases

Goods available for sale• – Ending inventory Cost of goods consumed• – Goods used internally Cost of goods sold

Operated DepartmentsRevenue Centers

• Examples– Rooms– Food and Beverage– Telecommunications– Garage and Parking– Guest Laundry

Undistributed Operating ExpensesSupport Centers

• Examples– Administrative and General (A&G)– Human Resources– Information Systems– Security– Marketing– Franchise Fees– Property Operation and Maintenance– Utility Costs

Statement of Cash Flows

Cash Flow ClassificationsA hospitality operation typically has cash inflows and outflows

related to three activities:– Operating activities– Investing activities– Financing activities

• STATEMENT OF CASH FLOW PURPOSE– Information regarding cash receipts and cash

disbursements– Assess liquidity– Assess financial flexibility– Assess dividend policy– Assess investing and financing needs– Assess a company’s ability to generate cash from operations

OPERATING ACTIVITIES• Revenue and expense transactions• Interest and dividend income• Interest expense• Working capital account adjustments• Current Account Issues:

– Dividends Payable - to Financing Activities– Marketable Securities - – Sale/Purchase to Investing Activities

Gain/Loss to Operating Activities• Current Portion of Long Term Debt - The

reclassification of a portion of LTD to a Current Liability does NOT affect Cash!!!! (only the payment of the debt affects cash)

• Interest Expense & Income Tax Payments - Are already included in the Income Statement

Gain/Loss on Sale of Equipment• The amount of the Gain or Loss goes to Operating

Activities• The Sale Price affects Cash, and goes to Investing

Activities• The Net Book Value (Cost - Accumulated Depreciation)

does NOT affect cash and is NOT recorded on the SCF

Financing Activities Issues

• Sale of Stock - Affects Cash

• Repurchase of Stock - Affects Cash (either Treasury Stock or Common Stock)

• Borrowing Money (taking down a Loan) - Affects Cash

• Dividends Declared - Do NOT affect Cash (Dividend Payments affect Cash)

Standard Costs

Costs and Sales Concepts• Accounting Defines costs as reduction in the value of an asset for the

purpose of security benefit or gain

Types of Costs• Fixed- normally unaffected by changes in sales volume , however they can

and often change over time• Variable-clearly related to business volume• Controllable- can be changed in the short term (variable costs are usually

found here)• Noncontrollable- cannot be changed in the short term (usually fixed cost)• Unit-refers to one item (one portion, one Martini)• Total-refers to the total of items of a given group (lunch items)• Prime Cost- costs of materials and labor; food, beverage, and payroll• Historical-used for comparison, establishment of goals for future• Planning-projection of revenues and expenses and uses for them

• Example; Pro-Forma

The COST-TO-SALES RATIO ; COST PERCENT

COST/SALES = COST PER DOLLAR OF SALE•  All percentages will be added together to equal

100%• Including but not limited to;

– Operational costs (food, beverage, etc)– Labor– Fixed Costs– Profit

Industry Variations in Costs

• Those with a low profit margin per item served depend on high business volume

• Those with a high profit margin per item do not require high volume

Sales Concepts

Monetary terms– Total Sales-all sales over a given time period– By Category-meal period, inventory system (ABC)– By Server– Be Seat or Cover

PriceSales Price-amount charged each customer; Prix fixe, a la carte, combo

• Average Sale-total sales/ # of guests served (also called average cover)

• Per Customer

• Per Server

Non-Monetary Terms

• Total Number Sold

• Total Covers

• Average Covers

• Covers per hour / meal period/ day/ served

• Seat Turnover/ Turns– # of seats occupied during a given period/

# of guests served during that period