Chapt. 3 & 4 Hospitality financial management
matching principle
all expenses incurred in generating a revenue should be recorded in the period the revenue was earned
the current ratio is calculated by:
current assets/ current liabilities
monetary unit principle
only transactions that can be expressed in terms of money can be shown on a company's financial statement
income statement
presents operating results over a specific period of time
cash
the most important asset a business can have. offers liquidity and buying power. cash is not limited to currency but can also be checks, money orders, and marketable securities
the food and beverage menu abstract tracks
the popularity and profitability of menu items
cash provides a business liquidity and buying power
true
vertical analysis is most often used to analyze and control variable expenses that appear on a hospitality company's income statement
true
a credit card transaction fee is:
a fee that credit card companies charge to merchants for processing
credit card transaction fee
a fee that credit card companies charge to merchants for processing
trend analysis
a quick way to assess the financial health of a company. calculations and data points, over a specific period of time, presented on line graphs and bar charts (ex.- revpar, food cost, payroll cost)
account reconciliation is:
a service provided by banks whereby banks reconcile a business's cash accounts and create summary reconciliation reports
zero balance accounts
a service whereby the balances of a business's cash accounts are consolidated into a single account, but separate checking account statements are provided, banks invest the surplus funds on behalf of the business
employee scheduling is an important part of management decision making because
a superior hospitality manager knows how to impact the bottom line
full disclosure principle
all potential events that could impact a company's financial position should be reflected on financial statements or footnotes
cost principle
all transactions must be recorded at cost rather than its market value
cost-volume-profit modeling
also known as break-even analysis, target the amount of revenue required to reach the owner's goals
vertical analysis
also known as common-size analysis; most often used to analyze and control variable expenses that appear on a hospitality company's income statement
cash forecast
an estimation of how much working capital a business will need for the next 90 days, objective is to alert management to probable cash surplus or shortages in advance
operating ratios:
assist management in determining how efficient the operation is
account reconciliation
banks reconcile a business's cash accounts and create summary reconciliation reports, they reduce administrative costs and protect against fraudulent activities
employee scheduling
based on: accurate revenue forecasts, productivity goals, customer service goals
sweep accounts
can generate additional interest income for a business, banks invest surplus cash balances in secure overnight accounts. Earnings are usually based on federal funds traded rate, and the interest earned is credited daily.
off-balance-sheet financing
company does not show debt associated wit real estate joint ventures, legal under GAAP as long as it is relatively minor
lockbox
could be a PO box at the post office, where all of your payments will be mailed to protect against identity theft, reduces the float time of payments
operating ratios
determine how efficient the operation is (food cost percentage, bev. cost %, labor cost %)
profitability ratios
effectiveness of achieving profit margins and roi goals (profit margin, return on assets, return on investments, return on equity)
materiality principle
events or info. must be accounted for if they make a difference to the user of the financial info.
a lender reads financial statements to evaluate the company's recent performance versus its market segment and competitors, determine important trends, and project future earnings for the company
false
food inventory turnover is an example of a solvency ratio
false
on the balance sheet, total liabilities equal total assets plus total equity
false
the daily payroll report summarized revenues earned by each department within an operation
false
the goal of financial accounting is to provide more timely operating results related to revenues and expenses to help management maximize the operating performance of the business
false
the goal of revenue management is to maximize food and beverage pricing
false
liquidity ratios are used to gauge the effectiveness of how assets have been managed
falsw
if a restaurant menu requires large inventories and these inventories turn over slowly, which of the following is impacted?
food and beverage turnover ratios
activity ratios
gauge effectiveness of how assets are managed (food inventory turnover, bev. inventory turnover, fixed asset turnover)
revenue management
goal is to maximize RevPAR; strategies- close lower levels of pricing during higher demand, open all pricing levels during times of low demand
retained earnings:
is the prior years profits that have not been paid out to owners and dividends
off-balance-sheet financing:
is used by companies that do not want to show debt on their balance sheet associated with a real estate joint venture of which they own a percentage
window dressing
making a company's financial statements look more favorable (ex.- company does not pay invoices, makes year end balance sheet look better)
published industry averages
management can compare operating results (ex. STAR reports)
accounting is divided into 2 parts
managerial and financial accounting
solvency ratios
measures ability to meet long term obligations (operating cash flow to long term debt, long term debt to total capitalization, debt-to-equity ratio, etc.)
liquidity ratios
measures ability to meet short term obligations (current ratio, accounts reciev. turnover, average collection paid, etc.)
the income statement is often referred to as
profit and loss statement
balance sheet
provides a snapshot of a companies financial conditions
going concern principle
requires businesses to assume they will continue to operate long into the foreseeable future
improper revenue recognition
revenues are recorded before they are actually earned, violates matching principle
revenue recognition principle
revenues should be recorded in the month they are earned rather than cash basis
economic entity principle
separates the dealings of a business from the private dealings of its owners
uniform system of accounts
standardized accounting systems prepared by various segments of the hospitality industry offering detailed info. about accounts (lodging, restaurants, clubs)
if a cash shortage is forecasted, management should:
take out a short term business loan
time period principle
the company must set specific time periods for measuring its financial results
working capital
the difference between current assets and current liabilities or amount of cash required to operate a business
the longer it takes to collect accounts receivable:
the more working capital the business will need
food and beverage pricing
track sales of each menu item, calculate each items gross profitability, set menu prices, remove unprofitable items from menu
horizontal analysis:
tracks and analyzes both income statement and balance sheet line items over a specified period
horizontal analysis
tracks and analyzes both income statement and balance sheet line items over a specified period, focuses on both dollar and percentage changes over time
a cash forecast is in essence a cash budget
true
offering a discount on cash sales saves the business money because the company does not have to pay credit card transaction fees
true
the going concern principle requires businesses to assume they will continue to operate into the foreseeable future
true
the three best known systems of accounts used in the hospitality industry are the systems for lodging, food service, and club management
true
when managing working capital, any surplus cash not required to operate your business should be used to fund projects that will generate additional cash flow
true
working capital is the difference between current assets and current liabilities
true
ratio analysis
used to assess financial health; five categories: liquidity, solvency, activity, operating, and profitability
profit flexing
utilized when revenues fall behind budget, adjust pricing and reduce expenses, maximize remaining revenue opportunities