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