hospitality industry managerial accounting
four step approach or preparing the SCF
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
cash receipts formula
AR beginning balance + Sales - AR ending Balance
Liquidity ratios
Liquidity ratios measure the ability of a company to repay its short‐term debts and meet unexpected cash needs.
Vertical Analysis - Common-size Annual Income Statement
Net income percentage (%) = Net income/ Total sales Cost of food sold percentage (%) = cost of food sold / Total sales
income before gain or loss on sale of property formula
Net operating income (NOI) - interest expense = income before gain or loss on sale of property formula
classification of Cash Flows
Operating investing financing
income statement questions
What was the cost of sales for the month (or year)? How profitable was the hospitality operation at the end of the month (or year)? - Normally, Rooms department How much was spent to market the hospitality operation's services?
daily report of operations
a frequent major report prepared for management in addition to the monthly income statement the balance sheet and the statement of cash flows are absent from the list
sales and marketing (undistributed operating expense)
costs relating to personnel working in the areas of sales and marketing franchise fees are also included in this schedule for lodging operations that are franchised
losses
decreases in assets, increases in liabilities, or a combination of both
two methods for converting net income to net cash flow from operationss
direct and indirect method
summary income statement (SIS)
divided into operated departments, undistributed operating expenses, and the final section that includes management fess, fixed charges, interest expense, gain or loss on sale of property , and income tax
expenses
outflow of assess, increase in liabilities, or a combination of both in the production and rendering of goods and services
property operation and maintenance (undistributed operating expense)
payroll and related costs of the property operation and maintenance personnel and the various supplies used to maintain the buildings, grounds, furniture, fixtures, and equipment
related expenses
payroll and related expenses includes salaries and wages of employees working in the designated operated departments include all payroll taxes and benefits relating to employees of each operated department
property taxes
real estate taxe, personal property taxes, and other taxes, cannot charge guests!
investing activities
relate primarily to cash flows from the acquisition and disposal of all non current assets, especially property, equipment, and investments. also cash flows from the purchase and disposal of marketable securities (short-term investment)
financing activities
relate to cash flows from the issuance and retirement of debt and the issuance and re-purchase of capital stock. cash inflows = cash received from issues of stock and both short-term and long-term borrowing cash outflows = repayments of loans (interest expense portion of the debt payment is an operation activity) and payment to owners for both dividends and any re-purchase of stocks
three major use groups of the SCF
1. management (internal ) management uses to assess the firms liquidity, its financial flexibility. determine its dividend policy, and plan investing and financing needs 2.investors 3.creditors (external) investors and creditors use to assess the firm's ability to pay its bills, ability to pay dividends, and need for additional financing, including borrowing debt and selling capital stock
fixed charges
rent, property and other taxes, and insurance are shown as fixed charges include depreciation of fixed assets and amortization of other assest
operated departments
reports net revenue by department for every major revenue-producing department net revenue = related revenues - allowances
revenues
represent the inflow of assets,reduction of liabilities or a combination of both resulting from the sale of goods or services
USAR and USFRC
uniform system of accounts for restaurants, published by the national restaurant association (NRA) -recommended for commercial food service operations uniform system of financial reporting for clubs, created by the club managers association of America -statement of activities for club operations
ratio anaylsis
used to evaluate relationships among financial statement items. The ratios are used to identify trends over time for one company or to compare two or more companies at one point in time. Financial statement ratio analysis focuses on three key aspects of a business: liquidity, profitability, and solvency.
average collection period
(also known as day's sales outstanding) is a variation of receivables turnover. It calculates the number of days it will take to collect the average receivables balance. It is often used to evaluate the effectiveness of a company's credit and collection policies. A rule of thumb is the average collection period should not be significantly greater than a company's credit term period. The average collection period is calculated by dividing 365 by the receivables turnover ratio. 365 / receivables turnover
Amortization
(or amortisation; see spelling differences) is paying off an amount owed over time by making planned, incremental payments of principal and interest. To amortize a loan means "to kill it off".
Service Center
Schedule reports only expenses by area of responsibility These areas do not generate revenues, but rather provide services to the operated departments and to other service centers. The total expenses of service departments are shown on the income statement under the Profit (Loss) column.
Profit center
Schedule reports revenues and expenses by area of responsibility
Schedule
The term refers to the schedule of producing financial statements, the statements themselves and several subsets of statements that either show how an entry was calculated or how it has aged. The schedules provide information to assist in the financial management of the business. departmental statement
capacity costs
aka Fixed charges relate to the physical plant or the capacity to provide goods and services to guests include rent, property taxes, insurance, and depreciation and amortization
income statement
aka statement of earnings, the profit and loss statement, the statement of operations reflects the revenues, expenses, gains, and losses for a period of time keyword: a period of time!
purpose of SCF
asses the org ability to generate positive future net cash flows asses the firm's ability to meet its obligations asses the difference between the enterprise's net income and cash receipts and disbursements - determine the major net sources of cash and how much related to the enterprise's operation assess the effect of both cash and noncash investing and financing during the accounting period - investing activities relate to the acquisition and disposition of non current asset, such as property and equipment
cost of good sold formula
beginning inventory + inventory purchases = goods available for sale goods available for sale - ending inventory = cost of goods consumed cost of good consumed - goods used internally = cost of goods sold
summary income statements (SIS)
brief income statements provided to external users, providing only summary detail about the results of operations Allows for easier comparisons to industry statistics. presentation of operating results . shows the following: revenues cost of revenue operating expenses additional income/expense items interest expense minority interest equity earnings unconsolidated subsidiary net income discontinued operations net income earnings per share
account receivable turnover ratio
calculates the number of times in an operating cycle (normally one year) the company collects its receivable balance. it is calculated by dividing net credit sales by the average net receivables. Net credit sales = net sales - cash sales. If cash sales are unknown, use net sales. Average net receivables are usually the balance of net receivables at the beginning of the year plus the balance of net receivables at the end of the year divided by two. If the company is cyclical, an average calculated on a reasonable basis for the company's operations should be used such as monthly or quarterly. net credit sales / average net receivables
relative change
changes in percentage dividing the absolute change by the amount for the previous period
vertical analysis
common size use to compare specific items by making total asset ( total revenue) to 100% compare with industry average
horizontal analysis
comparative use to compare with the year before absolute changes and relative changes
based year comparisons
compare all numbers to the based year (according to the items) everything in base year is 100%
utilities (undistributed operating expense)
electricity, gas, oil, stem, sewer, and water. taxes are included
allowances
include adjustments for service problems example: guest complain about room so hotel reduces the price for the guest
undistributed operating expense
includes 4 general categories: administrative and general expenses sales and marketing property operation and maintenance utilities
operating activities
includes cash transactions related to revenues and expense revenues = cash inflows - selling goods and services, interest and dividend income expenses = cash outflows - operational cash expenditures, salaries, taxes, supplies, interest expense, etc. payments of accounts payable, taxes payable, and the various accrued expenses - such as wages payable, are classified as cash outflows under operating activities.
other expenses (the final major expense category for operated departments)
includes only other direct expenses example: cable/satellite television, cleaning supplies, commissions, complimentary service and gifts, contract services, guest relocation, guest transportation, laundry and dry cleaning, linen, operating supplies, reservations, telecommunications, training, and uniforms
administrative and general expenses (undistributed operating expense)
includes service departments such as the general manager's office and the accounting office. salaries, wages, information service, professional fees, and provision for doubtful accounts
net operating income (NOI)
income before fixed charges - fixed charges = net operating income gross operating profit (GOP) - management fees and fixed charges = net operating income (NOI)
principal sources of information needed for preparing the SCF
income statement statement of retained earnings two successive balance sheep from the beginning and end of the accounting period
income statement s relationship with the balance sheet
income statement reflects operations of the hospitality property for the period between balance sheet dates
gains
increases in assets, reductions in liabilities, or a combination of both
current ratio
is also called the working capital ratio as working capital is the difference between current assets and current liabilities. This ratio measures the ability of a company to pay its current obligations using current assets. The current ratio is calculated by dividing current assets by current liabilities. current asset/ current liability example: current asset : 38,366 current liability: 27,945 current ratio = 1.4 : 1 owner prefers lower current assets creditors prefer higher current current assets
basic income statement format
revenues - cost of good sold = gross profit gross profit - overhead expenses - financing cost and income taxes = net income
USALI format
revenues - direct operating expenses = departmental operating income departmental operating income - overhead expenses - financing costs and income taxes = net income
Financial Accounting Standard Board (FASB)
rule making body, mandated that the SCF (statement of cash flow)be included with the other financial states issued to external users only since 1988
profit center
sales and direct expenses the food department and room department shown separately
service center
sales and marketing and property operation and maintenance the overhead expenses are divided among undistributed operating expenses, management fees, and fixed charges
gross profit
sales less cost of sales
cash equivalents
short term (90 days or less), highly liquid investments such as U.S. treasury bills and money market accounts
direct method
shows cash receipts from sales and cash disbursements for expenses requires each item on the income statement be concerted from an accrual basis to cash basis,
absolute changes
shows the change in dollars between 2 periods
uniform systems of accounts for the Lodging Industry (USALI).
standardized accounting systems providing a turnkey system for new entrants into the hospitality industry by offering detailed information about accounts, classifications, formats, and the different kinds, contents, and uses of financial statements and reports contains not only the basic financial statements, but also 19 supplementary departmental operating statements, appendices converting ratio analysis and statistic, and an expense dictionary allows more reasonable comparison of the operational results of similar hospitality properties it is a time-tested system designed to be used at the property level rather than the corporate level of a hotel
departmental income statements
supplements to the income statement that provide management with detailed financial information for each operating department and service center; also referred to as schedules generally considered to be the most useful financial statements for management's review of operations aka schedules
summary operating statement (SOS)
the 10th revised edition of the USALI this statement requires the combining of the food and beverage departments and the combining of all other operating departments that are shown on this statement as other operating departments contains lines for administrative and general, sales and marketing, property operation and maintenance, and utilities doesn not include depreciation, amortization, interest expense, gains or losses on the sale of property and equipment, and income tax expense, it is refeered to as the SOS rather than a summarty income statement
acid test ratio
the acid‐test ratio is also called the quick ratio. Quick assets are defined as cash, marketable (or short‐term) securities, and accounts receivable and notes receivable, net of the allowances for doubtful accounts. These assets are considered to be very liquid (easy to obtain cash from the assets) and therefore, available for immediate use to pay obligations. The acid‐test ratio is calculated by dividing quick assets by current liabilities. quick assets / current liabilities
interest expense
the cost of borrowing money and is based on the amounts borrowed, the interest rate, and the length of time for which the fund are borrowed
departmental income
the difference between an operated department's revenues and its direct expenses
responsibility accounting
the presentation is organized to focus attention on departmental results such as the rooms and food departments. the detail provided by both profit center and service center reflects reporting by areas of responsibility and is commonly referred to as responsinbility accounting
income before fixed charges formula
total department income - total undistributed expenses = gross operating profit (GOP) GOP less management fess equals income before fixed charges
gross operating profit formula
total operated departments income - total undistributed operating expenses = GOP