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  1. 1. Hospitality Finance Accounting Statements Virginia Stipp Lawrence, MHM
  2. 2. Three Major Financial Statements <ul><li>Balance Sheet-statement of financial position at a given date. Account balances for assets, liabilities, and owner’s equity </li></ul><ul><li>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 </li></ul><ul><li>1.      Profit & Loss (P&L) </li></ul><ul><li>2.      Operating Statement </li></ul><ul><li>Statement 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 </li></ul>
  3. 3. The Fundamental Accounting Equation <ul><li>Assets = Liabilities + Owners’ Equity </li></ul><ul><li>Assets-owned by the operation (cash, inventory, receivables, tangible items) </li></ul><ul><li>Liabilities-obligations to outside parties (payables) </li></ul><ul><li>Owners Equity-residual claims owners have on assets </li></ul><ul><ul><li>Permanent-not closed at the end of the accounting period (capital stock and retained earnings) </li></ul></ul><ul><ul><li>Temporary-closed at the end of the accounting period (revenue and expense accounts) </li></ul></ul>
  4. 4. The Accounting Cycle <ul><li>1.Record transactions in journals. </li></ul><ul><li>2.Post amounts from journals to ledger accounts. </li></ul><ul><li>3.Prepare a trial balance. </li></ul><ul><li>4.Prepare adjusting entries. </li></ul><ul><li>5.Post adjusting entries. </li></ul><ul><li>6.Prepare an adjusted trial balance. </li></ul><ul><li>7.Prepare the financial statements. </li></ul><ul><li>8.Close the revenue and expense accounts. </li></ul><ul><li>9.Prepare the post-closing trial balance. </li></ul>
  5. 5. Accounts & Ledgers <ul><li>Account - 5 categories (A, L, OE, R, E) </li></ul><ul><li>An element for classifying and summarizing business transactions </li></ul><ul><li>A basic storage unit for data </li></ul><ul><li>Ledger - “Book of final entry” </li></ul><ul><li>   A group of accounts </li></ul><ul><ul><li>General ledger = ‘master’ group of accounts </li></ul></ul><ul><ul><li>Chart of accounts = complete listing </li></ul></ul>
  6. 6. Journal = “Book of original entry” <ul><li>Intermediate step in recording transactions </li></ul><ul><li>“Journalizing” = recording a transaction in a journal </li></ul><ul><li>General journal () </li></ul><ul><ul><li>Posting </li></ul></ul><ul><ul><li>Transferring $ amounts from the general journal to the ledger accounts </li></ul></ul>
  7. 7. <ul><li>BALANCE SHEET </li></ul><ul><li>REFLECTS ASSETS AND CLAIMS CALLED LIABILITIES AND OWNER’S EQUITY </li></ul><ul><li>BALANCE AT A GIVEN DATE </li></ul><ul><li>CONVEYS INFORMATION </li></ul><ul><li>BALANCE SHEET-Assets ASSETS </li></ul><ul><li>CURRENT ASSETS </li></ul><ul><li>NON CURRENTS ASSETS </li></ul><ul><li>UNIQUE CATEGORIES </li></ul>
  8. 8. <ul><li>LIQUIDITY </li></ul><ul><li>“ Liquid” versus “Illiquid” versus “Insolvent” </li></ul><ul><li>Liquid = Plenty of cash, or the ability to convert assets to cash </li></ul><ul><li>Illiquid = Little cash, or difficulty converting assets to cash </li></ul><ul><li>Insolvent = unable to meet your obligations to lenders & vendors </li></ul>
  9. 9. <ul><li>Property & Equipment </li></ul><ul><li>Relates to Tangible Assets </li></ul><ul><li>Land is not depreciated (land is unique) </li></ul><ul><li>Construction In Progress - All labor, materials & other expenses of construction - not depreciated </li></ul><ul><li>Leasehold Improvements - renovations & remodeling expenses on leased space </li></ul><ul><li>China, Glassware, Linen, Uniforms </li></ul>
  10. 10. <ul><li>Other Assets </li></ul><ul><li>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. </li></ul><ul><li>Goodwill - excess of purchase price over net book value of a business </li></ul><ul><li>Deferred franchise fees </li></ul><ul><li>Preopening expenses </li></ul><ul><li>Organization costs </li></ul>
  11. 11. <ul><li>BALANCE SHEET-Liabilities </li></ul><ul><li>LIABILITIES </li></ul><ul><li>CURRENT LIABILITIES </li></ul><ul><li>LONG TERM DEBT </li></ul><ul><ul><li>Note Payable, Mortgage, Bond </li></ul></ul><ul><li>UNIQUE CATEGORIES </li></ul><ul><ul><li>Commitments and Contingencies </li></ul></ul>
  12. 12. <ul><li>Liquidity Ratios & Working Capital </li></ul><ul><li>Current Ratio = Current Assets____ </li></ul><ul><li>Current Liabilities </li></ul><ul><li>Quick Ratio = Cash + Acct. Receivable </li></ul><ul><li> Current Liabilities </li></ul><ul><li>Working Capital = </li></ul><ul><li>Current Assets - Current Liabilities </li></ul>
  13. 13. <ul><li>Retained Earnings </li></ul><ul><li>Retained Earnings = Cumulative Net Income that has NOT been distributed as dividends (ignoring adjustments); Net Losses reduce Retained Earnings </li></ul><ul><li>Sole Proprietorships and Partnerships do NOT have retained earnings!!! All of their income is paid out to partners. </li></ul>
  14. 14. <ul><li>BALANCE SHEET-Owner’s Equity </li></ul><ul><li>OWNER’S EQUITY </li></ul><ul><li>CAPITAL STOCK </li></ul><ul><li>PAID IN CAPITAL </li></ul><ul><li>RETAINED EARNINGS </li></ul><ul><li>TREASURY STOCK </li></ul>
  15. 15. <ul><li>INCOME STATEMENT </li></ul><ul><li>DEFINED </li></ul><ul><li>A report of sales and expenses for a defined period of time, resulting in net income (loss) of the business </li></ul><ul><li>Between two balance sheet dates </li></ul><ul><li>FORMAT </li></ul><ul><li>INTERNAL </li></ul><ul><ul><li>Lots of detail by department </li></ul></ul><ul><li>EXTERNAL </li></ul><ul><ul><li>Summary information only </li></ul></ul>
  16. 16. <ul><li>Revenue, Expense, Gain and Loss Revenue —the inflow of assets, reduction of liabilities, or both resulting from the sale of products and services. </li></ul><ul><li>Expens e—the outflow of assets, increase of liabilities, or both incurred during the production and rendering of products and services. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>
  17. 17. <ul><li>Income Statement Format Revenues </li></ul><ul><li>– Direct Operating Expenses </li></ul><ul><li>Departmental Operating Income </li></ul><ul><li>– Overhead Expenses </li></ul><ul><li>Net Income </li></ul>
  18. 18. <ul><li>Cost of Sales Formula </li></ul><ul><li>Beginning inventory </li></ul><ul><li>– Inventory purchases </li></ul><ul><li>Goods available for sale </li></ul><ul><li>– Ending inventory </li></ul><ul><li>Cost of goods consumed </li></ul><ul><li>– Goods used internally </li></ul><ul><li>Cost of goods sold </li></ul>
  19. 19. <ul><li>Operated Departments Revenue Centers </li></ul><ul><li>Examples </li></ul><ul><ul><li>Rooms </li></ul></ul><ul><ul><li>Food and Beverage </li></ul></ul><ul><ul><li>Telecommunications </li></ul></ul><ul><ul><li>Garage and Parking </li></ul></ul><ul><ul><li>Guest Laundry </li></ul></ul>
  20. 20. <ul><li>Undistributed Operating Expenses Support Centers </li></ul><ul><li>Examples </li></ul><ul><ul><li>Administrative and General (A&G) </li></ul></ul><ul><ul><li>Human Resources </li></ul></ul><ul><ul><li>Information Systems </li></ul></ul><ul><ul><li>Security </li></ul></ul><ul><ul><li>Marketing </li></ul></ul><ul><ul><li>Franchise Fees </li></ul></ul><ul><ul><li>Property Operation and Maintenance </li></ul></ul><ul><ul><li>Utility Costs </li></ul></ul>
  21. 21. <ul><li>Statement of Cash Flows C ash Flow Classifications </li></ul><ul><ul><li>A hospitality operation typically has cash inflows and outflows related to three activities: </li></ul></ul><ul><ul><li>Operating activities </li></ul></ul><ul><ul><li>Investing activities </li></ul></ul><ul><ul><li>Financing activities </li></ul></ul><ul><li>STATEMENT OF CASH FLOW PURPOSE </li></ul><ul><ul><li>Information regarding cash receipts and cash disbursements </li></ul></ul><ul><ul><li>Assess liquidity </li></ul></ul><ul><ul><li>Assess financial flexibility </li></ul></ul><ul><ul><li>Assess dividend policy </li></ul></ul><ul><ul><li>Assess investing and financing needs </li></ul></ul><ul><ul><li>Assess a company’s ability to generate cash from operations </li></ul></ul>
  22. 22. <ul><li>OPERATING ACTIVITIES </li></ul><ul><li>Revenue and expense transactions </li></ul><ul><li>Interest and dividend income </li></ul><ul><li>Interest expense </li></ul><ul><li>Working capital account adjustments </li></ul><ul><li>Current Account Issues: </li></ul><ul><ul><li>Dividends Payable - to Financing Activities </li></ul></ul><ul><ul><li>Marketable Securities - </li></ul></ul><ul><ul><li>Sale/Purchase to Investing Activities </li></ul></ul>
  23. 23. <ul><li>Gain/Loss to Operating Activities </li></ul><ul><li>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) </li></ul><ul><li>Interest Expense & Income Tax Payments - Are already included in the Income Statement </li></ul><ul><li>Gain/Loss on Sale of Equipment </li></ul><ul><li>The amount of the Gain or Loss goes to Operating Activities </li></ul><ul><li>The Sale Price affects Cash, and goes to Investing Activities </li></ul><ul><li>The Net Book Value (Cost - Accumulated Depreciation) does NOT affect cash and is NOT recorded on the SCF </li></ul>
  24. 24. <ul><li>Financing Activities Issues </li></ul><ul><li>Sale of Stock - Affects Cash </li></ul><ul><li>Repurchase of Stock - Affects Cash (either Treasury Stock or Common Stock) </li></ul><ul><li>Borrowing Money (taking down a Loan) - Affects Cash </li></ul><ul><li>Dividends Declared - Do NOT affect Cash (Dividend Payments affect Cash) </li></ul>
  25. 25. Standard Costs <ul><li>Costs and Sales Concepts </li></ul><ul><li>Accounting Defines costs as reduction in the value of an asset for the purpose of security benefit or gain </li></ul><ul><li>Types of Costs </li></ul><ul><li>Fixed- normally unaffected by changes in sales volume , however they can and often change over time </li></ul><ul><li>Variable-clearly related to business volume </li></ul><ul><li>Controllable- can be changed in the short term (variable costs are usually found here) </li></ul><ul><li>Noncontrollable- cannot be changed in the short term (usually fixed cost) </li></ul><ul><li>Unit-refers to one item (one portion, one Martini) </li></ul><ul><li>Total-refers to the total of items of a given group (lunch items) </li></ul><ul><li>Prime Cost- costs of materials and labor; food, beverage, and payroll </li></ul><ul><li>Historical-used for comparison, establishment of goals for future </li></ul><ul><li>Planning-projection of revenues and expenses and uses for them </li></ul><ul><li>Example; Pro-Forma </li></ul>
  26. 26. <ul><li>The COST-TO-SALES RATIO ; COST PERCENT COST/SALES = COST PER DOLLAR OF SALE </li></ul><ul><li>  All percentages will be added together to equal 100% </li></ul><ul><li>Including but not limited to; </li></ul><ul><ul><li>Operational costs (food, beverage, etc) </li></ul></ul><ul><ul><li>Labor </li></ul></ul><ul><ul><li>Fixed Costs </li></ul></ul><ul><ul><li>Profit </li></ul></ul>
  27. 27. <ul><li>Industry Variations in Costs </li></ul><ul><li>Those with a low profit margin per item served depend on high business volume </li></ul><ul><li>Those with a high profit margin per item do not require high volume </li></ul><ul><li>Sales Concepts Monetary terms </li></ul><ul><ul><li>Total Sales-all sales over a given time period </li></ul></ul><ul><ul><li>By Category-meal period, inventory system (ABC) </li></ul></ul><ul><ul><li>By Server </li></ul></ul><ul><ul><li>Be Seat or Cover </li></ul></ul>
  28. 28. <ul><li>Price Sales Price-amount charged each customer; Prix fixe, a la carte, combo </li></ul><ul><li>Average Sale-total sales/ # of guests served (also called average cover) </li></ul><ul><li>Per Customer </li></ul><ul><li>Per Server </li></ul>
  29. 29. <ul><li>Non-Monetary Terms </li></ul><ul><li>Total Number Sold </li></ul><ul><li>Total Covers </li></ul><ul><li>Average Covers </li></ul><ul><li>Covers per hour / meal period/ day/ served </li></ul><ul><li>Seat Turnover/ Turns </li></ul><ul><ul><li># of seats occupied during a given period/ # of guests served during that period </li></ul></ul>