CHAPTER UNDERSTANDING FINANCIAL STATEMENTS OF HOTELS AND RESTAURANTS I Questions Assets are things owned by the firm, liabilities are claims of outsiders to assets, and owners’ equity is claims of owners to assets The relationship involving the three is stated as follows: Assets = Liabilities + Owners’ Equity Creditors are interested in the hospitality operation’s ability to pay its current and future obligations The ability to pay its current obligations is shown, in part, by a comparison of current assets and current liabilities The ability to pay its future obligations depends, in part, on the relative amounts of long-term financing by owners and creditors Everything else being the same, the greater the financing from investors, the higher the probability that long-term creditors will be paid and the lower the risk that these creditors take in “investing” in the enterprise Investors or owners are most often interested in earnings that lead to dividends To maximize earnings, an organization should have financial flexibility, which is the operation’s ability to change its cash flows to meet unexpected needs and take advantage of new profitable investments, thus increasing net income and, ultimately, cash dividends for investors Some of the limitations of the balance sheet are: – It often does not reflect current values of some assets, such as property and equipment For hospitality operations, whose assets are appreciating rather than depreciating, this difference may be significant – They fail to reflect many elements of value to hospitality operations Most important to hotels, motels, restaurants, clubs, and other sectors of the hospitality industry are people Nowhere in the balance sheet is there a reflection of the human resource investment – Other valuable elements not directly shown on the balance sheet include such things as goodwill, superior location, loyal customers, and so on Understandably, it may be difficult to assign an objective value to these elements 2-2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations – They are less useful because they become outdated The user of the balance sheet must be aware that the financial position reflected at year-end may be quite different one month later – The balance sheet, like much of accounting, is based on judgments; that is, it is not exact Certainly, assets equal liabilities plus owners’ equity However, several balance sheet items are based on estimates, e.g., the amounts shown as accounts receivable (net) reflect the estimated amounts to be collected The term “current” as used in the balance sheet refers to (1) order of the convertibility of assets to cash, and (2) maturity of liabilities Current assets consist of cash and any other assets or resources that are expected to be realized in cash or to be sold or consumed during the normal operating cycle of the business (or one year, if the normal operating cycle is less than twelve months) Current liabilities are debts that will become due within the normal operating cycle of the business, usually within one year; they normally will be paid, when due, from current assets Assets and liabilities that are not current are classified as non-current The major differences between the balance sheet and the income statement are: a b The income statement covers a period while the balance sheet is prepared as of the last day of the accounting period The income statement reflects operations of the hospitality property for the period between balance sheet dates while the balance sheet reflects the financial position of the hospitality operation – its assets, liabilities, and owners’ equity – at a given date Three examples of direct operating expenses are: cost of rooms sold, direct labor expense (of personnel working in the rooms department) and other direct expenses (supplies used in the rooms department) Cost of food sold is determined by adding the beginning inventory and purchases, then subtracting from their sum the ending inventory Creditors find that the income statement yields significant information for determining the ability to realize income from operations which in turn will indicate also their ability to pay interest on debts Funds generated from operations may be used to settle the company’s debts Understanding Financial Statements of Hotels and Restaurants 2-3 Purposes of the Statement of Cash Flows a To predict future cash flows b To evaluate management decisions c To determine the ability to pay dividends to stockholders and interest and principal to creditors d To show the relationship of net income to changes in the business’ cash 10 The most important source of cash for many successful companies is from operating activities A large positive operating cash flow is a good sign because it means funds have been internally generated with no fixed obligations or commitment to return such to anybody 11 It is possible for cash to decrease during a year when income is high because cash may be used not only for operating activities but also for investing and financing activities 12 Interest expense is included as an operating activity because it enters into the determination of net income However, SFAS No 20 (revised 2000) states that financing activities may include not only the principal amount borrowed or repaid but also the interest paid on the debt incurred 13 Transactions involving accounts payable are not considered to be financing activities because such transactions are used to obtain goods and services rather than to obtain cash Furthermore, purchases of goods and services relate to a company’s day-to-day operating activities II Practical Problems PROBLEM L A A L EQ EQ A A Accounts Payable Marketable Securities Land Mortgage Payable Capital Common Stock Issued Prepaid Rent Expense Repair Parts Inventory PROBLEM A A A L EQ EQ A EQ Accounts Receivable Investments Building Sales Tax Payable Withdrawals Retained Earnings Food Inventory Paid-In Capital 2-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Assets Land Building Equipment Other Assets Total P 60,000 200,000 40,000 10,000 P310,000 PROBLEM Assets -Intangible Assets Organization Costs Franchise P 1,300 75,000 Other Assets Utility Deposits 500 PROBLEM The investment in Toyota Motor Company stocks maybe shown as a) Marketable securities if the company intends to sell them when the need for cash arises or b) Investment (long-term) if the company intends to hold on them for income purposes either in form of dividends or gain from appreciation of market value and other business reasons PROBLEM The purchase will be recorded as investment because Elle Corporation fully owns Cosmo Company and therefore control of operations can be fully exercised PROBLEM A C B2 D B4 G PROBLEM 7 A B2 A 10 B2 11 G 12 C 13 G 14 B4 15 C 16 B1 17 G 18 B1 19 C 20 A 21 G Understanding Financial Statements of Hotels and Restaurants 2-5 Minda’s Inn Current Assets Section of the Balance Sheet December 31, 2003 Current Assets Demand deposits, BPI Savings account, BPI Certificates of deposit Marketable securities Accounts receivable Less: Allowance for doubtful accounts Notes receivable Inventories Prepaid Expenses Total current assets P P 128,179 16,316 8,803 11,738 2,934 134,634 111,863 22,420 23,241 13,499 P 329,132 Minda’s Inn Current Liabilities Section of the Balance Sheet December 31, 2003 Current Liabilities Accounts payable Notes payable Accrued salaries Advance deposits - banquets Dividends payable Current maturities on long-term debt Total current liabilities PROBLEM ANSWER: P 51,000 (P21,000 + P22,000 + P8,000) ANSWER: P 30,500 (P12,000 + P18,500) ANSWER: P (20,500) (P30,500 – P51,000) ANSWER: P 8,000 increase ANSWER: P 110,000 ANSWER: P 261,000 (P325,000 – P64,000) ANSWER: P 50,500 (P80,500 – P30,000) PROBLEM (P26,500 – P18,500) P 58,690 42,611 78,293 14,203 21,246 25,824 P 240,867 2-6 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Rob Roy’s Restaurant Income Statement For the Year Ended December 31, 2003 Sales Food Beverage Other Sales Total Sales Cost of Sales Food (Schedule A) Beverage (Schedule B) Total Cost of Sales Gross Profit Operating Expenses Salaries Wages Fringe Benefits Employee Meals Payroll Taxes Direct Operating Expenses Music Marketing Heat, light and power Administrative and general Repairs Rent Depreciation Total Operating Expenses Operating Income Interest Income Before Income Taxes Income Taxes Net Income P1,200,000 500,000 20,000 P1,720,000 P 458,000 128,000 586,000 P1,134,000 P 150,000 280,000 50,000 5,000 30,000 100,000 20,000 30,000 35,000 92,000 30,000 152,000 50,000 1,024,000 P 110,000 20,000 P 90,000 27,000 P 63,000 Schedule A (Cost of Sales – Food Department) Beginning inventory Add: Purchases Less: Ending Inventory Schedule B (Cost of Sales – Beverage Department) P 20,000 460,000 P480,000 22,000 P458,000 Understanding Financial Statements of Hotels and Restaurants Beginning inventory Add: Purchases 2-7 P 15,000 130,000 P145,000 17,000 P128,000 Less: Ending Inventory Cost of Sales PROBLEM 10 Requirement (1) Inventory, December 1, 2003 Add: Purchases P 12,376 76,840 P 89,216 15,845 P 73,371 Less: Inventory, December 31, 2003 Less: Goods used internally Employee meals – general manager Employee meals – food department Promotional meals P 85 648 256 Add: Transfers from the Bar to Kitchen Cost of Food Sold 989 P 72,382 46 P 72,428 Requirement (2) Food Department Administrative Department Food Department Marketing Department PROBLEM 11 Happy Motel Rooms Department Schedule For the year ended December 31, 20xx Revenue Transient - regular - groups Other Allowances Net Revenue Expenses P100,000 50,000 2,000 P152,000 500 P151,500 2-8 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Salaries Wages Fringe Benefits Total Payroll and Related Expenses Other Expenses Commissions Uniforms Linen Expense Payroll Taxes Operating Supplies Contract Cleaning Dry Cleaning Laundry Other Total Other Expenses Total Expenses Departmental Income P 10,000 15,000 3,000 28,000 P 1,000 500 1,000 2,000 1,500 1,800 1,200 3,000 1,800 13,800 41,800 P109,700 PROBLEM 12 Activity Transaction Operating Investing Financing Short-term investment securities were purchased X Equipment was purchased X Accounts payable increased X Deferred taxes decreased X Long-term bonds were issued X Common stock was sold X Interest was paid to long-term creditors X Source Use X X X X X X X 2-9 Understanding Financial Statements of Hotels and Restaurants A long-term mortgage was entirely paid off A cash dividend was declared and paid X X X X Activity Transaction Operating Investing Financing 10 Inventories decreased X 11 Accounts receivable increased X 12 Depreciation charges totaled P200 thousand for the year X * Source Use X* X* X* Adjustments to net income PROBLEM 13 For 2003: Gross profit P507,000 (P561,000 – P54,000) Total fixed charges P68,000 (P17,000 + P21,000 + P30,000) Average tax rate 25% (P21,938  P87,750) Income P65,812 Total overhead expenses P140,250 Payroll cost percentage 28.75% (P161,000  P560,000) Food cost percentage 30% (P54,000  P180,000) PROBLEM 14 (1) (2) (4) (3) (4) (1) Operating Investing Noncash transaction Financing Noncash transaction Operating 10 11 12 13 14 (2) (1) (1) (1) (1) (3) Investing Operating Operating Operating Operating Financing 2-10 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations (1) (3) Operating Financing 15 (2) Investing PROBLEM 15 (1) (1) (2) (1) (4) (1) (1) (4) Operating Operating Investing Operating Noncash transaction Operating Operating Noncash transaction 10 11 12 13 14 15 (5) (1) (1) (1) (3) (1) (1) None of the above Operating Operating Operating Financing Operating Operating PROBLEM 16 Cash received from hotel guests during 2003: Cash sales Collection from customers Sales on account Less: Increase in AR Cash received from hotel guests P 800,000 P2,540,000 10,000 2,530,000 P3,330,000 Beginning balance, Dividends payable Dividends declared Ending balance, Dividends payable Dividends paid P 10,000 120,000 (15,000) P115,000 Cost of food used Increase in Food inventory Decrease in Accounts payable Cash payments for food purchases P400,000 8,000 5,000 P413,000 Analysis of long-term debt: Balance, January 1, 2003 Balance, December 31, 2003 Net increase P1,000,000 1,500,000 P 500,000 Understanding Financial Statements of Hotels and Restaurants Reductions during the year Conversion to common stock Reclassification as current debt Additional borrowing Net increase Income tax expense Beginning balance, Income tax payable Ending balance, Income tax payable Income tax paid 2-11 P (200,000) (50,000) 750,000 P 500,000 P 25,000 4,000 (5,000) P 24,000 PROBLEM 17 Ilang-Ilang Inn Statement of Cash Flows For 2004 Cash Flows from Operations Net income Add (Deduct) Adjustments to reconcile net income to cash flows from operations: Depreciation expense Amortization expense (other assets) Increase in accounts receivable Increase in inventory Increase in accounts payable Increase in wages payable Total Cash flows from operations Cash Flows from Investing Activities Purchase of equipment Cash Flow from Financing Activities Payment of dividends Payment of current portion of long-term debt P100,000 200,000 100,000 (35,000) (5,000) 45,000 5,000 310,000 410,000 (300,000) Net increase in Cash (50,000) (50,000) (100,000) P 10,000 Cash balance, 12.31.04 Cash balance, 12.31.03 Net increase in Cash P 40,000 30,000 P 10,000 PROBLEM 18 2-12 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Food Department Income Statement For the year ended December 31, 20xx Revenue Banquets Grill room Coffee garden Total Revenue Cost of Sales Gross Profit Other Income Gross Profit and Other Income Expenses Salaries and Wages Expense Employee Meals Expense Total Payroll and Related Expenses Other Expenses Supplies Expense License Expense Laundry and Linen Expense Glass and Tableware Expense Printing Expense Miscellaneous Expense Total Other Expenses Total Expenses Departmental Income P596,800 306,200 157,800 P1,060,800 423,400 P 637,400 1,200 P 638,600 P348,800 34,400 383,200 P 20,600 3,800 26,000 8,600 9,800 12,400 81,200 464,400 P174,200 PROBLEM 19 Food inventory, March Add: Food purchases, March Less: Food inventory, March 31 Cost of Sales Less: Employee Meals Cost Promotional Meals Cost Net Cost of Sales P 4,856 17,814 P22,670 3,222 P19,448 P 418 556 974 P18,474 PROBLEM 20 Food inventory, August Add: Food purchases, August Less: Food inventory, August 31 P 29,506 97,596 P127,102 25,622 Understanding Financial Statements of Hotels and Restaurants Cost of sales Less: Employee meals cost Promotional meals cost Complimentary meals cost Transfers kitchen to the bar 2-13 P101,480 P2,416 556 264 214 Add: Transfers bar to the kitchen Net Cost of Sales PROBLEM 21 3,450 P 98,030 96 P 98,126 Consolidated Income Statement Requirement (a) Revenues Cost of sales Gross profit Direct costs Wages & salaries Other direct costs Total Contribution to indirect costs Requirement (b) Allocated costs Administrative & general expenses (a) Marketing expenses Utilities expense Property operation & maintenance Depreciation expense Insurance expense Total Net income (loss) before taxes Total Dining Room Banquet Room Beverages P400,000 144,800 P255,200 P208,000 83,200 P124,800 P112,000 33,600 P 78,400 P 80,000 28,000 P 52,000 103,200 27,200 130,400 66,560 16,640 83,200 24,640 8,960 33,600 12,000 1,600 13,600 P124,800 P 41,600 P 44,800 P 38,400 13,000 9,000 6,000 6,760 4,680 2,400 3,640 2,520 3,000 2,600 1,800 600 12,000 14,000 2,000 56,000 4,800 5,600 800 25,040 6,000 7,000 1,000 23,160 1,200 1,400 200 7,800 P 68,800 P 16,560 P 21,640 P 30,600 (a) Allocation (1) General & administrative (based on revenue) Dining Room P208,000 / P400,000 Banquet Room P112,000 / P400,000 Beverages P 80,000 / P400,000 (2) Marketing costs (based on revenue) = = = 52% 28% 20% 2-14 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Dining Room Banquet Room Beverages (3) All other indirect costs (based on square footage) Dining Room 2,400 / 6,000 Banquet Room 3,000 / 6,000 Beverages 600 / 6,000 = = = 52% 28% 20% = = = 40% 50% 10% Requirement (c) Based on the schedule in Requirements a & b, no division should be closed because they all showed positive contribution to indirect costs and net income after allocating all the indirect costs This proves the fact that they are all profitable PROBLEM 22 Requirement (a) Balance Sheet Assets Current Assets Cash Credit card receivables Accounts receivable Inventories Prepaid expenses Total current assets P 4,100 7,560 1,940 8,200 1,900 P 23,700 Noncurrent Assets Cost P 80,000 712,800 119,080 64,120 Land Building Equipment Furnishings China & tableware Glassware Total assets Accumulated Depreciation P186,400 35,625 11,875 Net P 80,000 526,400 83,455 52,245 9,680 2,420 754,200 P777,900 Liabilities and Stockholders’ Equity Liabilities Current Liabilities Accounts payable Accrued expenses payable P 8,600 2,700 Understanding Financial Statements of Hotels and Restaurants Income taxes payable Current portion, Mortgage payable Total current assets 2-15 6,100 13,100 P 30,500 Noncurrent Liabilities Mortgage payable Total Liabilities 406,900 P437,400 Stockholders’ Equity Capital stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity P151,000 189,500 P340,500 P777,900 Requirement (b) Accounts Cash Credit Card Receivables Accounts Receivable Inventories Prepaid Expenses Land Building Accumulated Depreciation: Building Equipment Accumulated Depreciation: Equipment Furnishings Accumulated Depreciation: Furnishings China and Tableware Glassware Accounts Payable Accrued Expenses Payable Income Taxes Payable Current Portion, Mortgage Payable Mortgage Payable Capital Stock Retained Earnings Trial Balance Totals Trial Balance Debit Credit Balance Balance P 4,100 7,560 1,940 8,200 1,900 80,000 526,400 (net) 83,455 (net) 52,245 (net) 9,680 2,420 8,600 2,700 6,100 13,100 406,900 151,000 189,500 P 777,900 P 777,900 2-16 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations ... Retained Earnings Food Inventory Paid-In Capital 2-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Assets Land Building Equipment Other Assets Total P 60,000 200,000... 78,293 14,203 21,246 25,824 P 240,867 2-6 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Rob Roy’s Restaurant Income Statement For the Year Ended December 31, 2003... 40,000 30,000 P 10,000 PROBLEM 18 2-12 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Food Department Income Statement For the year ended December 31, 20xx Revenue