CHAPTER ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS – PART II I Questions Creditors use ratio analysis to evaluate the solvency of hospitality operations and to assess the riskiness of future loans For example, the current ratio may indicate the establishment’s ability to pay its upcoming bills In addition, creditors sometimes use ratio to express requirements for hospitality operations as part of the conditions set forth for certain financial arrangements For example, a creditor may require the maintenance of a current ratio of to as a condition of a loan Refer to pages 78 to 79 While ratios can be compared against results of a prior period and against industry averages, ratios are best compared against planned ratio goals or budgeted ratios For example, in order to more effectively control the cost of labor, management may project a goal for the current year’s labor cost percentage that is slightly lower than the previous year’s levels The expectation of a lower labor cost percentage may reflect management’s efforts to improve scheduling procedures and other factors related to the cost of labor By comparing actual labor cost percentage with the planned goal, management is able to assess the success of its efforts to control labor cost An investor would be interested on profitability ratios as well as ratios that measure the financial stability of the hotel Activity ratios reflect management’s ability to use the property’s assets and resources and generate satisfactory returns on them Turnover means the number of times a certain resource is able to generate either revenues, guests, cash, etc Managers are concerned about the solvency ratios because these will measure the firm’s ability to settle its debts, defray the operating expenses and maintain operating efficiency 4-2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations Creditors are likewise interested in solvency ratios because these ratios could show whether the firm has the capacity to satisfy their claims when they become due Stockholders are concerned about the ability of the company to meet its maturing debts and other operational requirements because a sound capital structure is necessary for continued successful operations II Practical Problems PROBLEM a b Current ratio = Quick ratio P12,000 + P1,800 + P180 + P4,400 + P1,120 P7,800 = P19,500 P7,800 = P12,000 + P1,800 + P180 P7,800 = P13,980 P7,800 = = 2.5 1.79 PROBLEM a Average of current liabilities = = P58,200 + P60,800 P119,000 = P40,400 P59,500 b Cash flow from operating activities = to current liabilities c 68% exceeds the recommended percentage of 40 PROBLEM a Food inventory turnover = 0.68 times or 68% P36,520 = = b P59,500 Average period in days for = food inventory to turnover P8,868 + P5,740 P36,520 P7,304 365 days = = 73 Analysis and Interpretation of Financial Statements – Part II 4-3 PROBLEM Current ratio has been declining from 1.44 in Year to 1.20 in Year This could indicate a deterioration in the working capital condition A restaurant should have a higher current ratio, preferably 2:1 because of the nature of its capital requirements The ratio in Year is therefore considered unsatisfactory PROBLEM Multiple occupancy rate = Rooms occupied by or more people Number of rooms occupied by guests 40% = Rooms 1,400 No of rooms = 560 1.5 = P120,000 CL 1.2 = CL = P80,000 QA = 24 = COFS P4,000 0.3 = COFS = P96,000 TFS = QA P80,000 P96,000 P96,000 – P1,000 TFS P316,667 PROBLEM Working capital = P86,100 – P62,400 = P23,700 Working capital position is favorable It indicates that the firm has sufficient assets to pay its short-term debts and meet its operational expense requirements PROBLEM a Cash flow from operating activities to current liabilities ratio = P143,200 P68,300 = 2.096 b Cash flow from operating activities to long-term liabilities ratio = P143,200 P823,300 = 0.174 c Cash flow from operating activities margin = P143,200 P2,406,800 = 0.059 4-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations PROBLEM 2003 a b c Working capital P35,900 – P32,800 P47,200 – P37,200 2004 P3,100 P10,000 Current ratio P35,900 P32,800 = P47,200 P37,200 = 1.09 1.27 Quick ratio P28,200 P32,800 = P36,300 P37,200 = 0.86 0.97 d Credit card receivables as a percentage of credit card revenues P4,300* P345,948 = 0.01 e Credit card receivables turnover ratio P345,948 P4,300* = 80.45 f Credit card average collection period 365 days 80.45 g Accounts receivable as a percentage of accounts receivable credit revenue P350** P13,620 h Accounts receivable turnover ratio P13,620 P350** i Accounts receivable average collection period 365 days 38.91 j Cost of sales percentage of sales revenue P212,472 P544,800 = 0.39 k The company has a very satisfactory collection period of credit card receivables and satisfactory accounts receivable average collection period = 4.54 days = 0.026 = 38.91 = 9.38 days Analysis and Interpretation of Financial Statements – Part II Cash Credit card Accounts receivable Total revenues * = = = P185,232 345,948 13,620 P544,800 Average credit card receivables ** Average accounts receivable PROBLEM a Return on assets 34.0% 63.5% 2.5% 100.0% P4,880 + P3,720 P480 + P220 = = 4-5 = P4,300 = P350 P20,100 + [P26,100 x (1 – 0.25)] = P411,200 + P395,700 = P39,675 P403,450 = 0.098 b Net return on assets = P20,100 P403,450 = 0.05 c Number of times interest is earned d Net income to revenue ratio = P52,900 P26,100 P20,100 P851,800 = = = 2.03 0.02 Discussion of hotel profitability Net income to revenue ratio is quite low The hotel should strive to lessen its operating costs if it wants to generate higher income on sales revenue P20,100 e Return on stockholders’ equity = = P108,800 + P80,200 P20,100 P94,500 = 0.21 Discussion of hotel profitability Return on stockholders’ equity is satisfactory considering that it is much higher than the return on other investment opportunities as time deposit rate, bond earnings rate, etc 4-6 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations PROBLEM 10 Let x = Cost of food used 24 = x P8,000 + P10,000 24 = x P9,000 x = P216,000 Cost of food used Less: Employees food expense Total Cost of food sold Average lunch food service check 34% = CFS = P216,000 (3,000) P213,000 = Lunch period revenue (%) x Total sales revenue Seats x Lunch period seat turnover x Operating days = 40% x P60,000 100 x 1.5 x 26 = P24,000 3,900 = P6.15 CFS P80,000 P27,200 Cost of food sold Add: Employee food expense Cost of food used P27,200 200 P27,400 Cost of food sold Add: Employee meals Cost of food used P30,000 300 P30,300 Let x = average inventory y = ending inventory P30,300 = 3.1 x x = P9,774 Analysis and Interpretation of Financial Statements – Part II P9,774 P9,000 + y – P9,000 + y = = P19,548 9,000 – = 9,000 P10,548 y PROBLEM 11 a Average rate per room occupied = P91,108 1,798 b Rooms occupancy percentage = 1,798 75 seats x 31days = c Room double occupancy percentage = 1,798 2,325 = = P50.67 0.77 3,417 – 1,798 = 1,619 = 1,619 1,798 = 90% d Food cost percentage = P18,904 P45,209 = 0.42 e Beverage cost percentage = P4,805 P14,810 = 0.32 f Rooms labor cost percentage = P30,020 P91,108 = 0.33 g Dining room labor cost percentage = = h Average check, dining room = = P15,011 P45,209 + P14,810 P15,011 P60,019 = 0.25 P60,019 40 x x 31 P60,019 3,720 = P16.13 4-7 4-8 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations i Dining room average seat turnover 3,720 40 x 31 = = 3,720 1,240 = j Average monthly revenue per dining room seat = P60,019 40 = P1,500.48 k Beverage revenue to food revenue % = P14,810 P45,209 = 0.33 l Beverage revenue to room revenue % = P14,810 P91,108 = 0.16 = P60,019 P91,108 = 0.66 m Dining revenue to room revenue % PROBLEM 12 2003 a b c Working capital P37,700 – P51,600 P45,000 – P48,300 2004 P(13,900) P(3,300) Current ratio P37,700 P51,600 = P45,000 P48,300 = Credit card receivables as a percentage of credit card revenue 0.73 0.93 = P7,920 + P9,240 0.64 (P742,600) P8,580 = P475,264 = 0.02 d Credit card receivables turnover ratio based on credit card revenue = P475,264 P8,580 = 55.39 e Credit card receivables average collection period ratio based on credit card revenue = 365 days 55.39 = 6.59 Analysis and Interpretation of Financial Statements – Part II f Accounts receivable as a percentage of accounts receivable credit revenue = = 4-9 P5,280 + P6,160 0.14 (P742,600) P5,720 P103,964 = 0.06 g Accounts receivable turnover ratio based on accounts receivable credit revenue = P103,964 P5,720 = 18.18 h Accounts receivable average collection period based on accounts receivable credit revenue = 365 days 18.18 i Total assets to total liabilities j k l P355,100 P243,600 = P367,200 P229,200 = = 20.08 1.46 1.60 Total liabilities to total assets P243,600 P355,100 = P229,200 P367,200 = 0.69 0.62 Total liabilities to stockholders’ equity P243,600 P111,500 = P229,200 P138,000 = 2.18 1.66 Return on total assets = = m Number of times interest is earned = P59,500 P355,100 + P367,200 P59,500 P361,150 = P59,500 0.16 P19,400 = 3.07 4-10 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations n Net income total revenue ratio = o Return on stockholders’ equity = P27,500 P742,600 = 0.04 P27,500 P111,500 + P138,000 P27,500 = P124,750 = 0.22 p q Food inventory turnover ratio Property, plant and equipment turnover ratio = P301,900 P14,600 + P13,900 = P301,900 P14,250 = 21.19 = P742,600 P317,400 + P322,200 P742,600 = P319,800 = 2.32 PROBLEM 13 a Yes This is reflected in the increasing current ratios from year 2002 to year 2004 b No Credit card turnover ratio is decreasing and this means collection period is increasing (Note: divide 365 days by Turnover) c Yes Accounts receivable turnover is increasing and therefore average collection period is decreasing d More money tied up in inventory The food inventory turnover ratio is decreasing and that means increase in average food inventory e Not improving The return on stockholders’ equity has been decreasing over the 3-year period f Yes Total liabilities to total equity or assets ratio has been declining g No The decline in liabilities accompanied by the decrease in the return on stockholders’ equity means that the company has not been using leverage to the advantage of the stockholders  ... P2,406,800 = 0.059 4-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations PROBLEM 2003 a b c Working capital P35,900 – P32,800 P47,200 – P37,200 2 004 P3,100 P10,000 Current... 3.07 4-10 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations n Net income total revenue ratio = o Return on stockholders’ equity = P27,500 P742,600 = 0 .04 P27,500... investment opportunities as time deposit rate, bond earnings rate, etc 4-6 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations PROBLEM 10 Let x = Cost of food used 24 = x