Accounting for Hospitality Managers with Answer Sheet (AHLEI), 5E Raymond Cote Solution Manual by Ace Test Banks

Accounting for Hospitality Managers Fifth Edition Instructor’s Guide Raymond Cote

Final Exam Review Instructor’s Notes

Session Outline NOTE: This final exam review session is designed for instructors who are teaching this book as part of a credited course from the Educational Institute. If your students are not enrolled in this course with the Institute, much of what follows will not apply to your situation. However, you may still find sections I. C, D, and E useful. I.

Review for the Final Exam Inform the class that this review session will attempt to anticipate Final Exam questions. A. Sources for exam questions The exam questions will be taken only from the textbook. The exam will not include: 1.

Any separate but related information you may have introduced

Any separate but related discussions

Additional material introduced by guest speakers, videotapes, field trips, etc.

B. Exam format and policies The Final Exam will contain multiple-choice questions. Each question is worth one point. There is only one correct answer for each question. The correct answer is the single best answer. Generally, if students have studied their assignments carefully, they need not worry about successfully completing this exam. A score of 90 or higher will entitle the student to receive on his or her certificate the designation “With Honors.” To achieve a score of 90 or higher, the student must possess more than casual knowledge of the material. If a student fails this exam, he or she will be allowed to sit for a “retake” exam at no extra charge. (A third exam is possible, though at additional expense to the student.) The retake is similar in format to the original exam, though the questions are substantially different. C. Tips on course review Inform the students that it is not a good idea for them to go back and reread the whole book, since this will result in just as much time being spent on familiar material as on unfamiliar material. The students should be encouraged to spend more time on those topics that present some difficulty and to minimize their study of topics that they already understand. D. Useful information for exam review By now, you probably know many of the areas in which discussion and review are important. Again, do not attempt to cover everything in this course. To make it easier for students to ask questions, this session need not be conducted as formally as the previous sessions. You may wish to review any topics that were troublesome when initially presented. E. Anticipating Final Exam questions 1.

Divide the class into four groups as follows: Group one: Group two:

Text chapters 1–5 Text chapters 6–10

Review Session

Session Outline Group three: Text chapters 11–15 Group four: Text chapters 16–20 2.

Have each student create 10 questions that cover the chapters assigned to the group. All 10 questions should be multiple-choice. They should also be based on the competencies found at the beginning of each chapter. They should write an answer key on a separate sheet of paper.

Once the students have created their questions, take two students out of each group to form new groups. All four of the original groups should be represented in each new group. For example, take two students from each of the old groups and put them in a new group. Continue forming new groups in this way until all students are in new groups. Each new group will have no more than eight students.

Have the students exchange questions and take one another’s tests.

Have the students score their tests and discuss the answers.

II. Close the session Announce the place and time of the Final Exam.

Instructor’s Notes

Final Exam Activities Final Exam Outline NOTE: This final exam session is designed for instructors who are teaching this book as part of a credited course from the Educational Institute. If your students are not enrolled in this course with the Institute, much of what follows will not apply to your situation. I.

Administer the Final Exam and conclude the course A. Reminder If you collected the Final Exam answer sheets at the beginning of the course, you should distribute them to the students at the time of the exam. B. Encourage students to take other courses Remind students that by getting more training and developing their abilities and attitudes, they will be contributing to their own success and to the future of the hospitality industry. If available, give students a copy of the most current Educational Institute course listings and recommend that they take more courses through: 1.

Correspondence with the Educational Institute as a Distance Learning student

Local Educational Institute chapters

A local college that offers courses in the hospitality field

Remind students about the criteria for obtaining Professional Certification through the Educational Institute of AH&LA: •

Certified Hotel Administrator (CHA)

•

Certified Lodging Manager (CLM)

•

Certified Hospitality Supervisor (CHS)

•

Certified Food and Beverage Executive (CFBE)

•

Certified Rooms Division Executive (CRDE)

•

Certified Hospitality Housekeeping Executive (CHHE)

•

Certified Hospitality Sales Professional (CHSP)

•

Certified Engineering Operations Executive (CEOE)

•

Certified Human Resources Executive (CHRE)

•

Certified Lodging Security Director (CLSD)

•

Certified Lodging Security Supervisor (CLSS)

•

Certified Hospitality Trainer (CHT)

•

Certified Hospitality Department Trainer (CHDT)

•

Certified Gaming Supervisor (CGS)

•

Master Hotel Supplier (MHS)

C. Explain exam policies and procedures Students must use a NUMBER TWO (soft lead) pencil. Tests are electronically scored, and unless answer sheets are marked correctly, students will not get credit for their answers.

Instructor’s Notes

Final Exam Outline Ask students to properly fill in the blanks on the answer sheet. THEY SHOULD PRINT ALL INFORMATION REQUIRED BY THE FORM. Read aloud the exam instructions printed on the answer sheet. Answer any questions students may have concerning the exam instructions. The Final Exam is a proctored test and must be administered in a supervised setting. Do not allow students to refer to texts, other course materials, notes, or each other for answers. D. Administer the Final Exam Remain in the classroom to supervise the session. E. Collect completed answer sheets and exam materials. Record absentees and include their names in your report to the Institute. F.

Exam security When the Final Exam is completed, collect and secure or destroy copies of the exam in order to protect the integrity of the test.

G. Final remarks Tell students when and where they can obtain their certificates and how they can find out their Final Exam scores. H. Mail all exams, your completed class roster, and your completed “Instructor’s Questionnaire” (which follows this session outline) to the Educational Institute. The address of the Educational Institute is as follows: American Hotel & Lodging Educational Institute 2113 N. High St. Lansing, MI 48906 The Educational Institute will grade the exams and issue a certificate to each student who passes the course. The exam results and certificates will be mailed directly to you.

Instructor’s Notes

**Instructors** Help us make this guide more flexible and effective! Let us know what works for you! Send us your ideas for additional classroom activities (case studies, role plays, etc.) and other instructional techniques. We hope to send you annual updates for your Instructor’s Guide, which will include as many as possible of the usable contributions we receive, in addition to any new information related to the subject area. If your ideas are used, you and your school or property will be listed as contributors. We rely heavily on your feedback and appreciate your help. Please send ideas to George Glazer, Senior Vice President, Research and Development, The Educational Institute, 2113 North High Street, Lansing, MI 48906.

Suggested Course Schedule, Quarter System The length of a course at a school using the quarter system is typically 10 weeks, plus a one-week final exam period. For instructors operating under the quarter system, we suggest the following schedule: Week 1 Chapter 1 Chapter 2

Course Introduction Hotel Revenue Accounting Hotel Expense Accounting

Week 2

Chapter 3 Chapter 4

Property and Equipment Accounting Other Noncurrent Assets Accounting

Week 3

Chapter 5 Chapter 6

Hospitality Payroll Accounting Hotel Departmental Statements

Week 4

Chapter 7 Chapter 8

Hotel Income Statements Ratio Analysis: Income Statement

Week 5

Chapter 9 Chapter 10

Hotel Balance Sheets Ratio Analysis of the Balance Sheet

Week 6

Chapter 11 Chapter 12

Statement of Cash Flows Interim and Annual Reports

Week 7

Chapter 13 Chapter 14

Budgeting Expenses Forecasting Sales

Week 8

Chapter 15 Chapter 16

Budgetary Reporting and Analysis Financial Decision-Making

Week 9

Chapter 17 Chapter 18

Cash Management and Planning Casino Accounting

Week 10

Chapter 19 Chapter 20

Inventory Accounting Assorted Topics FINAL EXAM

Suggested Course Schedule, Semester System The length of a course at a school using the semester system is typically 15 weeks. For instructors operating under the semester system, we suggest the following schedule: Week 1 Chapter 1

Course Introduction Hotel Revenue Accounting

Week 2

Chapter 2

Hotel Expense Accounting

Week 3

Chapter 3 Chapter 4

Property and Equipment Accounting Other Noncurrent Assets Accounting

Week 4

Chapter 5

Hospitality Payroll Accounting

Week 5

Chapter 6 Chapter 7

Hotel Departmental Statements Hotel Income Statements

Week 6

Chapter 8

Ratio Analysis: Income Statement

Week 7

Chapter 9 Chapter 10

Hotel Balance Sheets Ratio Analysis of the Balance Sheet

Week 8

Chapter 11

Statement of Cash Flows

Week 9

Chapter 12

Interim and Annual Reports

Week 10

Chapter 13

Budgeting Expenses

Week 11

Chapter 14 Chapter 15

Forecasting Sales Budgetary Reporting and Analysis

Week 12

Chapter 16

Financial Decision-Making

Week 13

Chapter 17

Cash Management and Planning

Week 14

Chapter 18 Chapter 19

Casino Accounting Inventory Accounting

Week 15

Chapter 20

Assorted Topics FINAL EXAM

vii

Instructional Aids Information Instructors can develop greater variety in their presentation by employing either an appropriate audiovisual aid or a different teaching-learning method. Brief information about some of the available audiovisual aids and various teaching-learning methods that can be used advantageously is presented here. It is suggested that instructors who are interested in using a particular device or method obtain further information at local libraries or from the manufacturers of particular equipment. Chalkboard: Chalkboards are useful for developing lists based on the current group discussion or lecture and for presenting data for problems, diagrams, etc. Flip Chart: Where no chalkboard is available, a blank flip chart of newsprint or other paper can serve the same purpose. Colored crayon or laundry marker-type pens can be used for writing. When preprinted, these charts can serve to focus group attention on a subject or question for discussion. Topical content can be developed for accompanying a lecture. Care should be taken to make lettering large enough to be seen easily and to avoid putting too much writing on any one page. The flip chart also provides for a ready review, since the recording is more or less permanent. Film, Filmstrip, and Slides (with or without sound accompaniment): Various factors should be considered when selecting a film, a filmstrip, or a series of slides. These include appropriateness of the subject matter, age, running time, size (in millimeters), whether color or black-and-white, and sound accompaniment. Appropriate projection equipment should be tested for operation and focus prior to the session. Be sure to have spare lamps, exciter bulbs, and an extension cord on hand. The room should be equipped with adequate electrical outlets and allow for maximum convenience in dimming the lights and projection. Overhead Projectors (opaque or transparency): Transparency projection does not require dimming of the room; opaque projection usually does. Special transparent slides must be secured or made in advance for transparency projectors. Methods for making low-cost transparencies from preprinted material or drawings are available. Opaque projections can be used to show large images from existing materials. Blank cellophane or clear plastic can be used with a transparency projector to project images of material being written by the instructor as a substitute for a chalkboard or flip chart. It should be convenient to dim room lights, electrical outlets should be available, and an extension cord and spare lamps should be on hand. If you have access to an LCD projector, you may wish to visit EI’s Internet site at http://www.ei-ahla.org to view additional resources. Videotape/DVD: Video can be a highly effective medium because it allows for the complete visual representation of activities that may be difficult to describe clearly in print alone or even with the aid of still photographs. Playback units should be tested prior to the session. Displays: Displays are effective when dynamic, well-lighted, and colorful. Lectures must be carefully prepared to support displays. Displays require much preparation and are costly. Panel Presentations: Groups of experts can present information or answer questions. These presentations are useful for supplementing the instructor’s knowledge. Additional: Student reports, projects, reading assignments, and handout materials can be used to reinforce printed material or to prepare for succeeding sessions.

viii

Instructional Kit for Accounting for Hospitality Managers These Educational Institute materials are included in the Instructor’s Kit for this course: 1.

Text: Accounting for Hospitality Managers, Fifth Edition, by Raymond Cote.

Instructor’s Guide: This guide includes 20 chapter sessions.

Optional test questions on hard copy and disk.

Build Your Reputation for Classroom Excellence! The award-winning Certified Hospitality Educator (CHE) program—the only professionaldevelopment opportunity designed specifically for hospitality educators—enables you to: •

Discover the newest, most effective instructional techniques

•

Receive recognition for your teaching abilities from students, colleagues, and the hospitality industry

•

Network with peers from around the world

•

Strengthen your students’ critical thinking skills

When you become certified, you are entitled to use the CHE designation after your name to signify your status. You also receive an internationally recognized lapel pin and plaque— tangible proof of your commitment to excellence in hospitality education. The CHE program is recommended by the Council on Hotel, Restaurant and Institutional Education (CHRIE), the Club Managers Association of America (CMAA), and the American Culinary Federation’s Educational Institute. To learn more about the four-day, hands-on workshop that leads to certification—and how CHE certification can benefit your career as well as your students’ futures—contact EI’s Professional Certification Department at 1-888-575-8726.

Course Introduction Introduction Outline NOTE: This introductory session is designed for instructors who are teaching this book as part of a credited course from the Educational Institute. If your students are not enrolled in this course with the Institute, much of what follows will not apply to your situation. However, you may still find some sections useful, especially section IV. I.

Registration A. Collect applications and check pre-registration against the students present. Go through each application to make sure it has been completely filled out. B. To avoid confusion later, take time now to mark tuition received with each application. If tuition is paid in cash, have clips and envelopes on hand to keep applications and money together. C. Pass out index cards and have each student list the following information: 1.

Name

Business affiliation and current position, if any

Hospitality industry background

These cards may be useful to you in grouping students throughout the course. II. Introduction A. Students Have the students introduce themselves and summarize their index card information. If possible, use table cards with names for the first few sessions. B. Instructor Introduce yourself and briefly go over your background in the hospitality industry. Focus on any managerial positions you may have held. III. Orientation A. Discuss pertinent administrative details 1.

The number and length of class meetings

The building and classroom number

Break times

Designated parking areas

Time of class meetings

Any other pertinent information

B. Distribute course materials Course materials should be given only to those students who have paid their enrollment fee in full. Allow the students to leaf through this material for a few moments. (Be sure to follow up on those students who have not paid.) C. Identify course materials Textbook: Accounting for Hospitality Managers, Fifth Edition, by Raymond Cote. Point out that the textbook will be the main source for reference and reading. Explain that the competencies at the beginning of each chapter describe what the students should know after studying the chapter.

Instructor’s Notes

Introduction

Introduction Outline D. Tests Announce any plans you have for administering tests, such as the Optional Tests included in this guide for each chapter session. E. Class preparation Stress the importance of preparatory reading and study for each session. Point out the need to do assignments faithfully, since subsequent assignments often build on material in prior lessons. F.

Class participation Encourage students to take an active role in most learning sessions. However, minimize discussion unrelated to the subject of the session. Cover all topics before allowing slight digressions. While it is not always easy to control the discussion, you must not neglect any major topics that may be included on the Final Exam.

G. Final Exam If you plan to use the Optional Tests, emphasize that students can begin to prepare for the Final Exam with their first test, since exam questions will be similar to Optional Test questions. Indicate that the Final Exam will cover material in the textbook and that not all of the questions on the Final Exam will necessarily be covered in class. Point out that any optional work you may assign will not necessarily be included on the Institute’s Final Exam. If you will be preparing your own exam, point out the areas it will cover. Tell students that AH&LA Certificates of Completion are awarded to students who successfully complete the Final Exam. Successful completion means scoring 70 percent or better. “With honors” is inscribed on the certificates of those students who score 90 percent or better. Explain that students who score less than 70 percent on the Final Exam have unsuccessfully completed the course. They may retake the exam once at no extra charge. Further retakes are available at an additional charge. Final exam results are sent to instructors on an academic grade report. Retake request forms are included if appropriate. The Final Exam is a proctored test and must be administered in a supervised setting. H. Final Exam answer sheet Explain that the Educational Institute courses are shrink-wrapped in plastic with an official certification application/exam answer sheet. Only those students who purchase new materials with the original Final Exam answer sheets will be eligible to receive certification. Answer sheets that are duplicated in any manner will not be graded or returned to the student. You should: 1.

Ask the students to print their names on the certification applications/exam answer sheets as they would like them to appear on their course certificates.

Collect the exam answer sheets and put them in a safe place until you are ready to administer the Final Exam.

Instructor’s Notes

Introduction

Introduction Outline I.

Your role as instructor Explain to the students what you perceive your role to be. Candidly inform the students that you may not know all the answers to their questions, but that you will attempt to obtain answers or at least provide the students with a reference. Problems and solutions vary from property to property, and therefore it is impossible to provide exact answers that would apply to all situations. Explain your role as instructor in terms of being a coordinator of information and a facilitator of class discussions.

IV. Course purpose Explain that this course is designed to provide students with a basic understanding of accounting concepts that managers within the hospitality industry need. A. Read the Table of Contents of the course textbook, Accounting for Hospitality Managers, Fifth Edition. Inform students that questions on the Final Exam will cover material within the chapters of the text. B. Inform students that at the completion of this course, they should be able to: • • • • • • • • • • • • • • • • • •

Explain how revenue and expenses are accounted for in hospitality operations. Describe the considerations involved in property, equipment, and other non-current asset accounting. Outline and apply the significant elements of payroll accounting. Recognize and use departmental statements or schedules. Read and analyze hotel income statements. Read and analyze hotel balance sheets. Read and analyze the statement of cash flows. Describe the types and purposes of interim and annual reports, including the role of an audit service. Outline the process of budgeting expenses and the elements that must be considered. Describe and use various models to forecast sales for hospitality operations. Distinguish between and use master, flexible, and capital budgets, and apply variance analysis techniques. Analyze several important types of managerial decisions in order to make the best choice. Describe the process of cash management and planning. Outline aspects of casino accounting that make it different from typical hospitality accounting. Understand and apply several methods of inventory accounting. Describe and use allocation methods. Explain the nature of fair value accounting and how it differs from historical cost accounting. Use present and future value tables appropriately.

V. Close the session Announce the time and place of the next session.

Instructor’s Notes

Accounting for Hospitality Managers Instructor’s Questionnaire Please use this form to indicate your comments and suggestions concerning the Educational Institute’s instructional format. 1. In general, the instructional format was: ____Excellent

____Good

____Average

____Poor

____Good

____Average

____Poor

____Good

____Average

____Poor

Comments: __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ 4. The most effective in-class activity was: __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ 5. The least effective in-class activity was: __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________

6. The most effective out-of-class activity was: __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ 7. The least effective out-of-class activity was: __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ 8. Do you feel this instructional format helps you teach effectively? __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ 9. Did you utilize any of the suggested guest speakers? __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ 10. Additional comments: __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________

Please mail to: American Hotel & Lodging Educational Institute Academic Publications Department 2113 N. High St. Lansing, MI 48906

Hotel Revenue Accounting Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Hotel Revenue Accounting Transparency Master 2: Hotel Income Competency 1:

Define revenue centers, identify examples of revenue centers in a hospitality business, and explain their roles in financial reporting. (pp. 4–6) Key Concepts: Revenue centers Major: Rooms, Food, Beverage Minor: telecommunications, garage, gift shop, newsstand, valet, laundry, barber/beauty shop, recreation, other operated departments Minor: may be leased to concessionaires Support centers Reporting areas; separate areas/reports/accounts Transparency Masters: Transparency Master 3: Categories of Revenue Centers Transparency Master 4: Food Sales Accounts Transparency Master 5: Beverage Sales Accounts

Competency 2:

Define revenue accounts, identify examples of revenue accounts for a hospitality business, and explain net revenue and gross profit. (pp. 6–9) Key Concepts: Revenue: results from sales of goods and services for cash or promise to pay Realization principle: sale recognized after services and products delivered and accepted Deposits are not sales Hotel revenue accounts: room, food, beverage, and telecommunications sales; and room, F&B, and telecommunications allowances contra revenue accounts; other accounts for income Net revenue: sales less allowances Gross profit: net revenue less cost of sales Transparency Masters: Transparency Master 6: Revenue Accounts

Competency 3:

Identify what is meant by trade discounts and cash discounts, and explain their relevance to a hospitality business. (pp. 9–12) Key Concepts: Trade discounts: price reductions Cash discounts depend on payment within a specified period, exclude freight charges ROG EOM Prox. Text Exhibits: Exhibit 1: Explanation of Discount Terms

Competency 4:

Describe two methods for recording invoices involving discounts and two procedures for recording cash discounts. (pp. 12–15) Key Concepts: Recording invoices with discounts Gross method Net method Recording cash discounts: Revenue procedure/nonrevenue procedure

Hotel Revenue Accounting

Competency 5:

Explain the common internal control forms and procedures involved in food and beverage sales. (pp. 15–21) Key Concepts: Guest checks: manual and automated Cash control in dining room and lounge Point-of-sale systems: order entry, billing, internal control Debit and credit cards Bankcards Nonbank credit cards Guest charges/tips Text Exhibits: Exhibit 2: Sample Allowance Voucher Exhibit 3: Sample Guest Check Exhibit 4: Sample Servers’ Signature Book Exhibit 5: Sample Guest Check—POS System Exhibit 6: Sample American Express Draft Transparency Masters: Transparency Master 7: Internal Control for Food and Beverage Sales

Competency 6:

Describe the difference between the guest ledger and the city ledger. (pp. 21–22) Key Concepts: Guest ledger (registered) Guest ledger accounting aka front office accounting Guest folios City ledger (nonregistered) Text Exhibits: Exhibit 7: Sample Guest Folio

Competency 7:

Identify three front office personnel who report to the accounting department, and describe the roles they play in providing hospitality accounting information. (pp. 22–26) Key Concepts: Accounts receivable clerk posts charges Charge vouchers Cashier receives payments Cash-in and cash-out transactions Night auditor enters, verifies charges: daily transcript report Reports: daily room, housekeeper’s, daily transcript Text Exhibits: Exhibit 8: Sample Charge Voucher Exhibit 9: Sample Automated Telephone Voucher Exhibit 10: Sample Daily Room Report Exhibit 11: Sample Housekeeper’s Report Exhibit 12: Sample Front Office Cash Receipts and Disbursement Journal Exhibit 13: Sample Daily Transcript Report

Competency 8:

Describe the system used for cash and data collection in a hospitality business. (pp. 26–32) Key Concepts: From each operated department: daily cashiers reports Cashiers forward receipts to general cashier General cashier prepares deposit summary, deposits funds, settles “due backs” Income auditor prepares daily report of revenue Departmental revenue report Summary sales and cash receipts journal

Hotel Revenue Accounting

Allowances journal Text Exhibits: Exhibit 14: Sample Cashier’s Deposit Slip Exhibit 15: Sample General Cashier’s Deposit Summary Exhibit 16: Sample Daily Report of Revenue Exhibit 17: Sample Departmental Revenue Report Exhibit 18: Sample Summary Sales and Cash Receipts Journal Exhibit 19: Sample Allowances Journal

Optional Class Activities Suggested Guest Speakers Have students visit a large hotel in your community and interview front desk personnel about their relationship to the accounting department. Or invite a hotel representative to visit your class and discuss this topic. Discussion questions could include: • • • •

What areas of responsibility do various front desk personnel have with regard to accounting procedures? What reports do they prepare on a daily basis? What sources of information do they use to prepare the reports? Who is responsible for preparing the various reports?

Individual/Group Activities Activity 1 Have each student complete Handout 1–1, “Exercises for Chapter 1.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 1—Answer Key Exercise 1 a.

Exercise 2 a.

Food Purchases Accounts Payable

900

Accounts Payable Cash

900

Accounts Payable Cash Food Purchases

900

Food Purchases Accounts Payable

882

Accounts Payable Discounts Lost Cash

882 18

Accounts Payable Cash

882

900

882 18

882

900

882

Hotel Revenue Accounting

Exercise 3 a. b. c. d. e. f.

1/25 (1/15 invoice date ) 10 days) 3/27 (3/17 invoice date ) 10 days) 4/18 (10 days from receipt of goods 4/8) 6/28 (10 days from receipt of goods 6/18) 9/10 (8/1 invoice, 2/10 EOM + 9/10) 9/10 (8/1 invoice, 2/10 Prox. + 9/10)

Hotel Revenue Accounting

HANDOUT 1-1: Exercises for Chapter 1 Exercise 1

An operation uses the periodic inventory accounting method. Discounts are to be recorded by the gross method (nonrevenue treatment). A $900 invoice for food provisions is received; credit terms are 2/10, n/30. a.

Record the receipt of the invoice. _______________________________ _______________________________

____________

Record the payment of the invoice if paid after the discount period. _______________________________ _______________________________

____________

____________ ____________

Record the payment of the invoice if paid within the discount period. _______________________________

____________

_______________________________

____________

_______________________________

____________

Exercise 2

An operation uses the periodic inventory accounting method. Discounts are to be recorded by the net method (nonrevenue treatment). A $900 invoice for food provisions is received; credit terms are 2/10, n/30. a.

Record the receipt of the invoice. _______________________________ _______________________________

____________ ____________

Record the payment of the invoice if paid within the discount period. _______________________________ ____________ _______________________________

____________

Hotel Revenue Accounting

Exercise 3

Give the latest date on which the discount is allowed. Invoice Date

Date Goods Received

Last Day for Credit Terms

a. 1/15 b. 3/17 c. 4/10 d. 6/15 e. 8/1 f. 8/1

1/16 3/15 4/8 6/18 8/2 8/2

2/10, n/30 2/10, n/30 2/10, n/30 ROG 2/10, n/30 ROG 2/10, n/30 EOM 2/10, n/30 Prox.

Discount

Hotel Revenue Accounting

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

4–6 6–9 9–12 12–15 15–21 21–22 22–26 26–32

Note that the answers to test questions may not appear verbatim on the referenced pages. Test questions may assess the examinees’ ability to apply a concept, not just their knowledge of the concept. These questions can also be found on the CD-ROM in Rich Text Format (.rtf) files that most word processing programs can open and read. You can use these questions as a starter to create your own tests.

Hotel Revenue Accounting

Hotel Revenue Accounting NAME _____________________________________________________ DATE _________________________________ 1.

The sale of food to guests in the lounge is recorded to: a. food sales. b. bar sales. c. concierge sales. d. other income.

Commissions from outside guest laundry services are shown on the: a. rooms department statement. b. other operating department statement. c. schedule of rentals and other income. d. marketing department statement.

If net sales are $1,000, food cost is $300, and labor cost is $200, gross profit: a. is $1,000. b. is $700. c. is $500. d. cannot be determined from the given information.

If an invoice is dated March 26 with terms of 6/15, n/30 EOM, the last day the discount can be taken is: a. April 15. b. May 15. c. June 15. d. June 30.

Using the gross method to record invoices, a May 29 invoice for supplies inventory of $500 with a 2% discount in 10 days is: a. recorded as accounts payable of $500. b. recorded as accounts payable of $490. c. not recorded until it is paid. d. recorded as cash discounts earned of $10.

Using the net method to record invoices, a May 29 invoice for supplies inventory of $500 with a 2% discount in 10 days is: a. b. c. d.

recorded as accounts payable of $500. recorded as accounts payable of $490. not recorded until it is paid. recorded as cash discounts earned of $10.

Under the revenue treatment of recording discounts, which procedure is used to record the discount on an invoice for food purchases of $300 with a 2% discount? a. b. c. d.

The discount is recorded to a Cash Discounts Earned account. The discount is recorded as a reduction of food cost. The discount is recorded as an increase to sales revenue. The discount is not recorded.

Hotel Revenue Accounting

A registered guest is charging a meal at the hotel’s restaurant. The meal charge will be posted in the: a. b. c. d.

general ledger. city ledger. guest ledger. daily rooms report.

An F&B customer who is not a registered guest is charging a meal at the hotel’s restaurant. The meal charge will be posted in the: a. b. c. d.

general ledger. city ledger. guest ledger. daily rooms report.

10. A registered guest is checking out and paying all charges with a personal check. The payment is recorded in the: a. b. c. d.

general ledger. city ledger. guest ledger. daily rooms report.

Hotel Revenue Accounting

Competencies for Hotel Revenue Accounting 1.

Define revenue centers, identify examples of revenue centers in a hospitality business, and explain their roles in financial reporting.

Define revenue accounts, identify examples of revenue accounts for a hospitality business, and explain net revenue and gross profit.

Identify what is meant by trade discounts and cash discounts, and explain their relevance to a hospitality business.

Describe two methods for recording invoices involving discounts and two procedures for recording cash discounts.

Explain the common internal control forms and procedures involved in food and beverage sales.

Describe the difference between the guest ledger and the city ledger.

Identify three front office personnel who report to the accounting department, and describe the roles they play in providing hospitality accounting information.

Describe the system used for cash and data collection in a hospitality business.

Transparency Master 1

Hotel Revenue Accounting

Hotel Income Revenue (Sales) – All expenses = Income

Transparency Master 2

Hotel Revenue Accounting

Categories of Revenue Centers Three Major Revenue Centers • Rooms • Food • Beverage Ancillary Revenue Centers •

Telecommunications

•

Garage and parking

•

Golf course

•

Golf pro shop

•

Guest laundry

•

Health center

•

Swimming pool

•

Tennis

•

Tennis pro shop

•

Other operated departments

Transparency Master 3

Hotel Revenue Accounting

Food Sales Accounts • Dining room • Coffee shop • Banquets • Room service (food sales) • Lounge (food sales)

Transparency Master 4

Hotel Revenue Accounting

Beverage Sales Accounts • Bar • Dining room • Banquets • Room service (beverage sales)

Transparency Master 5

Hotel Revenue Accounting

Revenue Accounts • Room Sales • Room Allowances • Food Sales • Food Allowances • Beverage Sales • Beverage Allowances • Other Income—F&B • Telecommunications Sales • Telecommunications Allowances • Other accounts for income (interest, dividend, rental, etc.)

Transparency Master 6

Hotel Revenue Accounting

Internal Control for Food and Beverage Sales • Guest checks—manual • Guest checks—POS systems • Debit and credit cards • Guest charges • Charged tips

Transparency Master 7

Hotel Expense Accounting Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Hotel Expense Accounting Competency 1:

Define business segmentation, and describe its relevance to a hospitality corporation comprising multiple hotels. (pp. 39–46) Key Concepts: Business segmentation: Division of work into specialized responsibility areas: st 1 level of accounting: top echelons of corporation nd 2 level: reports by individual hotels rd 3 level: departments or other financial reporting centers Corporate vs. individual reports: Rooms, F&B, Telecommunications, A&G, Marketing, POM, Information Systems, Human Resources, Transportation Text Exhibits: Exhibit 1: Segmentation of the Somnus Corporation

Competency 2:

Define the term “financial reporting center,” and give examples of the major classifications of financial reporting centers. (pp. 46–48) Key Concepts: Financial reporting centers: Area of responsibility/separate cost information Reporting centers in hotels: Revenue: Rooms, F&B, Telecommunications, Gift Shop, Garage and parking, Other operated departments, Rentals and other income Support: A&G, Marketing, POM, Information systems, Human Resources Other: Utility Costs, Fixed Charges Identification numbers Text Exhibits: Exhibit 2: Sample Rooms Department Organization Chart for a Large Hotel Exhibit 3: Sample Organization Chart for the Food and Beverage Department of a Medium-Sized Hotel Exhibit 4: Sample Marketing Department Organization Chart for a Large Hotel Transparency Masters: Transparency Master 2: Financial Reporting Centers Transparency Master 3: Revenue Centers Transparency Master 4: Support Centers

Competency 3:

Explain responsibility accounting, identify four broad categories of expenses, and describe the difference between direct and indirect expenses. (pp. 48–49) Key Concepts: Evaluate managers’ effectiveness Expenses Direct: charged to particular department Indirect: benefit entire hotel; some are fixed charges Income taxes Text Exhibits: Exhibit 5: Typical Expenses Classified by Responsibility Area Transparency Masters: Transparency Master 5: Direct Expenses Transparency Master 6: Indirect Expenses

Hotel Expense Accounting

Competency 4:

Describe the cost of sales category of expense accounts, and identify the kind of departments to which this category applies. (pp. 49–52) Key Concepts: Cost of sales accounts Food Beverage Phone calls Perpetual inventory accounting system Periodic inventory accounting system

Competency 5:

Describe the payroll and related expenses category of expense accounts, and identify the departments to which this category applies. (p. 52) Key Concepts: Payroll and related expenses Salaries/wages Payroll taxes Employee meals Workers’ compensation Employee group benefits Hotel-operated departments: Rooms, F&B, A&G, Marketing, POM Transparency Masters: Transparency Master 7: Payroll and Related Expenses

Competency 6:

Identify the typical bookkeeping accounts used to record expenses for the various departments in a hotel property. (pp. 52–61) Key Concepts: Rooms expenses Commissions Reservation expense Contract cleaning Laundry and dry cleaning Guest transportation Linen Guest supplies Cleaning supplies Printing and stationery Uniforms F&B expenses China, glass, silver, linen Contract cleaning Kitchen fuel Laundry/dry cleaning Licenses Music/entertainment Guest supplies Cleaning supplies Paper/bar supplies Menus Utensils Printing/stationery Uniforms A&G expenses Credit card commissions Cash shortages/overages Dues/subscriptions Donations Human resources

Hotel Expense Accounting

Postage Professional fees Provision for doubtful accounts Travel Printing/stationery Marketing expenses Direct mail advertising Outdoor/Print/Radio and Television advertising In-house graphics Point-of-sale material Selling aids Advertising agency fees Other fees and commissions Printing/stationery Dues/subscriptions Postage Travel POM expenses Repairs and maintenance Removal of waste matter Uniforms Utility costs Electricity Fuel Steam Water Fixed charges Rent—Land and buildings Rent—Information systems equipment Rent—Telecommunications equipment Rent—Other property and equipment Property taxes Property insurance General insurance Interest expense Depreciation expense Amortization expense Income taxes Employee meals are excluded from net cost of food used. Transparency Masters: Transparency Master 8: Rooms Department Expenses Transparency Master 9: F&B Department Expenses Transparency Master 10: A&G Department Expenses Transparency Master 11: Marketing Department Expenses Transparency Master 12: POM Department Expenses Transparency Master 13: Utility Costs Transparency Master 14: Fixed Charges Competency 7:

Describe the special considerations involved in accounting for credit card fees, and differentiate between recording fees for bankcards and nonbank credit cards. (pp. 61–62) Key Concepts: Credit card fees A&G: expense account called Credit Card Commissions Matching principle; materiality principle Bankcards and fees Nonbank cards and fees

Hotel Expense Accounting

Competency 8:

Describe two major methods of accounting for bad debts. (pp. 62–67) Key Concepts: Direct write-off method: for companies with small amounts of accounts receivable Allowance method Recording estimated bad debts Percentage of sales procedure Percentage of receivables procedure Recovery of bad debts Text Exhibits: Exhibit 6: Estimating Bad Debts by an Aging of Accounts Receivable

Optional Class Activities Suggested Guest Speakers Have students visit a large hotel in your community and interview the general manager about the property’s various financial reporting centers. Or invite the general manager to visit your class and discuss this topic. Have the students draw an organization chart depicting the classification of financial reporting centers and the flow of responsibility for management of revenue and expenses. Or have students visit a local hotel and interview the manager about uncollectible accounts. Interview questions could include: •

Does the business use an allowance method to estimate uncollectible accounts? Why or why not?

Individual/Group Activities Activity 1 Have each student complete Handout 2–1, “Exercises for Chapter 2.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 1—Answer Key Exercise 1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Utensils—F&B Real Estate Taxes—FC Cash Short or Over—A&G Water—Utility Costs Water—Utility Costs Depreciation: Furnishings and Equipment—FC Bad Debts Expense—A&G Uniforms—Rooms Radio and Television Advertising—Marketing Electrical and Mechanical Equipment—POM Fuel—Utility Costs Credit Card Commissions—A&G Insurance: General—A&G Franchise Fees—Marketing Contract Cleaning—F&B Licenses and Permits—F&B Furniture, Fixtures, Equipment, and Decor—POM Insurance: General—A&G Insurance—FC Guest Supplies—F&B

Hotel Expense Accounting

Exercise 2 1. 2. 3. 4. 5. 6. 7. 8.

Direct Direct Indirect Direct Indirect Direct Direct Indirect

Exercise 3 Bad Debts Expense Allowance for Doubtful Accounts Sales Allowances Net Sales

3,240 3,240

$250,000 800 $249,200

1.3%  $249,200 = $3,239.60 = $3,240 rounded. Under the percentage of sales procedure (sales used as basis), the computed amount increases the Allowance account. Exercise 4 Bad Debts Expense Allowance for Doubtful Accounts

20 20 Percentage Accounts Receivable

Not yet due 1 to 30 days past due 31 to 60 days past due Over 60 days past due Total

$ 42,000 10,000 6,000 4,000 $ 62,000

Considered Uncollectible 1% 3% 5% 25%

Potential Bad Debts $

420 300 300 1,000 $ 2,020

Under the percentage of receivables procedure, the computed amount represents the total estimated potential bad debts that should be represented in the Allowance account.

Hotel Expense Accounting

HANDOUT 2-1: Exercises for Chapter 2 Exercise 1

A hotel has the following financial reporting centers: Revenue Centers Rooms F&B Telecommunications (Tel) Rentals & Other Income (R&OI)

Nonrevenue Centers A&G Marketing POM Utility Fixed Charges (FC)

Identify the accounts and centers associated with the following expenses: Account 1.

Replacement pots for the kitchen

Property taxes expense

Cashier’s shortage

Water used by room guests

Water used by the kitchen

Depreciation on room furniture

Write–off of bad debts

Uniforms for the rooms department

Television advertising

10.

Repairs to kitchen equipment

11.

Heating oil for guestrooms

12.

Credit card fees

13.

Liability insurance—food products

14.

Royalty fee

15.

Cleaning of lounge by outside firm

16.

Food license

17.

Repair of room furniture

18.

Public liability insurance

19.

Fire and casualty insurance on building

20.

Free matches to restaurant guests

Center

Hotel Expense Accounting

Exercise 2

Identify the following as direct or indirect expenses: 1.

Cost of Food Sales

Salaries and Wages—F&B

Depreciation on Hotel Building

Guest Supplies—Rooms Department

Interest on Mortgage

Kitchen Fuel

Uniforms Expense—F&B

Property Taxes

Exercise 3

In this example, a hotel uses the percentage of sales procedure in accounting for uncollectible accounts. Its sales for the period were $250,000 and allowances were $800. Based on past history, it is estimated that 1.3% of net sales will become uncollectible. The Allowance account before adjustment is as follows: $2,000 Journalize the entry to record the adjustment. (Note: Round the amount to the nearest dollar. In accounting, estimates are generally not recorded with pennies in the amount.) _______________________________

____________

_______________________________

____________

Exercise 4

In this example, a hotel uses the percentage of receivables procedure in accounting for uncollectible accounts. Its sales for the period were $250,000, allowances were $800, and the Accounts Receivable balance at the end of the period is $62,000. Based on an aging of accounts receivable and historical percentages, the following information is available:

Not yet due 1 to 30 days past due 31 to 60 days past due Over 60 days past due Total

Accounts Receivable $ 42,000 10,000 6,000 4,000 $ 62,000

Considered Uncollectible 1% 3% 5% 25%

Hotel Expense Accounting

The Allowance account before adjustment is as follows: $2,000 Journalize the entry to record the adjustment. _______________________________ _______________________________

____________ ____________

Hotel Expense Accounting

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

39–46 46–48 48–49 49–52 52 52–61 61–62 62–67

Hotel Expense Accounting

Hotel Expense Accounting NAME: _____________________________________________________ DATE: _________________________________ 1.

Which of the following is not a financial reporting center in a hospitality business? a. Rooms department b. Food and beverage department c. Service bar d. Utility costs

Which of the following is not classified as a support center within a hospitality business? a. Administrative and general b. Telecommunications c. Human resources d. Information systems

Which of the following is not a direct expense properly allocated to a particular department within a hospitality business? a. Cost of sales b. Payroll c. Operating supplies d. Insurance

Which of the following is not an expense account associated with the food and beverage department? a. China, glassware, silver, and linen b. Kitchen fuel c. Credit card commissions d. Menus

The wages for the accounts receivable clerk in the front office are charged to the: a. rooms department. b. front office department. c. accounting department. d. marketing department.

If a hotel accepts MasterCard, Visa, and American Express cards and if a guest uses one of these cards to purchase food and beverages, the credit card fee will be charged to the: a. marketing department. b. F&B department. c. A&G department. d. schedule of rentals and other income.

Water used in the F&B department is charged to the: a. F&B department. b. schedule of utility costs. c. A&G department. d. property operation and maintenance department.

Hotel Expense Accounting

When received from guests, nonbank credit card drafts are: a. treated the same as cash. b. recorded as accounts receivable. c. accounted for using the allowance method. d. classified as uncollectable accounts.

Gas used to heat guestrooms is charged to the: a. rooms department. b. schedule of utility costs. c. A&G department. d. property operation and maintenance department.

10. The percentage of receivables (balance sheet) procedure is used to estimate bad debts. The current balance in the Allowance for Doubtful Accounts is $500 credit. An aging of the accounts receivable results in a forecast of $1,700 potential bad debts. The adjustment to the Allowance for Doubtful Accounts is: a. $1,200 credit. b. $1,200 debit. c. $1,700 credit. d. $1,700 debit.

Hotel Expense Accounting

Competencies for Hotel Expense Accounting 1.

Define business segmentation, and describe its relevance to a hospitality corporation comprising multiple hotels.

Define the term “financial reporting center,” and give examples of the major classifications of financial reporting centers.

Explain responsibility accounting, identify four broad categories of expenses, and describe the difference between direct and indirect expenses.

Describe the cost of sales category of expense accounts, and identify the kind of departments to which this category applies.

Describe the payroll and related expenses category of expense accounts, and identify the departments to which this category applies.

Identify the typical bookkeeping accounts used to record expenses for the various departments in a hotel property.

Describe the special considerations involved in accounting for credit card fees, and differentiate between recording fees for bankcards and nonbank credit cards.

Describe two major methods of accounting for bad debts. Transparency Master 1

Hotel Expense Accounting

Financial Reporting Centers • Rooms • F&B • Telecommunications • A&G • Marketing • POM • Information systems • HR • Transportation

Transparency Master 2

Hotel Expense Accounting

Revenue Centers • Rooms • F&B • Telecommunications • Gift shop • Garage and parking • Other operated departments • Rentals and other income

Transparency Master 3

Hotel Expense Accounting

Support Centers • A&G • Marketing • POM • Information systems • HR

Transparency Master 4

Hotel Expense Accounting

Direct Expenses • Cost of sales • Payroll & related costs • Operating supplies • China, glassware, silver, linen • Laundry and dry cleaning

Transparency Master 5

Hotel Expense Accounting

Indirect Expenses • Insurance • Interest • Property taxes • Rent • Depreciation and amortization

Transparency Master 6

Hotel Expense Accounting

Payroll and Related Expenses • Salaries and wages • Payroll taxes • Employee meals • Workers’ compensation insurance • Employee group plans

Transparency Master 7

Hotel Expense Accounting

Rooms Expenses • Commissions • Reservation expense • Contract cleaning • Laundry and dry cleaning • Guest transportation • Linen • Guest supplies • Cleaning supplies • Printing and stationery • Uniforms

Transparency Master 8

Hotel Expense Accounting

F&B Expenses • China, glassware, silver, and linen • Contract cleaning • Kitchen fuel • Laundry and dry cleaning • Licenses • Music and entertainment • Guest supplies • Cleaning supplies • Paper supplies • Bar supplies • Menus • Utensils • Printing and stationery • Uniforms

Transparency Master 9

Hotel Expense Accounting

A&G Expenses • Credit card commissions • Cash overages and shortages • Dues and subscriptions • Donations • Human resources • Postage • Professional fees • Provision for doubtful accounts • Travel • Printing and stationery

Transparency Master 10

Hotel Expense Accounting

Marketing Expenses • Direct mail advertising • Outdoor advertising • Print advertising • Radio and television advertising • In-house graphics • Point-of-sale material • Selling aids • Advertising agency fees • Other fees and commissions • Printing and stationery • Dues and subscriptions • Postage • Travel

Transparency Master 11

Hotel Expense Accounting

POM Expenses • Repairs and maintenance Building supplies Electrical and mechanical equipment Engineering supplies Furniture, fixtures, equipment, decor Grounds and landscaping Swimming pool • Removal of waste matter • Uniforms

Transparency Master 12

Hotel Expense Accounting

Utility Costs • Electricity • Fuel • Steam • Water

Transparency Master 13

Hotel Expense Accounting

Fixed Charges • Rent—land and buildings • Rent—information systems equipment • Rent—telecommunications equipment • Rent—other property and equipment • Property taxes • Property insurance • General insurance • Interest expense • Depreciation expense • Amortization expense

Transparency Master 14

Property and Equipment Accounting Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Property and Equipment Accounting Competency 1:

Explain the items typically classified as property and equipment. (p. 73) Key Concepts: Property and equipment: long-lived, tangible assets Acquired for use in business operation Not intended for resale to customers

Competency 2:

Describe the determination of acquisition costs recorded for various types of property and equipment. (pp. 74–77) Key Concepts: Recorded at acquisition costs Interest during construction (FASB Statement #34) Land purchased with building to be demolished Land and building purchased for a lump sum Equipment installation costs Land or leasehold improvements Building repairs and improvements China, glassware, and silver: Capitalize/depreciate/expense Capitalize/depreciate/expense/adjust Capitalize/depreciate/capitalize/adjust Uniforms and linen Text Exhibits: Exhibit 1: Computing the Cost of a Land Purchase

Competency 3:

Summarize the difference between accounting for building repairs and accounting for building improvements. (p. 76) Key Concepts: Building repairs and maintenance: expenditures for repairs are expensed Building improvements: expenditures are capitalized

Competency 4:

Describe the difference between operating leases and capital leases, and explain the four criteria for distinguishing capital leases from operating leases. (pp. 77–78) Key Concepts: Operating leases: rental arrangements, short-term use of equipment Capital leases: long-term financing arrangements that transfer ownership to lessee at end of lease term Four criteria for capital vs. operating lease: Ownership transfer to lessee at end Bargain purchase option Lease term is equal to 75% or more of property’s estimated economic life Payments at least 90% of fair market value of leased property

Competency 5:

Explain the purpose of depreciation, the affected accounts, the different types of values of assets, and how the preparation of tax returns affects depreciation. (pp. 78–80, 94–95) Key Concepts: Depreciation: spreads cost of asset over its estimated useful life Entries, except for china, glassware, silver, uniforms, linen:

Property and Equipment Accounting

Depreciation Expense Accumulated Depreciation: contra-asset account Net asset value (book value) = cost of asset – accumulated depreciation Salvage value (residual value) = estimated proceeds from asset disposal – all removal and selling costs at end of useful life When book value = salvage value, asset is fully depreciated One method of depreciation for financial statements, another for income tax: may result in different book value for asset For exchanges of like-kind assets, income tax rules do not allow recognition of gain or loss Tax accounting requires any loss on like-kind exchange be used to adjust cost basis of new asset For income tax purposes, loss not deductible; instead, used to increase asset’s cost basis Many companies will not make like-kind exchange that results in loss; instead, sell old asset first, then purchase new asset: thus, loss is tax-deductible If like-kind exchange involves gain, companies will trade so gain is neither recognized nor taxed Text Exhibits: Exhibit 7: Summary of Rules Relating to Like-Kind and Dissimilar Exchanges Competency 6:

Explain the difference between time-factor and use-factor methods of depreciation. (p. 80) Key Concepts: Time-factor methods: estimate useful life in terms of time Straight-line Declining balance Sum-of-the-years-digits Use-factor methods of depreciation: estimate useful life in terms of units of output Productive output

Competency 7:

Describe the straight-line, declining balance, and sum-of-the-years-digits methods of depreciation. (pp. 80–84) Key Concepts: Straight-line method Simplest, most popular Spreads depreciation expenses evenly throughout asset’s useful life Annual depreciation expense = (cost – salvage value) ÷ years of useful life Annual depreciation percentage = 100% ÷ years of useful life Annual depreciation percentage  asset’s cost = annual depreciation expense Declining balance method Based on a percentage rate Annual depreciation rate  cost of asset = depreciation expense for first year of asset’s estimated useful life Annual depreciation rate  beginning book value of asset = each successive year’s depreciation expense Double declining balance method Double declining rate = (100% ÷ years of useful life)  2 Sum-of-the-years-digits method Uses a fraction in computing depreciation expense Numerator is remaining years of asset’s useful life; denominator is sum of digits of asset’s estimated useful life Depreciation expense = (remaining years of useful life ÷ sum-of-the-years-digits)  (cost – salvage value) Text Exhibits: Exhibit 2: Depreciation Schedule: Straight-Line Method Exhibit 3: Depreciation Schedule: Double Declining Balance Method Exhibit 4: Depreciation Schedule: Sum-of-the-Years-Digits Method Exhibit 5: Sum-of-the-Years-Digits Depreciation Method—Additional Computations

Property and Equipment Accounting

Transparency Masters: Transparency Master 2: Depreciation of Property and Equipment Competency 8:

Identify accelerated depreciation methods. (pp. 84–85) Key Concepts: Accelerated depreciation methods result in highest depreciation charges in first year, lowering charges in successive years Declining balance method Sum-of-the-years-digits method Text Exhibits: Exhibit 6: Comparison of Depreciation Methods

Competency 9:

Explain the options for computing depreciation for partial time periods. (p. 86) Key Concepts: Options for depreciation for partial periods: Nearest whole month Nearest whole year One-half year’s depreciation on all assets acquired or sold during year No depreciation on any acquisitions during year; full year’s depreciation on any assets sold during year A full year’s depreciation on any acquisitions during year; no depreciation on any assets sold during year

Competency 10:

Describe the productive-output method of depreciation. (pp. 86–87) Key Concepts: Use-factor method Allocates depreciable cost of asset based on its estimated useful output Depreciation expense = unit depreciation factor  actual output of asset during depreciation period Unit depreciation factor = (cost of asset – salvage value) ÷ estimated useful output

Competency 11:

Explain what special considerations apply to the depreciation of china, glassware, and silver. (pp. 87–88) Key Concepts: No depreciation expense or accumulated depreciation accounts used to record allocated acquisition costs Asset account directly reduced by computed amount Expense account: depreciation charge

Competency 12:

Explain amortization and the amortization of leaseholds and leasehold improvements. (pp. 88–89) Key Concepts: Amortization: allocating costs of long-lived, intangible assets to periods that benefit from their use Does not require an accumulated account for expense Leaseholds: rights granted by a lease to the tenant or user Leasehold improvements: improvements made to leased property: revert to landlord upon lease termination

Competency 13:

Explain the accounting considerations involved in the sale, disposal, or tradein of property and equipment. (pp. 89–94) Key Concepts: Sale/disposal of property and equipment: gain or loss computed on book value Book value + asset’s cost – accumulated depreciation Sale at a price above book value Sale at a price below book value Sale at a price equal to book value

Property and Equipment Accounting

Trade-in of property and equipment: gain or loss based on the fair market value of newly acquired asset Exchange of like-kind assets Nonrecognition of book gain Recognition of book loss Exchange of dissimilar assets Tax accounting for exchange of assets Tax accounting vs. financial accounting

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a hospitality operation in your community and interview the accountant about how acquisition costs were determined for the company’s most recent purchase of a property or equipment item. Or invite the accountant to visit your class to discuss this topic. Discussion questions could include: • • •

Were there any expenses related to the acquisition of the asset that were not allocated to its acquisition cost? What method of depreciation was chosen for the newly acquired asset? Why? How will depreciation for the current period be calculated for the asset?

Alternatively, have students interview a hospitality business’s accountant about the recent sale or disposal of a property or equipment item. Discussion questions could include: • •

How did this transaction affect the accounting records? What entries were made to record the effects of this transaction?

Individual/Group Activities Activity 1 Have each student complete Handout 3–1, “Exercises for Chapter 3.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 1—Answer Key

Cost $5,200 – Salvage $800 = $1,100 annual depreciation. Useful Life 4 years Alternative computation of annual depreciation: 100% = 25% 4 years Year 1 2 3 4

25%  $4,400 = $1,100

Computation Upon Acquisition 25%  $4,400 25%  $4,400 25%  $4,400 25%  $4,400

Depreciation Expense

Accumulated Depreciation

Cost

Book Value

— $1,100 1,100 1,100 1,100 $4,400

— $1,100 2,200 3,300 4,400

$5,200 5,200 5,200 5,200 5,200

$5,200 4,100 3,000 1,900 800

Property and Equipment Accounting

Straight-Line Rate = 25%

Year 1 2 3 4 3.

Depreciation Expense

Accumulated Depreciation

Cost

Book Value

— $2,600 1,300 500 0 $4,400

— $2,600 3,900 4,400 4,400

$5,200 5,200 5,200 5,200 5,200

$5,200 2,600 1,300 800 800

Depreciation Expense

Accumulated Depreciation

Cost

Book Value

— 1,760 1,320 880 440 $4,400

— 1,760 3,080 3,960 4,400

$5,200 5,200 5,200 5,200 5,200

$5,200 3,440 2,120 1,240 800

Accumulated Depreciation

Cost

Book Value

— $1,320 3,080 3,960 4,400

$5,200 5,200 5,200 5,200 5,200

$5,200 3,880 2,120 1,240 800

Upon Acquisition 50%  $5,200 50%  $2,600 $1,300 – $800 (Book = Salvage)

Cost $5,200 – Salvage $800 = Depreciable Basis $4,400

Year 1 2 3 4 4.

Computation

Double Declining Rate = 50%

Years Reversed

Computation Upon Acquisition 4/10  $4,400 3/10  $4,400 2/10  $4,400 1/10  $4,400

4 3 2 1 10

Cost $5,200 – Salvage $800 = Depreciation of 22¢ (.22) per unit 20,000 Units Year 1 2 3 4

Depreciation Computation Upon Acquisition .22  6,000 .22  8,000 .22  4,000 .22  2,000

Expense — $1,320 1,760 880 440 $4,400

Activity 2 Have each student complete Handout 3–2, “Exercises for Chapter 3.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 2—Answer Key Exercise 1 1.

Cash Accumulated Depreciation—Transportation Equipment Loss on Disposal of Equipment Transportation Equipment Record outright sale of truck at a loss Selling Price Book Value ($15,000 – $7,000) Loss on Disposal

6,200 7,000 1,800 15,000 $ $

6,200 8,000 1,800

Property and Equipment Accounting

Cash Accumulated Depreciation—Transportation Equipment Transportation Equipment Gain on Disposal of Equipment Record outright sale of truck at a gain Selling Price Book Value ($15,000 – $12,000) Gain on Disposal

6,200 12,000 15,000 3,200 $ $

6,200 3,000 3,200

Exercise 2 1.

This is an exchange of like-kind assets with a gain. Computation of nonrecognized gain: Trade-in allowance on old equipment Book Value of old equipment ($25,000 – $19,000) Nonrecognized gain (Reduce cost basis of new equipment) Cost basis of new equipment: List price of new equipment Less nonrecognized gain on trade-in of old equipment Recorded cost basis of new equipment Journal entry: Computer Equipment (new) Accumulated Depreciation—Computer Equipment (old) Computer Equipment (old) Cash Note Payable

$ 10,000 6,000 $ 4,000 $ 40,000 4,000 $ 36,000 36,000 19,000 25,000 5,000 25,000

This is an exchange of like-kind assets with a material loss. Computation of recognized loss: Trade-in allowance on old equipment Book Value of old equipment ($25,000 – $12,000) Recognized loss Journal entry: Computer Equipment (new) Accumulated Depreciation—Computer Equipment (old) Loss on Disposal of Equipment Computer Equipment (old) Cash Note Payable

$ 10,000 13,000 $ 3,000 40,000 12,000 3,000 25,000 5,000 25,000

Exercise 3 1.

This is an exchange of dissimilar assets at a gain. Computation of recognized gain: Trade-in allowance on old equipment Book Value of old equipment ($25,000 – $19,000) Recognized gain

$ 10,000 6,000 $ 4,000

Property and Equipment Accounting

Journal entry: Transportation Equipment Accumulated Depreciation—Computer Equipment Computer Equipment Cash Note Payable Gain on Disposal of Equipment 2.

40,000 19,000 25,000 5,000 25,000 4,000

This is an exchange of dissimilar assets at a loss. Computation of recognized loss: Trade-in allowance on old equipment Book Value of old equipment ($25,000 – $12,000) Recognized loss Journal entry: Transportation Equipment Accumulated Depreciation—Computer Equipment Loss on Disposal of Equipment Computer Equipment Cash Note Payable

$ 10,000 13,000 $ 3,000 40,000 12,000 3,000 25,000 5,000 25,000

Property and Equipment Accounting

HANDOUT 3-1: Exercises for Chapter 3 For the following asset, complete each depreciation schedule provided: Acquisition cost Salvage value Useful life

$5,200 800 4 years

1. Straight-line method Depreciation Computation

Accumulated Expense

Depreciation

Cost

Book Value

Upon Acquisition

______

Year

2. Double declining method Depreciation Computation

Accumulated Expense

Depreciation

Cost

Book Value

Upon Acquisition

______

Depreciation Computation

Accumulated Expense

Depreciation

Cost

Book Value

Upon Acquisition

______

Year

3. Sum-of-the-years-digits method Year

Property and Equipment Accounting

4. Productive-output method Assume the life of the asset is based on 20,000 units. The units usage is year 1: 6,000 units; year 2: 8,000; year 3: 4,000; and year 4: 2,000. Year 1 2 3 4

Depreciation Computation

Accumulated Expense

Depreciation

Cost

Book Value

Upon Acquisition

______

______ ______ ______ ______

Property and Equipment Accounting

HANDOUT 3-2: Exercises for Chapter 3 Exercise 1 Outright Sale of Assets 1. A truck is sold outright for $6,200. The financial records show that its cost was $15,000 and accumulated depreciation to the date of sale is $7,000. Journalize the entry to record the disposal of this asset. Trucks are recorded to Transportation Equipment. Computations area: Journal Entry

debit

credit

______

2. A truck is sold outright for $6,200. The financial records show that its cost was $15,000 and accumulated depreciation to the date of sale is $12,000. Journalize the entry to record the disposal of this asset. Trucks are recorded to Transportation Equipment. Computations area: Journal Entry

debit

credit

______

Property and Equipment Accounting

Exercise 2 Exchange of Like-Kind Assets 1. A computer with an original cost of $25,000 and accumulated depreciation of $19,000 is traded in for a new computer with a list price of $40,000. The dealer grants a trade-in allowance of $10,000 on the old computer. The balance of $30,000 is paid with $5,000 cash and a note for the balance. Journalize this transaction in accordance with generally accepted accounting principles. Computers are recorded to a Computer Equipment account. Computations area: Journal Entry

debit

credit

______

2. A computer with an original cost of $25,000 and accumulated depreciation of $12,000 is traded in for a new computer with a list price of $40,000. The dealer grants a trade-in allowance of $10,000 on the old computer. The balance of $30,000 is paid with $5,000 cash and a note for the balance. Journalize this transaction in accordance with generally accepted accounting principles. Computers are recorded to a Computer Equipment account. Computations area: Journal Entry

debit

credit

______

Property and Equipment Accounting

Exercise 3 Exchange of Dissimilar Assets 1. A computer with an original cost of $25,000 and accumulated depreciation of $19,000 is traded in for a new van with a list price of $40,000. The dealer grants a trade-in allowance of $10,000 on the old computer. The balance of $30,000 is paid with $5,000 cash and a note for the balance. Journalize this transaction in accordance with generally accepted accounting principles. Computers are recorded to a Computer Equipment account, and vans are recorded to a Transportation Equipment account. Computations area: Journal Entry

debit

credit

______

2. A computer with an original cost of $25,000 and accumulated depreciation of $12,000 is traded in for a new van with a list price of $40,000. The dealer grants a trade-in allowance of $10,000 on the old computer. The balance of $30,000 is paid with $5,000 cash and a note for the balance. Journalize this transaction in accordance with generally accepted accounting principles. Computers are recorded to a Computer Equipment account, and vans are recorded to a Transportation Equipment account. Computations area: Journal Entry

debit

credit

______

Property and Equipment Accounting

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide. Optional Test A ready-to-use test containing questions related to the competencies covered by this chapter is included in this session. These questions are similar in format and content to the questions on the Final Exam that the Educational Institute provides and grades for students who are enrolled in this course with the Institute. (If your students are not enrolled in Institute’s course, they will not receive this Final Exam.) The answers to this session’s optional test are: 1-b-C2, 2-c-C4, 3-b-C5, 4-d-C7, 5-a-C12, 6-b-C13, 7-d-C7, 8-c-C10, 9-c-C4, 10-a-C13 Each question is linked to a competency. Competencies are listed on the first page of the chapter and in the Sample Lesson Plan. An answer reading 3-b-C4 translates to: 3: the question number b: the correct answer C4: the competency number The pages in the text that are associated with this chapter’s competencies are as follows: C1: C2: C3: C4: C5: C6: C7: C8: C9: C10: C11: C12: C13:

73 74–77 76 77–78 78–80, 94–95 80 80–84 84–85 86 86–87 87–88 88–89 89–94

Property and Equipment Accounting

Property and Equipment Accounting NAME: _____________________________________________________ DATE: _________________________________ 1.

Which of the following assets is non-depreciable? a. b. c. d.

Which of the following is not a criterion for identifying a lease arrangement as a capital lease? a. b. c. d.

They should be recorded by the tenant to a Leasehold Improvements account. They do not revert to the landlord upon termination of a lease. They include the installation of all temporary partitions. They should be amortized over their estimated useful life or the remaining term of the lease, whichever is longer.

When an asset is sold at a price above its book value: a. b. c. d.

is an accelerated depreciation method. is classified as a productive-output method of depreciation. results in the highest depreciation expense for the early years of an asset’s estimated useful life. results in equal depreciation charges each year of an asset’s estimated useful life.

Which of the following is true about improvements made to leased property? a. b. c. d.

market value. book value. salvage value. residual value.

The straight–line method of depreciation: a. b. c. d.

The lease transfers ownership of the property to the lessee by the end of the lease term. The lease contains a bargain purchase option. The lessee agrees to certain expenditures to improve the leased property or equipment The lease term is equal to 75% or more of the estimated economic life of the leased property.

The cost of an asset minus the amount of its accumulated depreciation is called: a. b. c. d.

buildings land land improvements on property owned by the company china, glassware, and silver

there is a loss on the disposal of the item. it is necessary to credit the revenue account Gain on Disposal of Equipment for the amount of the gain. the gain is not recognized through an entry involving a general ledger revenue account. the contra–asset account Accumulated Depreciation is unaffected.

Following is information about an asset: Cost Salvage Value Useful Life

$5,200 800 4 years

Using double declining depreciation, the depreciation expense in year 4 is: a. b. c. d.

$1,300. $800. $1,600. $0.

Property and Equipment Accounting

A truck with an estimated useful life of 100,000 miles is purchased for $30,000. In its first year, the truck travels 20,000 miles. Using the productive–output method, the depreciation in the first year is: a. b. c. d.

$30,000. $20,000. $6,000. $0.

The tenant or user under a rental arrangement is called a: a. b. c. d.

debtor. lessor. lessee. lease.

10. Which of the following is an accounting term for cash when used in an exchange of assets? a. b. c. d.

boot transfer exchange currency expenditure

Property and Equipment Accounting

Competencies for Property and Equipment Accounting 1.

Explain the items typically classified as property and equipment.

Describe the determination of acquisition costs recorded for various types of property and equipment.

Summarize the difference between accounting for building repairs and accounting for building improvements.

Describe the difference between operating leases and capital leases, and explain the four criteria for distinguishing capital leases from operating leases.

Explain the purpose of depreciation, the affected accounts, the different types of values of assets, and how the preparation of tax returns affects depreciation.

Explain the difference between time-factor and use-factor methods of depreciation.

Describe the straight-line, declining balance, and sum-of-the-yearsdigits methods of depreciation.

Identify accelerated depreciation methods.

Explain the options for computing depreciation for partial time periods.

10. Describe the productive-output method of depreciation. 11. Explain what special considerations apply to the depreciation of china, glassware, and silver. 12. Explain amortization and the amortization of leaseholds and leasehold improvements. 13. Explain the accounting considerations involved in the sale, disposal, or trade-in of property and equipment. Transparency Master 1

Property and Equipment Accounting

Depreciation of Property and Equipment • Straight-line method • Declining balance method • Double declining balance method • Sum-of-the-years-digits method

Transparency Master 2

Other Noncurrent Assets Accounting Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Other Noncurrent Assets Accounting Competency 1:

Define intangible assets, and list common intangible assets discussed in this chapter. (pp. 105–107) Key Concepts: Lack physical existence Are long-lived Organization costs, goodwill, franchises, trademarks and tradenames, patents, copyrights, preopening expenses, and liquor licenses Amortization Spreads cost over asset’s useful life Allocates cost to periods benefiting from asset’s use Ignores salvage value Generally not accumulated 40 years maximum Economic life vs. legal life Cost is basis for recording Transparency Masters: Transparency Master 2: Examples of Intangible Assets

Competency 2:

Define organization costs, and describe how they are amortized. (p. 107) Key Concepts: State incorporation fees, attorneys’ fees, costs of printing stock certificates, etc. Amortization: minimum 5 years, maximum 40 years Entries for purchase and amortization

Competency 3:

Explain the accounting term “goodwill,” and describe how goodwill is amortized. (pp. 107–108) Key Concepts: Goodwill Public view of it vs. accounting definition Factors resulting in goodwill: competitive advantages, excellent employee relations, others Recorded only if purchased Amortization: maximum 40 years Entries for purchase and amortization Covenant not to compete

Competency 4:

Explain franchise agreements, and describe how the costs of such agreements are amortized. (p. 108) Key Concepts: Franchise Right to sell services or products in specific area; specific time and conditions Ramada Inns, McDonald’s, Dunkin’ Donuts, Wendy’s, Pizza Hut, etc. Purchase may include substantial associated costs Amortization: maximum 40 years Entries for purchase, amortization, and periodic payments

Other Noncurrent Assets Accounting

Competency 5:

Define trademarks and tradenames, and describe how they are amortized. (p. 109) Key Concepts: Involve government registration (U.S. Patent Office) and legal protection Right retained as long as continuously used May be sold or have indefinite lives Cost includes development and fees for filing and registry Amortization: maximum 40 years Entries for purchase and amortization

Competency 6:

Compare patents and copyrights, and describe how they are amortized. (pp. 109–110) Key Concepts: Patent Government-granted right concerning products or designs 17-year legal right Amortization: shortest of legal, remaining legal, or useful lives Entries for purchase and amortization; cost of legal defense Copyright Government-granted right concerning musical, literary, and artistic material For author’s life plus 50 years May be sold Amortization: maximum 40 years Entries for purchase and amortization; cost of legal defense

Competency 7:

Define preopening expenses, and contrast them to organization costs. (pp. 110–111) Key Concepts: Preopening expenses Business start-up costs Differ from organization costs Market/feasibility studies, travel, consultants, training, salaries, services, grand opening ads, and labor Amortization: USALI recommends 1 year; but properties amortizing longer may continue Properties outside U.S. may amortize over years Entries for expenses and amortization Text Exhibits: Exhibit 1: Progression of Business Expenditures

Competency 8:

Describe the renewal and purchase of liquor licenses, and explain how their costs are amortized. (p. 111) Key Concepts: Fees for renewal generally recorded immediately to expense Purchase from current holder may be necessary If costs are material, recorded to noncurrent asset account Amortization: maximum 40 years Entries for purchase and amortization

Competency 9:

Define cash value intangible assets using security deposits as an example. (p. 112) Key Concepts: Cash value intangible assets: represent future sources of cash Security deposits, cash surrender value of life insurance

Other Noncurrent Assets Accounting

Security deposits Reimbursement for damages or compensation for services For occupancy, rented equipment, or utilities Are not advance payments Cannot be treated as accounts receivable Not amortized Transparency Masters: Transparency Master 3: Examples of Cash Value Intangible Assets Competency 10:

Describe the two basic kinds of life insurance, pointing out their similarities and differences. (pp. 112–113) Key Concepts: Term life insurance Does not build up cash value Worthless if canceled or expires Whole life insurance Combines death benefits with cash value Significantly higher premiums Can borrow against Entries for company-owned Business vs. employee Policy ownership Beneficiary Taxability/tax reporting Financial reporting

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a hospitality operation in your community and interview the controller about the intangible assets owned by the operation. Or invite the controller to visit your class to discuss this topic. Discussion questions could include: • • •

Which of the intangible assets are amortized? What is the amortization period for these assets? Does the operation own any intangible assets that do not appear in its financial records?

Or have students interview the manager of a local franchise lodging operation about the franchise agreement. Discussion questions could include: • •

What benefits does the franchiser offer the operation? What is required of the operation in return for these benefits?

Ask students to interview the personnel director of a large hospitality operation about the life insurance benefits offered by the company. Discussion questions could include: • •

Is the insurance coverage company-owned or employee-owned? Is the coverage term life insurance or whole life insurance?

Other Noncurrent Assets Accounting

Individual/Group Activities Activity 1 Have each student complete Handout 4–1, “Exercises for Chapter 4.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 1—Answer Key Exercise 1 1. E

2. O

3. G

4. B

5. A

6. L

7. J

Exercise 2

1. 2. 3.

Maximum Under GAAP 40 40 40

Exercise 3 1. 2. 3. 4.

Goodwill (Asset) Cash Liquor License (Asset) Cash Organization Cost (Asset) Cash Preopening Cost (Asset) Cash

25,000 25,000 50,000 50,000 7,000 7,000 20,000 20,000

Exercise 4 1.

Amortization Expense Goodwill $60,000/300 months

200

Amortization Expense Organization Cost $6,000/60 months

100

Amortization Expense Franchise Cost (Asset) $72,000/240 months

300

200

100

300

Other Noncurrent Assets Accounting

Exercise 5 1. 2. 3. 4.

Licenses Expense (F&B Department) Cash Franchise Fees Expense (Marketing Dept.) Cash Organization Cost Cash Amortization Expense Copyright (Asset)

Exercise 6 1. a. Leasehold Security Deposit Prepaid Rent Cash b.

a. b.

Amortization Expense Leasehold $27,000/180 months

1,500 1,500 8,000 8,000 5,000 5,000 25,000 25,000

27,000 5,000 2,000 34,000 150 150

Rent Expense (Real Estate) Prepaid Rent

2,000

Organization Cost Cash

9,000

Amortization Expense Organization Cost $9,000/60 months

2,000 9,000 150 150

Other Noncurrent Assets Accounting

HANDOUT 4-1: Exercises for Chapter 4 Exercise 1 Select from the following list the term that best represents each statement. Selections do not apply to more than one statement. A. Covenant not to compete B. Organization cost C. Leasehold improvement D. Advertising expense E. Preopening cost

F. Leasehold G. Franchise cost H. License expense I. Legal and professional J. Liquor license (asset)

K. Boot L. Copyright M. Trademark N. Goodwill O. Patent

1. Grand opening advertising of $15,000 for a new hotel

2. Exclusive right granted by the federal government to manufacture or sell a product

3. Capital expenditure for the exclusive right to sell a product in a specified area

4. Expenditures to form a corporation

5. Agreement by seller not to open a similar business within a specified geographic area or period of time

6. Exclusive right granted by the federal government to produce or sell musical, literary, or artistic material

7. Purchase of liquor license on the open market

Exercise 2 Indicate the write-off period for the following intangible assets: Maximum Under GAAP 1. Preopening costs

______

2. Goodwill

______

3. Organization costs

______

Other Noncurrent Assets Accounting

Exercise 3

Journalize the following transactions: 1. Purchase of $25,000 goodwill for cash

2. Purchase of liquor license on open market for $50,000 cash

3. $7,000 cash payment to form a new corporation

4. $20,000 cash payment for start-up costs of a new motel

Exercise 4 Journalize the monthly entries to amortize the following intangible assets: 1. $60,000 goodwill. Write-off period = 25 years.

2. $6,000 organization costs. Write-off period = 5 years.

3. $72,000 franchise cost. Life of franchise contract = 20 years.

Other Noncurrent Assets Accounting

Exercise 5 Journalize the following transactions: 1. $1,500 payment to County Liquor Board for renewal of liquor license

2. $8,000 payment to franchiser based on 2% of this month’s sales

3. $5,000 payment to attorney for legal fees regarding the drafting of the corporate charter and incorporation of the new business

4. A copyright’s unamortized balance is $25,000 as of May 1. On May 2, an unsuccessful defense in court shows the copyright is worthless.

Exercise 6 1. On May 1, a hotel leases a parking lot next to its facilities. The terms of the lease are $2,000 monthly rent; the life of the lease is 15 years. In order to get the lease on this prime location the hotel had to pay the following expenditures up front: An incentive payment of $27,000 to get the lease A deposit to cover possible damages of $5,000 First month’s rent deposit of $2,000 a.

Journalize the May 1 check issued for $34,000. debit ______

credit ______

______

Other Noncurrent Assets Accounting

b. Journalize any adjusting entries on May 31.

2. On June 1, a new corporation incurred the following expenditures: State incorporation fees: $2,500 Attorney’s fees for incorporation: $6,000 Stock certificates: $500 a. Journalize the June 1 check issued for $9,000. debit ______

credit ______

______

b. Journalize any adjusting entries on June 30. The corporation has elected to use the minimum tax write-off period for financial reporting.

Other Noncurrent Assets Accounting

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

105–107 107 107–108 108 109 109–110 110–111 111 112 112–113

Other Noncurrent Assets Accounting

Other Noncurrent Assets Accounting NAME: _____________________________________________________ DATE: _________________________________ 1.

Which of the following is a means of allocating the costs of intangible assets to those periods that benefit from their use? a. b. c. d.

Organization costs include: a. b. c. d.

employee training costs. travel costs for securing suppliers and customers. costs incurred prior to formation of the corporation. executive salaries.

Which of the following is true of security deposits? a. b. c. d.

5 years. 17 years. 40 years. indefinite length.

Preopening expenses include all of the following except: a. b. c. d.

assets purchased. goodwill. a covenant not to compete. all of the above.

A patent right is granted for a period of: a. b. c. d.

state incorporation fees. attorneys’ fees. printing costs for stock certificates. all of the above.

When a business is purchased, the purchase price should stipulate the portion of the amount paid for: a. b. c. d.

acquisition expenditure optioning amortization assignment

They serve as reimbursement for damages to property or equipment. They are advance payments for occupancy, equipment, or services. They are always refunded after a year. They can be treated as accounts receivable.

A company has been purchased for $2,000,000, of which $500,000 has been allocated to goodwill. The purchased company is estimated to have a useful life of 99 years. Goodwill could be amortized over a maximum period of: a. b. c. d.

1 year. 5 years. 40 years. 99 years.

Other Noncurrent Assets Accounting

The exclusive right granted by the federal government to manufacture or sell a product is called a: a. b. c. d.

franchise. copyright. trademark. patent.

The renewal of a liquor license with a governmental agency is an expenditure that will be recorded to: a. b. c. d.

an expense account such as Liquor License Expense. an asset account such as Liquor License. franchise cost. goodwill.

10. A new lease is negotiated for a restaurant building. The lease requires an $8,000 deposit to cover possible damages. This expenditure is recorded as: a. b. c. d.

repairs expense. prepaid repairs. preopening expense. security deposit.

Other Noncurrent Assets Accounting

Competencies for Other Noncurrent Assets Accounting 1. Define intangible assets, and list common intangible assets discussed in this chapter. 2. Define organization costs, and describe how they are amortized. 3. Explain the accounting term “goodwill,” and describe how goodwill is amortized. 4. Explain franchise agreements, and describe how the costs of such agreements are amortized. 5. Define trademarks and tradenames, and describe how they are amortized. 6. Compare patents and copyrights, and describe how they are amortized. 7. Define preopening expenses, and contrast them to organization costs. 8. Describe the renewal and purchase of liquor licenses, and explain how their costs are amortized. 9. Define cash value intangible assets using security deposits as an example. 10. Describe the two basic kinds of life insurance, pointing out their similarities and differences. Transparency Master 1

Other Noncurrent Assets Accounting

Examples of Intangible Assets • Organization costs • Goodwill • Franchises • Trademarks and tradenames • Patents • Copyrights • Preopening expenses • Liquor licenses

Transparency Master 2

Other Noncurrent Assets Accounting

Examples of Cash Value Intangible Assets •Security deposits •Cash surrender value of life insurance

Transparency Master 3

Hospitality Payroll Accounting Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Hospitality Payroll Accounting Competency 1:

Describe areas covered under the Fair Labor Standards Act (FLSA) including how time worked is computed and recorded. (pp. 120–122) Key Concepts: Covers equal pay for equal work, child labor, recordkeeping, minimum wage, and definition of overtime pay No provisions for breaks; vacation, holiday, severance, or sick pay; or extra pay for weekends Overtime is 1.5 times regular rate for hours in excess of 40 per week Customs, union contracts, state laws may supersede FLSA Computing time worked May not include breaks/rest, meals, changing clothes, washing up Includes training sessions Employees must be paid for all, including fractions of an hour Recording—Employer must maintain time sheets or cards Text Exhibits: Exhibit 1: Sample Employee Time Card

Competency 2:

Define the terms “employer” and “employee.” (p. 123) Key Concepts: IRS defines employer/employee relationship Employer Person or organization for whom a worker performs a service as an employee Usually supplies tools and a workplace Has the right to fire employee Employee Anyone who performs services for one who legally controls the method and result of the services, regardless of what the employer calls the position No class distinctions IRS Form SS–4—Employer Identification Number IRS Form SS–5—Employee Social Security Number

Competency 3:

Differentiate the following sets of terms: wages and salaries; gross pay and net pay; and regular pay and overtime pay. (pp. 123–126) Key Concepts: Wages vs. salaries Employees on wages must be paid overtime Those on salary may or may not be paid overtime Exemptions from FLSA overtime provisions: executive, administrative, professional, and outside sales Gross pay vs. net pay Gross is pay before deductions Net is pay after deductions Regular pay vs. overtime pay Regular pay is based on a 40-hour workweek Overtime is 1.5 times regular hourly rate for hours beyond 40 Employers may convert weekly wage or monthly salary to hourly rate Text Exhibits: Exhibit 2: Computation of Net Pay

Hospitality Payroll Accounting

Competency 4:

Describe two methods of calculating overtime pay. (pp. 126–127) Key Concepts: Two methods yield identical results; the difference is classification of regular and overtime pay Overtime pay method—regular hours merit regular pay; overtime hours merit overtime pay (number of overtime hours multiplied by overtime hourly rate) Overtime premium method—employer pays regular pay for total hours worked, and adds half of regular pay for all overtime hours

Competency 5:

Explain the major types of deductions affecting employee payroll. (pp. 127–130) Key Concepts: Imposed on employees Governmental deductions (mandatory) Federal Insurance Contributions Act (FICA) Tax for Social Security and Medicare Extends to self-employed workers Federal Income Tax (FIT) IRS Form W-4 (Employee’s Withholding Allowance Certificate) Use of tables or percentages State income tax—may “piggyback” on federal tax City income tax Other state taxes (such as disability insurance tax) Voluntary deductions Group health and life insurance plans; retirement, savings, and stock purchase plans; union dues; charitable contributions Text Exhibits: Exhibit 3: IRS Form W-4 Chapter Appendix: Appendix: Special Research Reports Transparency Masters: Transparency Master 2: Payroll Deductions

Competency 6:

Describe the payroll taxes imposed on employers and the related forms and procedures. (pp. 130–131) Key Concepts: FICA taxes—based on employee wages and tips IRS Form 941, Employer’s Quarterly Federal Tax Return—reports FICA and FIT withheld Unemployment taxes—state (SUTA) and federal (FUTA)—based on employee wages IRS Form 940—reports employer’s liability for FUTA taxes; annually Deposits made at federal reserve banks or authorized depositories Form 8109-B—Federal Tax Deposit (FTD) Coupon Transparency Masters: Transparency Master 3: Employer’s Payroll Taxes

Competency 7:

Explain the primary function of a payroll system and some of the forms, records, and procedures required to perform this function. (pp. 132–135) Key Concepts: Payroll system provides information necessary to compute employee payroll; includes forms, records, and procedures Employee’s earnings record (yearly)—used to prepare IRS Form W–2 Payroll register

Hospitality Payroll Accounting

Payroll journal and entries Payroll bank account (usually separate) Electronic funds transfer system (EFT) Computerized payroll applications Cost-effectiveness varies by property Payroll outsourcing Text Exhibits: Exhibit 4: Sample Employee’s Earnings Record Exhibit 5: IRS Form W-2 Exhibit 6: Sample Payroll Register Transparency Masters: Transparency Master 4: The Payroll System Competency 8:

Describe payroll accounting for tipped employees with respect to employee tip reporting, minimum wage, tip credit, net pay, and overtime pay. (pp. 135–137) Key Concepts: Two sources of income for tipped employees—employer and guests Tips include cash, charge, and credit card; are gross income Service charges vs. tips Employee tip reporting—IRS Form 4070 or similar statement FLSA minimum wage rate Employer tip credit Lowers gross wages payable by the employer Tipped employee can never make less than minimum wage, including tips Net pay of tipped employees Gross taxable earnings includes gross wages and tips Paycheck never less than 0 Making up deficiencies State wage laws and tip credit provisions Overtime pay for tipped employees Chapter Appendix: Appendix: Special Research Reports Text Exhibits: Exhibit 7: IRS Form 4070

Competency 9:

Explain the purpose of the eight percent tip regulation and its relationship to employee tip reporting. (pp. 138–140) Key Concepts: Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) Tips reported by employees shall not be less than 8% of gross receipts of the property Shortfall requires allocation to directly tipped employees—tip allocation statements Employees should keep daily records of personal sales, cash tips, charge tips, and hours worked Operations affected by the 8% tip regulation Exempt operations—cafeterias, fast food, and operations with 95% of gross receipts including 10% or greater service charge Exempt receipts—complimentary hors d’oeuvres served at a bar; complimentary dessert served to a regular patron; complimentary guestroom fruit baskets; carryout sales; state or local taxes; services to which a 10% or more service charge is added Properties with any combination of full- or part-time employees whose hours worked on a typical business day exceed 80 hours are subject to the 8% rule IRS Form 8027

Hospitality Payroll Accounting

Text Exhibits: Exhibit 8: Sample Employee Report of Daily Sales and Tips Exhibit 9: IRS Form 8027 Competency 10:

Recognize methods of allocating tip shortfall among directly tipped employees. (pp. 140–144) Key Concepts: When tip shortfall allocation is required Methods for computing Good faith agreement Gross receipts method—gross receipts ratio determines each employee’s share Hours worked method—only operations with fewer than the equivalent of 25 fulltime employees may use it; allocation is based on individual’s hours worked Text Exhibits: Exhibit 10: Sales and Tips Analysis—Bruno’s Restaurant Exhibit 11: Determining Shortfall Ratios—Bruno’s Restaurant Exhibit 12: Allocation of Tip Shortfall—Bruno’s Restaurant Exhibit 13: Sales and Tip Analysis—Dot’s Diner Exhibit 14: Determining Shortfall Ratios—Dot’s Diner Exhibit 15: Allocation of the Tip Shortfall—Dot’s Diner Transparency Masters: Transparency Master 5: Tip Shortfall Allocation Methods

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a hotel in your community and interview the accounting personnel in charge of payroll, or invite hotel personnel to visit your class to discuss payroll accounting. Discussion topics could include: • •

The forms and procedures that make up the company’s payroll system The design of a simple flowchart illustrating the steps in the company’s payroll system

Or have students interview the manager of a food service operation where tipping is customary. Discussion questions could include: • •

What are the operation’s procedures for employee tip reporting? What are the procedures for applying tip credits to employees’ wages and allocating tip shortfalls?

Individual/Group Activities Activity 1 Have each student complete Handout 5–1, “Exercises for Chapter 5.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 1—Answer Key Exercise 1 Weekly Wage $340.00 $400.00 $308.00

Regular Hourly Rate 8.50 10.00 7.70

Overtime Hourly Rate 12.75 15.00 11.55

Hospitality Payroll Accounting

Exercise 2 Monthly Salary $1,300 1,625 2,275

Regular Hourly Rate 7.50 9.38 13.13

Exercise 3 Employee No. 127 128 131 132

Hours Worked M T W T 10 10 10 14 10 10 10 10 10 10 9 12 12 12 11

8 10 4

Total 44 52 39 51

Hourly Rate 8.20 8.80 9.30 9.20

Regular 262.40 352.00 297.60 331.20

Earnings Overtime 147.60 158.40 97.65 207.00

Gross 410.00 510.40 395.25 538.20

SOLUTION:

M T W T F S Total

Reg 8 8 8 8

127 OT 2 2 2 6

Reg 8 8 8 8 8 40

128 OT 2 2 2 2 4 12

Reg

131 OT

8 8 8 8

2 2 1 2

Reg 8 8 8 8 4

132 OT 4 4 4 3

REGULAR PAY = Regular Hours (not to exceed 40) × Regular Hourly Rate OVERTIME PAY = Overtime Hours × Overtime Hourly Rate. (Overtime hourly rate is 1.5 the regular hourly rate.) Exercise 4 Employee No. 127 128 131 132

M 10 10 12

Hours Worked T W T F 10 10 14 10 10 10 8 10 10 9 10 12 12 11 4

S 4

Total 44 52 39 51

Hourly Rate 8.20 8.80 9.30 9.20

Regular 360.80 457.60 362.70 469.20

SOLUTION: These are the same hours and rates as in Exercise 3. REGULAR PAY = TOTAL HOURS WORKED  Regular Hourly Rate OVERTIME PREMIUM = Overtime Hours  (Regular Hourly Rate  .5)

Earnings Overtime 49.20 52.80 32.55 69.00

Gross 410.00 510.40 395.25 538.20

Hospitality Payroll Accounting

Activity 2 Have each student complete Handout 5–2, “Exercises for Chapter 5.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 2—Answer Key Exercise 1 Tips that should have been reported ($120,000 × 8%) Actual tips reported Shortfall to be allocated

= =

9,600 8,200 1,400

Tips that should have been reported Tips reported by indirectly tipped employees Directly tipped employees’ share of 8% gross receipts

= = =

9,600 900 8,700

Directly Tipped Employees 1 2 3 4 5 6

Share of 8% Gross 8,700 8,700 8,700 8,700 8,700 8,700

× ×

Gross Receipts Ratio 23,000/120,000 20,000/120,000 26,000/120,000 18,000/120,000 16,000/120,000 17,000/120,000

= =

Total

Employee Share of 8% Gross 1,668 (+1) 1,450 1,885 1,305 1,160 1,232

– –

8,700

Actual Tips Reported 1,500 1,200 1,900 1,100 800 800

= =

Employee Shortfall Numerator 168 250 0 205 360 432

7,300

1,415 ↑ Shortfall Denominator

Employee Number 3 had no reporting shortfall and will not receive any allocation. The allocation of the shortfall is as follows: Directly Tipped Employee 1 2 4 5 6 Total

Shortfall Ratio 168/1,415 250/1,415 205/1,415 360/1,415 432/1,415

Shortfall 1,400 1,400 1,400 1,400 1,400

Exercise 2 Tips that should have been reported ($120,000 × 8%) Actual tips reported Shortfall to be allocated Tips that should have been reported Tips reported by indirectly tipped employees Directly tipped employees’ share of 8% gross receipts

= = = = =

9,600 8,200 1,400 9,600 900 8,700

Allocation 167 (+1) 247 203 356 427 1,400

Hospitality Payroll Accounting

Directly Tipped Employees 1 2 3 4 5 6

Share of 8% Gross 8,700 8,700 8,700 8,700 8,700 8,700

× ×

Employee Hours Ratio 40/200 40/200 40/200 30/200 25/200 25/200

= =

Total

Employee Share of 8% Gross 1,739 (– 1) 1,740 1,740 1,305 1,088 1,088

Actual Tips Reported 1,500 1,200 1,900 1,100 800 800

– –

8,700

= =

Employee Shortfall Numerator 239 540 0 205 288 288

7,300

1,560 ↑ Shortfall Denominator

Employee Number 3 had no reporting shortfall and will not receive any allocation. The allocation of the shortfall is as follows: Directly Tipped Employee 1 2 4 5 6 Total

Shortfall Ratio 239/1,560 540/1,560 205/1,560 288/1,560 288/1,560

Shortfall 1,400 1,400 1,400 1,400 1,400

Allocation = 215 (+1) 485 184 258 258 1,400

Exercise 3 Tips that should have been reported ($2,000,000 × 8%) Actual tips reported Shortfall to be allocated

= =

160,000 154,000 6,000

Tips that should have been reported Tips reported by indirectly tipped employees Directly tipped employees’ share

= = =

160,000 9,000 151,000

Directly Tipped Employees 1 2 3 4 5 6 Total

Share of 8% Gross 151,000 151,000 151,000 151,000 151,000 151,000

× ×

Employee Gross Receipts Share of Ratio = 8% Gross 440,000/2,000,000 = 33,219 (– 1) 460,000/2,000,000 34,730 350,000/2,000,000 26,425 370,000/2,000,000 27,935 195,000/2,000,000 14,723 185,000/2,000,000 13,968 151,000

– –

Actual Tips Reported 32,000 33,500 25,900 25,900 14,400 14,300 146,000

= =

Employee Shortfall Numerator 1,219 1,230 525 2,035 323 0 5,332 ↑ Shortfall Denominator

Hospitality Payroll Accounting

Employee Number 6 had no reporting shortfall and will not receive any allocation. The allocation of the shortfall is as follows: Directly Tipped Employee 1 2 3 4 5 Total

Shortfall Ratio 1,219/5,332 1,230/5,332 525/5,332 2,035/5,332 323/5,332



Shortfall 6,000 6,000 6,000 6,000 6,000

Allocation 1,372 1,384 591 2,290 363 6,000

Exercise 4 Tips that should have been reported ($2,000,000  8%) Actual tips reported Shortfall to be allocated

= =

160,000 154,000 6,000

Tips that should have been reported Tips reported by indirectly tipped employees Directly tipped employees’ share

= = =

160,000 9,000 151,000

Directly Tipped Employees 1 2 3 4 5 6 Total

Share of 8% Gross 151,000 151,000 151,000 151,000 151,000 151,000

 

Employee Hours Ratio 2,000/9,000 2,000/9,000 1,800/9,000 1,600/9,000 800/9,000 800/9,000

= =

Employee Share of 8% Gross 33,556 33,556 30,200 26,844 13,422 13,422 151,000

– –

Actual Tips Reported 32,000 33,500 25,900 25,900 14,400 14,300 146,000

Employee Shortfall = Numerator = 1,556 56 4,300 944 0 0 6,856 ↑ Shortfall Denominator

Employees Number 5 and Number 6 had no reporting shortfall and will not receive any allocation. The allocation of the shortfall is as follows: Directly Tipped Employee 1 2 3 4 Total

Shortfall Ratio 1,556/6,856 56/6,856 4,300/6,856 944/6,856



Shortfall 6,000 6,000 6,000 6,000

Allocation 1,362 49 3,763 826 6,000

Hospitality Payroll Accounting

HANDOUT 5–1: Exercises for Chapter 5 Exercise 1 Convert the following weekly wages to an hourly rate. Round your answer to two decimal places. Overtime is at 1.5 times regular pay. The regular workweek is 40 hours. The company uses the overtime pay method in computing overtime pay. (Round the regular hourly rate to two decimals before computing the overtime hourly rate.) Weekly Wage $340.00 $400.00 $308.00

Regular Hourly Rate

Overtime Hourly Rate

Exercise 2 Convert the following monthly salaries to a regular hourly rate. The regular workweek is 40 hours. Monthly Regular Salary Hourly Rate $1,300 1,625 2,275 Exercise 3 Compute the earnings for the following employees using the overtime pay method. Overtime is paid for work in excess of 8 hours in a day or any hours in excess of 40 for the week. Emp. No. M 127 128 131 132

Hours Worked T W T F

10 10 10 14 10 10 10 10 8 10 10 9 10 12 12 12 11 4

S 4

Total

Hourly Rate

Regular

Earnings Overtime

Gross

_____ _____ _____ _____

8.20 8.80 9.30 9.20

_____ _____ _____ _____

Exercise 4 Compute the earnings for the following employees using the overtime premium method. Overtime is paid for work in excess of 8 hours in a day or any hours in excess of 40 for the week. Emp.

Hours Worked

T W

Hourly

No.

127 128 131 132

10 10 10 14 10 10 10 10 8 10 10 9 10 12 12 12 11 4

S 4

Earnings

Total

Rate

Regular

Overtime

Gross

_____ _____ _____ _____

8.20 8.80 9.30 9.20

_____ _____ _____ _____

Hospitality Payroll Accounting

HANDOUT 5-2: Exercises for Chapter 5 Exercise 1 Restaurant A is a large food and beverage establishment electing to make tip allocations using its actual payroll period and gross receipts attributable to employees. Following are the results for this payroll period: Directly Gross Receipts Tipped for Employees Payroll Period 1 23,000 2 20,000 3 26,000 4 18,000 5 16,000 6 17,000 Total 120,000 Indirectly tipped employees Total

Tips Reported by Employees 1,500 1,200 1,900 1,100 800 800 7,300 900 8,200

Tips that should have been reported Actual tips reported Shortfall to be allocated

= = ______________ = ______________

Tips that should have been reported Tips reported by indirectly tipped employees Directly tipped employees’ share of 8% gross receipts

= = ______________ = ______________

In the computations below, round all results to a whole number. If the items do not foot to the proof total, force the results for Employee 1 up or down as necessary Directly Tipped Employees 1 2 3 4 5 6 Total

Share of 8% Gross _______ _______ _______ _______ _______ _______

Gross Receipts Ratio _____________ _____________ _____________ _____________ _____________ _____________

Employee Share of 8% Gross ______ ______ ______ ______ ______ ______ ______

Actual Tips Reported _______ _______ _______ _______ _______ _______ _______

Employee Shortfall Numerator ________ ________ ________ ________ ________ ________ 1,415

Hospitality Payroll Accounting

Directly Tipped Employee _______ _______ _______ _______ _______ _______ Total

Shortfall Ratio ___________ ___________ ___________ ___________ ___________ ___________ ___________

Shortfall __________ __________ __________ __________ __________ __________ __________

Allocation __________ __________ __________ __________ __________ __________ __________

Exercise 2 Restaurant B is a large food and beverage establishment electing to make tip allocations using its actual payroll period and employee hours attributable to employees. The gross receipts for the period are $120,000. Following are the results for this payroll period. Directly Gross Receipts Tipped for Employees Payroll Period 1 40 2 40 3 40 4 30 5 25 6 25 Total 200 Indirectly tipped employees Total

Tips Reported by Employees 1,500 1,200 1,900 1,100 800 800 7,300 900 8,200

Tips that should have been reported Actual tips reported Shortfall to be allocated

= = ______________ = ______________

Tips that should have been reported Tips reported by indirectly tipped employees Directly tipped employees’ share of 8% gross receipts

= = ______________ = ______________

Share of 8% Gross _______ _______ _______ _______ _______ _______

Gross Receipts Ratio _____________ _____________ _____________ _____________ _____________ _____________

Employee Share of 8% Gross ______ ______ ______ ______ ______ ______ ______

Actual Tips Reported _______ _______ _______ _______ _______ _______ _______

Employee Shortfall Numerator ________ ________ ________ ________ ________ ________ 1,560

Hospitality Payroll Accounting

Directly Tipped Employee _______ _______ _______ _______ _______ _______ Total

Shortfall Ratio ___________ ___________ ___________ ___________ ___________ ___________

Shortfall __________ __________ __________ __________ __________ __________

Allocation __________ __________ __________ __________ __________ __________ __________

8% Tip Regulation Problems—Calendar Year Period Allocation Exercise 3 Restaurant A is a large food and beverage establishment electing to make tip allocations using its calendar year payroll period and gross receipts attributable to employees. Following are the results for the calendar year. Directly Gross Receipts Tipped for Employees Calendar Year 1 440,000 2 460,000 3 350,000 4 370,000 5 195,000 6 185,000 Total 2,000,000 Indirectly tipped employees Total

Tips Reported by Employees 32,000 33,500 25,900 25,900 14,400 14,300 146,000 900 154,000

Tips that should have been reported Actual tips reported Shortfall to be allocated

= = ______________ = ______________

Tips that should have been reported Tips reported by indirectly tipped employees Directly tipped employees’ share of 8% gross receipts

= = ______________ = ______________

Hospitality Payroll Accounting

In the computations below, round all results to a whole number. If the items do not foot to the proof total, force the results for Employee 1 up or down as necessary. Directly Tipped Employees 1 2 3 4 5 6 Total

Share of 8% Gross _______ _______ _______ _______ _______ _______

Directly Tipped Employee _______ _______ _______ _______ _______ _______ Total

Gross Receipts Ratio _____________ _____________ _____________ _____________ _____________ _____________

Shortfall Ratio ___________ ___________ ___________ ___________ ___________ ___________

Employee Share of 8% Gross ______ ______ ______ ______ ______ ______ ______

Actual Tips Reported _______ _______ _______ _______ _______ _______ _______

Shortfall __________ __________ __________ __________ __________ __________

Employee Shortfall Numerator ________ ________ ________ ________ ________ ________ 5,332

Allocation __________ __________ __________ __________ __________ __________ __________

Exercise 4 Restaurant B is a large food and beverage establishment electing to make tip allocations using its calendar year payroll period and employee hours attributable to employees. The gross receipts for the period are $2,000,000. Following are the results for the calendar year: Directly Employee Hours Tipped for Employees Calendar Year 1 2,000 2 2,000 3 1,800 4 1,600 5 800 6 800 Total 9,000 Indirectly tipped employees Total

Tips Reported by Employees 32,000 33,500 25,900 25,900 14,400 14,300 146,000 9,000 154,000

Hospitality Payroll Accounting

Tips that should have been reported Actual tips reported Shortfall to be allocated

= = ______________ = ______________

Tips that should have been reported Tips reported by indirectly tipped employees Directly tipped employees’ share of 8% gross receipts

= = ______________ = ______________

In the computations below, round all results to a whole number. If the items do not foot to the proof total, force the results for Employee I up or down as necessary. Directly Tipped Employees 1 2 3 4 5 6 Total

Share of 8% Gross _______ _______ _______ _______ _______ _______

Directly Tipped Employee _______ _______ _______ _______ _______ _______ Total

Gross Receipts Ratio _____________ _____________ _____________ _____________ _____________ _____________

Shortfall Ratio ___________ ___________ ___________ ___________ ___________ ___________

Employee Share of 8% Gross ______ ______ ______ ______ ______ ______ ______

Actual Tips Reported _______ _______ _______ _______ _______ _______ _______

Shortfall __________ __________ __________ __________ __________ __________

Employee Shortfall Numerator ________ ________ ________ ________ ________ ________ 6,856

Allocation __________ __________ __________ __________ __________ __________ __________

Hospitality Payroll Accounting

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

120–122 123 123–126 126–127 127–130 130–131 132–135 135–137 138–140 140–144

Hospitality Payroll Accounting

Hospitality Payroll Accounting NAME: _____________________________________________________ DATE: _________________________________ 1.

Under the 24-hour time system, which of the following represents 5 P.M.? a. b. c. d.

The actual amount of an employee’s paycheck is called the: a. b. c. d.

lowers the amount of gross wages payable by the employer. is also known as a service charge. may result in an employee being paid less than minimum wage. is the result of a tip shortfall allocation.

If tips reported by all employees are less than 8% of gross receipts for a particular period, the tip shortfall must be: a. b. c. d.

the employee’s marital status and the type of payroll period. the number of withholding allowances the employee claims. the employee’s gross pay. none of the above.

A tip credit: a. b. c. d.

the employees’ regular hourly rate. 1.5 times the employee’s regular hourly rate. .5 times the employee’s regular hourly rate. the employee’s overtime premium rate.

The proper tax withholding table to use is determined by: a. b. c. d.

gross pay. net pay. regular pay. salary.

According to FLSA provisions, under the overtime pay method, an employee’s overtime hours are multiplied by: a. b. c. d.

5.0 hours 0500 hours 1200 hours 1700 hours

split evenly between the employer and tipped employees. allocated among all tipped employees. allocated among directly tipped employees. charged to indirectly tipped employees.

An employee has an hourly rate of $10. This week, the employee has worked a total of 44 hours. The four hours are considered overtime hours payable at double-time. The employee’s gross pay: a. b. c. d.

is $400. is $440. is $480. cannot be determined because the FICA and income tax rates have not been provided.

Hospitality Payroll Accounting

Following is a gross receipts analysis performed to comply with the 8% tip regulation: Directly Gross Tipped Receipts Tips Reported Employee for Period by Employee 1 $ 3,600 $ 216 2 3,200 176 3 4,600 362 4 3,400 160 5 2,400 90 6 2,800 136 Total $ 20,000 $ 1,140 Indirectly Tipped Employees

100

Based on the above analysis and using the gross receipts method, there is: a. b. c. d. 9.

no shortfall for the period. a shortfall of $460. a shortfall of $360. insufficient data to determine any shortfall.

Deductions for federal income taxes, FICA taxes, and state income taxes are called __________ deductions. a. b. c. d.

governmental voluntary social IRS

Hospitality Payroll Accounting

Competencies for Hospitality Payroll Accounting 1.

Describe areas covered under the Fair Labor Standards Act (FLSA) including how time worked is computed/recorded.

Define the terms “employer” and “employee.”

Differentiate the following sets of terms: wages and salaries; gross pay and net pay; and regular pay and overtime pay.

Describe two methods of calculating overtime pay.

Explain the major types of deductions affecting employee payroll.

Describe the payroll taxes imposed on employers and the related forms and procedures.

Explain the primary function of a payroll system and some of the forms, records, and procedures required to perform this function.

Describe payroll accounting for tipped employees with respect to employee tip reporting, minimum wage, tip credit, net pay, and overtime pay.

Explain the purpose of the 8% tip regulation and its relationship to employee tip reporting.

10. Recognize methods of allocating tip shortfall among directly tipped employees. Transparency Master 1

Hospitality Payroll Accounting

Payroll Deductions Governmental Deductions • Federal Insurance Contributions Act (FICA) tax • Tax for Social Security and Medicare • Federal Income Tax (FIT) • State income tax • City income tax • Other state taxes (such as the temporary disability insurance or TDI tax) Voluntary Deductions • Group health and life insurance plans • Retirement, savings, and stock purchase plans • Union dues • Charitable contributions

Transparency Master 2

Hospitality Payroll Accounting

Employer’s Payroll Taxes • FICA taxes • Federal unemployment taxes (FUTA) • State unemployment taxes (SUTA)

Transparency Master 3

Hospitality Payroll Accounting

The Payroll System • Employee’s earnings record • Payroll register • Payroll journal entries • Payroll bank account

Transparency Master 4

Hospitality Payroll Accounting

Tip Shortfall Allocation Methods • Good faith agreement • Gross receipts method • Hours worked method

Transparency Master 5

Hotel Departmental Statements Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Hotel Departmental Statements Competency 1:

Summarize the purposes and users of a hotel’s departmental statements. (pp. 159–162) Key Concepts: Internal users only (top managers, department heads, supervisors) Purpose: present information for management To monitor profitability of operations To create long-range plans Supporting schedules provide details Each department’s operations Financial affairs of the company Revenue centers Support centers Utility costs Fixed charges USALI: standardized accounting procedures, account titles, financial statement formats Text Exhibits: Exhibit 1: Hotel Financial Information System Chapter Appendix: Appendix: USALI Summary Operating Statement and Sample Departmental Statements Transparency Masters: Transparency Master 2: Hotel Department Classification Transparency Master 3: Revenue Centers Transparency Master 4: Support Centers Transparency Master 5: Fixed Charges

Competency 2:

Differentiate between the general formats for financial statements for revenue and support centers. (p. 162) Key Concepts: Revenue center Generates sales Statement shows departmental income or loss after expenses are deducted Support center Does not generate sales Statement is a list of expenses Transparency Masters: Transparency Master 6: Reporting of Payroll Expenses

Competency 3:

List the information included in the standard reporting of departmental payroll expenses. (p. 163) Key Concepts: Standardized payroll expense reporting includes: Salaries and wages Employee benefits Total payroll and related expenses These 3 lines, or lines similar to them, on each departmental statement Chapter Appendix: Appendix: USALI Summary Operating Statement and Sample Departmental Statements

Hotel Departmental Statements

Competency 4:

Recognize the ways in which financial statements are identified and referenced in relation to other statements. (pp. 163–164) Key Concepts: Identifiers In upper-right corner of departmental statements Used as references on hotel income statement (show source of corresponding information) There are identifiers for: Summary/master statement (“A”) Supporting/departmental statements (“A1,” “A2,” etc.) Text Exhibits: Exhibit 2: Rooms Department Income Statement—Hotel DORO Exhibit 12: Long-Form Income Statement—Hotel DORO

Competency 5:

Describe the general formats used for a hotel’s departmental financial statements. (pp. 164–167) Key Concepts: Labeling of income (loss) Statements vary according to department Include elements such as net revenue, total expenses, departmental income (loss) Examples: Rooms department income F&B department income Telecommunications department income Other operated departments income Schedule of rentals and other income A&G department Marketing department POM department Schedule of utility costs Schedule of fixed charges Text Exhibits: Exhibit 3: Food and Beverage Department Income Statement—Hotel DORO Exhibit 4: Telecommunications Department Income Statement—Hotel DORO Exhibit 5: Other Operated Departments Income Statement—Hotel DORO Exhibit 6: Schedule of Rentals and Other Income—Hotel DORO Exhibit 7: Administrative and General Department Statement—Hotel DORO Exhibit 8: Marketing Department Statement—Hotel DORO Exhibit 9: Property Operation and Maintenance Department Statement—Hotel DORO Exhibit 10: Schedule of Utility Costs—Hotel DORO Exhibit 11: Schedule of Fixed Charges—Hotel DORO

Competency 6:

Explain how information from departmental statements is used to prepare a hotel’s income statement. (pp. 167–175) Key Concepts: Hotel’s income statement Consolidates all results of revenue centers, support centers, utility costs, and fixed charges Brings forward departments’ net revenue, cost of sales, payroll and related expenses, total other expenses, income (loss) Issued only to top management and board of directors Text Exhibits: Exhibit 12: Long-Form Income Statement—Hotel DORO

Hotel Departmental Statements

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a hotel in your community and interview the accountant about the departmental statements prepared for the property. Or invite the accountant to visit your class and discuss this topic. Discussion questions could include: • • •

What departmental statements are prepared, and what are the similarities and differences in their formats? What supporting schedules are commonly included with the departmental statements? Why? What information is brought forward from the departmental statements to the hotel income statement?

Individual/Group Activities Activity 1 Have each student complete Handout 6-1, “Exercises for Chapter 6.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 1—Answer Key Comprehensive Case Problem—Banner Motel 1. Banner Motel, Inc. Rooms Department Income Statement For the year ended December 31, 20X9 REVENUE Room Sales Allowances Net Revenue EXPENSES Salaries and Wages Employee Benefits Total Payroll and Related Expenses Other Expenses: Commissions Contract Cleaning Guest Transportation Laundry and Dry Cleaning Linen Operating Supplies Reservation Expense Uniforms Other Operating Expenses Total Other Expenses Total Expenses Departmental Income (Loss)

Schedule A1

$ 1,176,174 2,107 1,174,067

156,125 31,458 187,583 3,916 10,284 9,115 9,828 6,912 11,959 8,133 2,969 8,423 71,539 259,122 $ 914,945

Hotel Departmental Statements

2. Banner Motel, Inc. Food and Beverage Department Income Statement For the year ended December 31, 20X9

Revenue Allowances Net Revenue Cost of Food and Beverage Sales: Cost of Food and Beverage Consumed Less Cost of Employees’ Meals Net Cost of F&B Sales

Schedule A2

Food

Beverage

Total

$ 511,207 806 510,401

196,114 65 196,049

707,321 871 706,450

173,362 14,396 158,966

45,106

218,468 14,396 204,072

45,106

Other Income: Other Revenue Other Cost of Sales Net Other Income

3,490 1,396 2,094

GROSS PROFIT EXPENSES Salaries and Wages Employee Benefits Total Payroll and Related Expenses Other Expenses: China, Glassware, and Silver Contract Cleaning Kitchen Fuel Laundry and Dry Cleaning Licenses Music and Entertainment Operating Supplies Uniforms Other Operating Expenses Total Other Expenses Total Expenses Departmental income (Loss)

504,472 247,165 49,976 297,141 9,106 5,200 3,516 6,212 2,197 26,105 12,919 4,105 8,136 77,496 374,637 $ 129,835

Hotel Departmental Statements

3. Banner Motel, Inc. Telecommunications Department Income Statement For the year ended December 31, 20X9 REVENUE Local Long Distance Service Charges Total Revenue Allowances Net Revenue

Schedule A3

$ 5,916 52,917 819 59,652 674 58,978

COST OF CALLS Local Long Distance Total Cost of Telecommunications Service

7,318 64,173 71,491

Gross Profit (Loss)

(12,513)

EXPENSES Salaries and Wages Employee Benefits Total Payroll and Related Expenses Other Operating Expenses

28,917 5,088 34,005 7,908

Total Expenses

41,913

Departmental Income (Loss)

$ (54,426)

4. Banner Motel, Inc. Other Operated Departments Income Statement For the year ended December 31, 20X9 REVENUE Services Sales of Merchandise Net Revenue

Schedule A4

$ 35,618 40,107 75,725

Cost of Merchandise Sold

16,043

GROSS PROFIT EXPENSES Salaries and Wages Employee Benefits Total Payroll and Related Expenses Other Operating Expenses Total Expenses

59,682

Departmental Income (Loss)

32,107 5,558 37,665 7,219 44,884 $ 14,798

Hotel Departmental Statements

5. Banner Motel, Inc. Rentals and Other Income For the year ended December 31, 20X9 Rental of Store Space Vending Machines Commissions Cash Discounts Earned Interest Income Total Rentals and Other Income

Schedule A5 $ 42,000 6,544 3,218 1,412 $ 53,174

6. Banner Motel, Inc. Administrative and General Department Statement For the year ended December 31, 20X9 Salaries and Wages Employee Benefits Total Payroll and Related Expenses Other Expenses: Credit Card Commissions Information Systems Expense Dues and Subscriptions Human Resources Expense Insurance—General Operating Supplies Postage and Telegrams Professional Fees Uncollectible Accounts Traveling and Entertainment Other Operating Expenses Total Other Expenses Total Administrative and General Expenses

Schedule A6

$ 98,714 17,336 116,050 12,719 6,000 1,608 2,875 7,111 8,907 3,916 7,000 1,512 3,903 5,116 60,667 $ 176,717

Hotel Departmental Statements

7. Banner Motel, Inc. Marketing Department Statement For the year ended December 31, 20X9 Salaries and Wages Employee Benefits Total Payroll and Related Expenses Advertising: Outdoor Print Radio and Television Other Total Advertising Fees and Commissions: Agency Fees Franchise Fees Total Fees and Commissions Other Operating Expenses Total Marketing Expense

Schedule A7 $ 60,210 10,634 70,844 1,216 7,928 3,400 844 13,388 2,975 25,000 27,975 4,116 $ 116,323

8. Banner Motel, Inc. Property Operation and Maintenance For the year ended December 31, 20X9 Salaries and Wages Employee Benefits Total Payroll and Related Expenses Other Expenses: Building Supplies Electrical and Mechanical Equipment Engineering Supplies Furniture, Fixtures, Equipment, and Décor Grounds and Landscaping Operating Supplies Removal of Waste Matter Swimming Pool Uniforms Other Operating Expenses Total Other Expenses Total Property Operation and Maintenance

Schedule A8 $ 42,196 7,549 49,745 8,914 15,618 4,947 16,835 6,968 5,312 3,914 3,750 800 6,176 73,234 $ 122,979

9. Banner Motel, Inc. Utility Costs For the year ended December 31, 20X9 Electricity Fuel Water Total Utility Costs 10.

Schedule A9 $ 35,673 39,917 8,803 $ 84,393

Hotel Departmental Statements

Banner Motel, Inc. Schedule of Fixed Charges For the year ended December 31, 20X9 Rent: Real Estate Furnishings, Fixtures, and Equipment Data Processing Equipment Total Rent Expense Property Taxes and Other Municipal Charges: Real Estate Taxes Personal Property Taxes Utility Taxes Business and Occupation Taxes Total Property Taxes and Other Municipal Charges Insurance on Building and Contents Interest Expense Depreciation: Building Furnishings, Fixtures, and Equipment Amortization: Leasehold Improvements Total Fixed Charges

Schedule A10

$ 12,000 20,602 16,250 48,852 48,000 15,715 1,200 1,500 66,415 9,152 175,600 94,000 115,000 1,500 $ 510,519

Hotel Departmental Statements

HANDOUT 6-1: Exercises for Chapter 6 Exercise 1 Comprehensive Case Problem—Banner Motel, Inc. Following is a summary of various general ledger accounts for the Banner Motel, Inc., for the year ended December 31, 20X9. Prepare the departmental statements in accordance with the formats illustrated for the Hotel DORO’s financial statements. Any account information relating to employee benefits is to be consolidated and shown under the caption called Employee Benefits. 1.

Rooms Department: debit Room Sales Allowances Salaries and Wages Payroll Taxes Employee Meals Other Employee Benefits Commissions Contract Cleaning Guest Transportation Laundry and Dry Cleaning Linen Operating Supplies Reservation Expense Uniforms Other Operating Expenses

credit 1,176,174

2,107 156,125 18,735 4,917 7,806 3,916 10,284 9,115 9,828 6,912 11,959 8,133 2,969 8,423

Food and Beverage Department: debit Food Sales Beverage Sales Allowances—Food Allowances—Beverage Other Sales Cost of Food Consumed Employee Meals Credit Cost of Beverage Sales Other Cost of Sales Salaries and Wages Payroll Taxes Employee Meals Other Employee Benefits China, Glassware, and Silver Contract Cleaning Kitchen Fuel Laundry and Dry Cleaning Licenses Music and Entertainment Operating Supplies Uniforms Other Operating Expenses

credit 511,207 196,114

806 65 3,490 173,362 14,396 45,106 1,396 247,165 30,107 7,511 12,358 9,106 5,200 3,516 6,212 2,197 26,105 12,919 4,105 8,136

Hotel Departmental Statements

Telecommunications Department: debit Local Long Distance Service Charges Allowances Local Long Distance Salaries and Wages Payroll Taxes Employee Meals Other Employee Benefits Other Operating Expenses

674 7,318 64,173 28,917 3,470 172 1,446 7,908

Other Operated Departments: debit Services Merchandise Cost of Merchandise Sold Salaries and Wages Payroll Taxes Employee Meals Other Employee Benefits Other Operating Expenses

credit 35,618 40,107

16,043 32,107 3,853 100 1,605 7,219

Rentals and Other Income: debit

credit 42,000 6,544 3,218 1,412

debit 98,714 11,486 914 4,936 12,719 6,000 1,608 2,875 7,111 8,907 3,916 7,000 1,512 3,903 5,116

credit

Rental of Store Space Commissions: Vending Machines Cash Discounts Earned Interest Income 6.

credit 5,916 52,917 819

Administrative and General Department: Salaries and Wages Payroll Taxes Employee Meals Other Employee Benefits Credit Card Commissions Information Systems Expense Dues and Subscriptions Human Resources Expense Insurance—General Operating Supplies Postage and Telegrams Professional Fees Uncollectible Accounts Traveling and Entertainment Other Operating Expenses

Hotel Departmental Statements

Marketing Department: Salaries and Wages Payroll Taxes Employee Meals Other Employee Benefits Outdoor Advertising Print Advertising Radio and Television Advertising Other Advertising Agency Fees Franchise Fees Other Operating Expenses

credit

debit 42,196 5,064 375 2,110 8,914 15,618 4,947 16,835 6,968 5,312 3,914 3,750 800 6,176

credit

debit 35,673 39,917 8,803

credit

debit

credit

POM Department: Salaries and Wages Payroll Taxes Employee Meals Other Employee Benefits Building Supplies Electrical and Mechanical Equipment Engineering Supplies Furniture, Fixtures, Equipment, and Décor Grounds and Landscaping Operating Supplies Removal of Waste Matter Swimming Pool Uniforms Other Operating Expenses

debit 60,210 7,225 407 3,002 1,216 7,928 3,400 844 2,975 25,000 4,116

Utility Costs: Electric Fuel Water

10. Fixed Charges: Rental Expense Accounts: Real Estate Furnishings, Fixtures, and Equipment Information Systems Equipment Real Estate Taxes Personal Property Taxes Utility Taxes Business and Occupation Taxes Insurance on Building and Contents Interest Expense Depreciation Accounts: Building Furnishings, Fixtures, and Equipment Amortization Accounts: Leasehold Improvements

12,000 20,602 16,250 48,000 15,715 1,200 1,500 9,152 175,600 94,000 115,000 1,500

Hotel Departmental Statements

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

159–162 162 163 163–164 164–167 167–175

Hotel Departmental Statements

Hotel Departmental Statements NAME: _____________________________________________________ DATE: _________________________________ 1.

A support center: a. b. c. d.

The standardized reporting of a department’s payroll expenses includes all of the following except: a. b. c. d.

They are incurred regardless of sales volume. They are incurred even if a hotel is closed. They benefit a hotel as a whole. All of the above.

Which of the following will appear on the schedule of rentals and other income? a. b. c. d.

schedule of utility costs. schedule of fixed charges. cost of sales report. food and beverage department income statement.

Which of the following is true of fixed charges? a. b. c. d.

administrative and general department marketing department profit-making evaluation information systems department

Utility costs associated with the cooking of food are shown on the: a. b. c. d.

interest income information systems guest telephone calls b and c

Costs associated with advertising, public relations, and research are shown on which statement? a. b. c. d.

salaries. wages. employee meals. employee benefits.

A hotel’s schedule of rentals and other income includes revenue from which of the following? a. b. c. d.

generates sales. does not generate sales. always shows a gross profit. a and c.

rental of store and office space, commissions, sale of grease and bones rental of store and office space, commissions, interest income sales of popcorn and peanuts in the lounge sales of souvenirs and candy in the restaurant

Which of the following are all revenue centers? a. b. c. d.

Marketing, Rooms, F&B Rooms, Telecommunications, F&B Marketing, Gift Shop, F&B Rooms, Telecommunications, Marketing

Hotel Departmental Statements

Which of the following are support centers? a. b. c. d.

Housekeeping, Telecommunications A&G, Property Operation and Maintenance Utility All of the above

10. According to the following summary of the F&B Department, what is the gross profit? Sales Allowances Cost of Goods Consumed Meals to Hotel Employees Payroll and Related Expenses Other Expenses a. b. c. d.

$100,000 $61,000 $60,000 $50,000

101,000 1,000 41,000 1,000 32,000 10,000

Hotel Departmental Statements

Competencies for Hotel Departmental Statements 1.

Summarize the purposes and users of a hotel’s departmental statements.

Differentiate between the general formats for financial statements for revenue and support centers.

List the information included in the standard reporting of departmental payroll expenses.

Recognize the ways in which financial statements are identified and referenced in relation to other statements.

Describe the general formats used for a hotel’s departmental financial statements.

Explain how information from departmental statements is used to prepare a hotel’s income statement.

Transparency Master 1

Hotel Departmental Statements

Hotel Department Classification • Revenue centers • Support centers • Utility costs • Fixed charges

Transparency Master 2

Hotel Departmental Statements

Revenue Centers • Rooms • Food and beverage • Telecommunications • Other operated departments • Schedule of rentals and other income

Transparency Master 3

Hotel Departmental Statements

Support Centers • Administrative and general • Marketing • Property operation and maintenance • Utility costs • Fixed charges

Transparency Master 4

Hotel Departmental Statements

Fixed Charges • Rent • Property taxes • Insurance • Interest • Depreciation • Amortization

Transparency Master 5

Hotel Departmental Statements

Reporting of Payroll Expenses • Salaries and wages • Employee benefits • Total payroll and related expenses

Transparency Master 6

Hotel Income Statements Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Hotel Income Statements Competency 1:

Describe the two groups who use a hotel income statement and the formats available for presenting data to them, and explain the elements and conventions used in preparing an income statement. (pp. 193–198) Key Concepts: Internal users External users Internal financial statements Include great detail, supporting schedules For directors, executives, managers, supervisors External financial statements Summarize, emphasize results For stockholders, creditors, investors Reviewed/audited by independent CPAs Income statement Reports results of operations for specific period Fiscal year: 12-month accounting cycle for corporation Revenue – Expenses = Net Income Conventions Accrual basis accounting Realization principle Matching principle Formats Internal long-form Internal short-form External Net income is not cash flow Examples of income statements: Hotel DORO Internal formats External formats: SEC and Sarbanes-Oxley Act Text Exhibits: Exhibit 1: Internal Long-Form Income Statement—Hotel DORO Exhibit 2: Internal Short-Form Income Statement—Hotel DORO Exhibit 3: External Income Statement—Hotel DORO Transparency Masters: Transparency Master 2: Hotel Income Statement Formats

Competency 2:

Explain the preparation and purposes of common-size and comparative income statements, and describe their analysis and interpretation. (pp. 198–207) Key Concepts: Common-size income statement Items related to common base amount Common-size/vertical analysis Examples/interpretation: Hotel DORO Common-size percentages Line Amount divided by Net Sales Calculations require rounding Forced numbers Pie charts

Hotel Income Statements

Comparative income statement Presents data for two or more periods Comparative/horizontal analysis Divisor: prior period’s data Dollar change = Current year amount - prior year amount Percentage change = Dollar change amount divided by prior year amount Cross-checking Interpretation Examples/interpretation: Hotel DORO Text Exhibits: Exhibit 4: Pie Chart—Hotel DORO’s Food and Beverage Sales Dollar Exhibit 5: Common-Size Income Statement—Hotel DORO’s Food and Beverage Department Exhibit 6: Common-Size Income Statement—Hotel DORO Exhibit 7: Comparative Income Statement—Hotel DORO Competency 3:

Describe the purpose of and information reported on the statement of retained earnings. (pp. 207–208) Key Concepts: Statement of retained earnings Provides information on lifetime profits retained by corporation Dividends declared Dividends payable Statement of income and retained earnings Ending retained earnings brought forward to equity section of balance sheet Examples: Hotel DORO USALI: income statements for external users are usually brief Degree of detail in external income statements discretionary GAAP, the FASB, the SEC govern reporting of financial information and statements to the public. USALI’s statements don’t conflict with them Statement of stockholders’ equity Text Exhibits: Exhibit 8: Statement of Retained Earnings—Hotel DORO Exhibit 9: Statement of Income and Retained Earnings (External)—Hotel DORO Exhibit 10: Sample External Income Statement Format Exhibit 11: Stockholders’ Equity Statement Format

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a hotel in your community and interview the accountant about the income statement(s) prepared for the property. Or invite the accountant to visit your class to discuss this topic. Discussion could include: • •

An explanation of the formats and the line items used. The differences in the level of detail reported on the hotel’s internal and external income statements.

Individual/Group Activities Activity 1 Have each student complete Handout 7-1, “Exercises for Chapter 7.” Correct the assignments using the following answer key and return them, or go over the answers in class.

Hotel Income Statements

Individual/Group Activity 1—Answer Key Exercise 1 1. F

2. F

3. TR

4. F

5. TR

6. F

7. F

8. TR

9. F

Exercise 2 1.The realization principle dictates that revenue is recognized when the goods or services have been delivered and accepted. 2.Dividends declared reduce retained earnings. 3.The divisor when preparing a common-size income statement is net sales. 4.The divisor when preparing a comparative income statement is the prior period’s data for that line item. 5.A pie chart can be constructed from a common-size income statement. Exercise 3 Dearborn Hotel STATEMENT OF INCOME For the year ended September 30, 20X9 Income OPERATED DEPARTMENTS: Rooms Food and Beverage Telecommunications Other Operated Departments Rentals and Other Income Total Departmental Income UNDISTRIBUTED EXPENSES: Administrative and General Marketing Property Operation and Maintenance Utility Costs Total Undistributed Expenses INCOME BEFORE FIXED CHARGES FIXED CHARGES: Rent Property Taxes Insurance Interest Depreciation and Amortization Total Fixed Charges INCOME BEFORE INCOME TAXES AND LOSS ON SALE OF PROPERTY Loss on Sale of Property INCOME BEFORE INCOME TAXES Income Taxes NET INCOME

$ 914,945 129,835 (54,426) 14,798 53,174 1,058,326 176,717 116,323 122,979 84,393 500,412 557,914 48,852 66,415 9,152 175,600 210,500 510,519 47,395 7,500 39,895 6,540 $ 33,355

Hotel Income Statements

Exercise 4 Dearborn Hotel Statement of Retained Earnings For the year ended September 30, 20X9 Retained earnings, October 1, 20X8 Net income for the year ended September 30, 20X9 Total Dividends declared during the year Retained earnings, September 30, 20X9

$ 351,478 33,355 $ 384,833 75,000 $ 309,833

Hotel Income Statements

Individual/Group Activity 2 Have each student complete Handout 7-2, “Exercises for Chapter 7.” Correct the assignments using the following answer key and return them, or go over the answers in class.

Individual/Group Activity 2—Answer Key Exercise 1 Hotel Dalerags, Inc. Statement of Income For the year ended September 30, 20X9 Net Revenue OPERATED DEPARTMENTS: Rooms $1,174,067 Food and Beverage 709,940 Telecommunications 58,978 Other Operated Departments 75,725 Rentals and Other Income 53,174 Total Operated Departments 2,071,884 UNDISTRIBUTED EXPENSES: Administrative and General Marketing Property Operation & Maintenance Utility Costs Total Undistributed Expenses INCOME BEFORE FIXED CHARGES 2,071,884

Cost of Sales

Payroll and Related Expenses

Other Expenses

Income (Loss)

205,468 71,491 16,043

187,583 297,141 34,005 37,665

71,539 77,496 7,908 7,219

293,002

556,394

164,162

914,945 129,835 (54,426) 14,798 53,174 1,058,326

116,050 70,844 49,745 236,639

60,667 45,479 73,234 84,393 263,773

176,717 116,323 122,979 84,393 500,412

793,033

427,935

557,914

293,002

FIXED CHARGES: Rent Property Taxes Insurance Interest Depreciation and Amortization Total Fixed Charges

48,852 66,415 9,152 175,600 210,500 510,519

INCOME BEFORE INCOME TAXES AND LOSS ON SALE OF PROPERTY

47,395

Loss on Sale of Property

7,500

INCOME BEFORE INCOME TAXES

39,895

Income Taxes

6,540

NET INCOME

33,355

Hotel Income Statements

Exercise 2 Hotel Bessdoon, Inc. Statement of Retained Earnings For the year ended March 31, 20X9 Retained earnings at beginning of year Net income Total Dividends declared during the year Retained earnings at end of year

$ 351,478 33,355 384,833 75,000 $ 309,833

Exercise 3 Hotel Bessdoon, Inc. Statement of Income and Retained Earnings For the year ended March 31, 20X9 Revenues Expenses Income before income taxes and loss on sale of property Loss on sale of property Income before income taxes Income taxes Net income Retained earnings at beginning of year Dividends declared during the year Retained earnings at end of year

$ 2,071,884 2,024,489 47,395 (7,500) 39,895 6,540 33,355 351,478 75,000 $ 309,833

Hotel Income Statements

HANDOUT 7-1: Exercises for Chapter 7 Exercise 1 Use TR for true and F for false to answer the following questions: 1. Hotel revenues do not include interest income. 2. Hotel revenues are realized only when paid by the customer. 3. A fiscal year is any consecutive 12 months. 4. A $5,000 net income will increase the cash balance by $5,000. 5. A hotel income statement includes the operating results of its revenue centers, expenses of its support centers, utility costs, fixed costs, gains and losses from the sale of assets, and income taxes expense. 6. The statement of retained earnings is prepared for a proprietorship or partnership. 7. Dividends payable appear on the statement of retained earnings. 8. The income statement and statement of retained earnings may be combined into a single statement. 9. The percentages in a comparative analysis may be added to arrive at a total change for a series of related items.

1. _______ 2. _______ 3. _______ 4. _______

5. _______ 6. _______ 7. _______ 8. _______ 9. _______

Exercise 2 Complete the following statements: 1. The ____________________ principle dictates that revenue is recognized when the goods or services have been delivered and accepted. 2. Dividends _________________________ reduce retained earnings. 3. The divisor when preparing a common-size income statement is ____________________. 4. The divisor when preparing a comparative income statement is the ___________________________________________. 5. A pie chart can be constructed from a ____________________ income statement.

Hotel Income Statements

Exercise 3 Prepare an internal short-form income statement for the Dearborn Hotel. The data is for the year ended September 30, 20X9. Income of Revenue Centers: Rooms Food and Beverage Telecommunications Other Operated Departments Vending Machine Commissions Cash Discounts Earned Interest Income Rental of Store Space

$914,945 129,835 (54,426) 14,798 6,544 3,218 1,412 42,000

Expenses of Support Centers: A&G Marketing Property Operation and Maintenance

176,717 116,323 122,979

Other Expenses: Utility Costs Rent Property Taxes Insurance Interest Depreciation and Amortization Income Taxes

84,393 48,852 66,415 9,152 175,600 210,500 6,540

Sale of Assets: Loss on Sale of Property

(7,500)

Exercise 4 Prepare a statement of retained earnings for the above hotel given the following additional data: Dividends declared this year Retained earnings October 1, 20X8

75,000 351,478

Hotel Income Statements

HANDOUT 7-2: Exercises for Chapter 7 Exercise 1 Prepare an internal long-form income statement for Hotel Dalerags, Inc. The data is for the year ended September 30, 20X9. Net Revenue Rooms $1,174,067 Food and Beverage 709,940 Telecommunications 58,978 Other Operated Departments 75,725 Vending Machine Commissions 6,544 Cash Discounts Earned 3,218 Interest Income 1,412 Rental of Store Space 42,000 Gain on Sale of Property 20,500 Loss on Sale of Property (28,000) A&G Marketing Property Maintenance Utility Costs Rent Property Taxes Insurance Interest Depreciation and Amortization Income Taxes

Cost of Sales

Payroll Other and Related Expenses

205,468 71,491 16,043

187,583 297,141 34,005 37,665

71,539 77,496 7,908 7,219

116,050 70,844 49,745

60,667 45,479 73,234 84,393 48,852 66,415 9,152 175,600 210,500 6,540

Exercise 2 Prepare a statement of retained earnings for Hotel Bessdoon, Inc. The data is for the year ended March 31, 20X9. Dividends paid this year Dividends declared this year Income before income taxes Income taxes Retained earnings April 1, 20X8

$ 90,000 75,000 39,895 6,540 351,478

Exercise 3 Using the information in Exercise 2, prepare a combined statement of income and retained earnings given the following additional data: Revenues Expenses Loss on sale of property

$2,071,884 2,024,489 7,500

Hotel Income Statements

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

Optional Test A ready-to-use test containing questions related to the competencies covered by this chapter is included in this session. These questions are similar in format and content to the questions on the Final Exam that the Educational Institute provides and grades for students who are enrolled in this course with the Institute. (If your students are not enrolled in Institute’s course, they will not receive this Final Exam.) The answers to this session’s optional test are: 1-c-C1, 2-b-C1, 3-d-C1, 4-c-C2, 5-d-C3, 6-a-C3, 7-b-C1, 8-c-C3, 9-d-C2, 10-b-C2 Each question is linked to a competency. Competencies are listed on the first page of the chapter and in the Sample Lesson Plan. An answer reading 3-b-C4 translates to: 3: the question number b: the correct answer C4: the competency number The pages in the text that are associated with this chapter’s competencies are as follows: C1: 193–198 C2: 198–207 C3: 207–208 Note that the answers to test questions may not appear verbatim on the referenced pages. Test questions may assess the examinees’ ability to apply a concept, not just their knowledge of the concept. These questions can also be found on the CD-ROM in Rich Text Format (.rtf) files that most word processing programs can open and read. You can use these questions as a starter to create your own tests.

Hotel Income Statements

Hotel Income Statements NAME: _____________________________________________________ DATE: _________________________________ 1.

Which of the following is not an example of an internal user of a company’s financial statements? a. b. c. d.

Which of the following is the correct form of the equation that is the basis for preparing the income statement? a. b. c. d.

It is not prepared for incorporated businesses. It uses common-size percentages rounded to one decimal place. It is never combined with the income statement. It may be combined with the income statement.

The purpose of the statement of retained earnings is to show: a. b. c. d.

zeroing out the income statement bookkeeping accounts. classifying dividends as a business expense. restating the percentages as a component of the sales dollar. redesigning the statement.

Which of the following sentences about the statement of retained earnings is true? a. b. c. d.

American Institute of Certified Public Accountants Financial Accounting Standards Board Percentage Change Board of Review a and b

Interpretation of data shown on a common-size income statement can be simplified by: a. b. c. d.

Revenue = Expenses – Net Income Revenue - Expenses = Net Income Line Amount ÷ Net Sales = Common-Size Percentage Sales – Cost of Sales = Gross Profit

An external income statement must comply with the pronouncements of which of the following? a. b. c. d.

member of the board of directors department head stockholder top-level manager

the lifetime earnings retained by the corporation. the lifetime cash flow. the lifetime sales. all of the above.

The sources of hotel revenue might be: a. b. c. d.

profits and sales. sales, interest income, and dividend income. net income. all of the above.

Hotel Income Statements

The following information is provided: Dividends paid this year Dividends declared this year Net income this year Retained earnings, start of year

$ 30,000 40,000 100,000 150,000

The retained earnings at the end of this year are: a. b. c. d. 9.

$180,000. $220,000. $210,000. $260,000.

Following is a portion of an income statement: 20X8 $180,000

Sales

20X7 $190,000

In a comparative analysis, the percentage change from 20X7 to 20X8 is: a. b. c. d.

a 105% decrease. a 94.7% decrease. a 5.6% decrease. A 5.3% decrease.

10. The following is a portion of a comparative analysis: Cost of Sales

This Year $400,000

The cost of sales last year was: a. b. c. d.

$370,000. $430,000. $30,000. $60,000.

Change (30,000)

Hotel Income Statements

Competencies for Hotel Income Statements 1.

Describe the two groups who use a hotel income statement and the formats available for presenting data to them, and explain the elements and conventions used in preparing an income statement.

Explain the preparation and purposes of common-size and comparative income statements, and describe their analysis and interpretation.

Describe the purpose of and information reported on the statement of retained earnings.

Transparency Master 1

Hotel Income Statements

Hotel Income Statement Formats • Internal long-form format • Internal short-form format • External formats

Transparency Master 2

Ratio Analysis of the Income Statement Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Ratio Analysis of the Income Statement Competency 1:

Explain the use of ratios in the analysis of a hospitality business income statement, and list the advantages and limitations of their use. (pp. 221–223) Key Concepts: Success depends on realization of profits Sales volume reflects activity Income statement analysis Study of relationships between sales and expenses Comparison of relationships with benchmarks Prior years Industry standards Management goals Ratio Direct relationship between 2 relevant items for a period Expressed as a number Ratio analysis Advantages: easy to compute and use; basis of comparison against benchmarks; point to problems; establish trends Limitations: must be compared with other figures, do not solve problems; must be properly interpreted; estimates or procedural changes Transparency Masters: Transparency Master 2: Advantages of Ratio Analysis Transparency Master 3: Limitations of Ratio Analysis

Competency 2:

Summarize the general categories of popular income statement ratios. (pp. 223–225, 241–242) Key Concepts: Ratios used for comparison Prior-period Industry and trade association Budgeted Zero base budgeting Popular income statement ratios Profitability ratios: reflect effectiveness of management in producing income Profit margin ratio Return on equity ratio Activity (asset management) ratios: measure effectiveness of management’s use of assets Inventory turnover ratio Days’ inventory on hand ratio Operating ratios: measure effectiveness of management’s expense control and efficiency of operations Average room rate Occupancy percentage RevPAR Food cost percentage Labor cost percentage Prime cost percentage Average food check Occupancy ratios: measure success in selling rooms; computed for paid, complimentary, average, and multiple occupancy Occupancy percentage

Ratio Analysis of the Income Statement

Stock valuation ratios: used by investors to determine whether to buy, hold, or sell stock Earnings per share ratio Price earnings ratio Number of times interest earned ratio: number of times interest expense is covered by earnings (Net Income + Income Taxes + Interest) ÷ Interest Expense Interpretation Return on assets (ROA) ratio: measures how assets were used to generate net income Net Income ÷ Average Total Assets Interpretation Reference: Reference List of Ratio Formulas (pp. 242–243) Transparency Masters: Transparency Master 4: Meaningful Ratios for Comparison Purposes Transparency Master 5: Popular Income Statement Ratios Competency 3:

List the ratios typically used to analyze a hotel rooms department, and describe their formulas and interpretation. (pp. 225–229) Key Concepts: Profit margin (net income to sales) ratio: measure of profitability Departmental Income ÷ Net Sales Interpretation Labor cost percentage: measure of operating efficiency; provides labor cost on each sales dollar Total Payroll and Related Expenses ÷ Net Sales Interpretation Average room rate (ARR)/average selling price/average daily rate (ADR): provides average rate charged per paid room occupied; measure of operations Net Room Sales ÷ Paid Rooms Occupied Interpretation Occupancy percentage: measures room sales in terms of hotel’s capacity to generate rooms sold Paid Rooms Occupied ÷ Rooms Available RevPAR: measures how well hotel has filled its rooms, measured in dollars per room Rooms Revenue ÷ Rooms Available for Sale USALI doesn’t use out-of-order rooms or rooms reserved for corporate use in denominator Text Exhibits: Exhibit 1: Rooms Department Income Statement—Hotel DORO Reference: Reference List of Ratio Formulas (pp. 242–243) Transparency Masters: Transparency Master 6: Rooms Department Ratios

Competency 4:

List the ratios typically used to analyze a food and beverage department, and describe their formulas and interpretation. (pp. 229–236) Key Concepts: Profit margin ratio: measures profitability Departmental Income ÷ Net Sales Interpretation Labor cost percentage: provides operating measurement Total Payroll and Related Expenses ÷ Net Sales Interpretation Food cost percentage: shows food cost per dollar of sales; operating ratio Cost of Food Sold ÷ Net Food Sales Interpretation

Ratio Analysis of the Income Statement

Prime cost percentage: total labor and materials used in production or selling; operating measurement (Total Cost of Sales + Total Payroll and Related Expenses) ÷ Net Sales Interpretation Beverage cost percentage: shows beverage cost per dollar of sales; operating measurement Cost of Beverages Sold ÷ Net Beverage Sales Interpretation Well brands vs. call brands Average food check: represents average sale per cover; operating ratio Net Food Sales ÷ Covers Interpretation Average beverage check Average total check: includes sales of food and beverages for a cover Inventory turnover ratio: indicates how fast inventory moves through a hospitality business (number of times); shows activity; asset management tool; food and beverage computed separately Cost of Food (or Beverages) Used ÷ Average Food (or Beverage) Inventory Interpretation (purchase and use equals 1 “time”) Industry turnover norms (high vs. low; fine dining vs. quick service) Days’ inventory on hand ratio: measures average number of days inventory is on hand before use 365 Days ÷ Annual Inventory Turnover Ratio Interpretation Text Exhibits: Exhibit 2: Food and Beverage Department Income Statement—Hotel DORO Reference: Reference List of Ratio Formulas (pp. 242–243) Transparency Masters: Transparency Master 7: F&B Department Ratios Competency 5:

List the ratios typically used to analyze a hotel, and describe their formulas and interpretation. (pp. 236–241) Key Concepts: Hotel ratios: measure activities of single property or corporation For analyzing a single property Profit margin ratio: mixed measure of profitability Net Income ÷ Net Sales Interpretation Labor cost percentage: mixed measure of labor costs Total Payroll and Related Expenses ÷ Net Sales Interpretation For analyzing a hotel corporation Profit margin ratio: same formula as for hotel Interpretation Return on equity ratio: measures profit after taxes relative to equity of shareholders or measures return on common stockholders’ equity Equity is retained earnings of corporation and proceeds from sale of stock Net Income ÷ Average Equity (if common stock issued) Interpretation Net Income Less Preferred Dividends ÷ Average Common Shareholders’ Equity (if preferred stock issued) Earnings per share (EPS) Net Income ÷ Average Common Stock Outstanding Interpretation Simple capital structure Complex capital structure

Ratio Analysis of the Income Statement

Price earnings (PE) ratio: evaluates whether stock is reasonably priced Market Price per Share ÷ Earnings per Share Interpretation Text Exhibits: Exhibit 3: Long-Form Income Statement—Hotel DORO Exhibit 4: Condensed Balance Sheet—Hotel DORO Reference: Reference List of Ratio Formulas (pp. 242–243) Transparency Masters: Transparency Master 8: Hotel Ratios

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a hotel in your community and interview the manager about the ratio analysis of income statements. Alternatively, invite the manager to visit your class to discuss this topic. Discussion questions could include: • • •

What are some of the ratios the operation uses to analyze its income statement(s)? How are these ratios used to evaluate the hotel’s financial condition and operating performance? Does the manager set goals for some ratios?

Individual/Group Activities Activity 1 Have each student complete Handout 8-1, “Exercises for Chapter 8.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 1—Answer Key 1.

Cost of Food Sold Net Sales

Cost of Beverage Sold Net Beverage Sales

Cost of Food Used Average Food Inventory

$315,000 (35% × $900,000)

68% Computed as follows: Sales Food Cost Gross Profit

180,000 = 26.24% 686,000 =

50,000 = 20.08% 249,000 =

100% 32% 68%

$360,000 (12% × $3,000,000)

202,000 (4,800 + 3,600) ÷ 2

202,000 4,200

48.1 Times

Ratio Analysis of the Income Statement

7. 36% Computed as follows: Food Cost + Labor Cost = Prime Cost

32% = 32% + ? = 36% 68% = 68%

8. Occupancy Percentage: Average Room Rate:

Paid Rooms Occupied Rooms Available Net Room Sales Paid Rooms Occupied

9. Occupancy Percentage:

Paid Rooms Occupied Rooms Available

52,900 240 × 365

3,245,619 52,900 =

= $61.35

77,745 300 × 365

Average Room Rate:

Net Room Sales Paid Rooms Occupied

3,529,623 77,745

10. Occupancy Percentage:

Rooms Sold Rooms Available

59 75

= 79%

Average Room Rate:

Net Room Sales Paid Rooms Occupied

3,024 59

= $51.25

11. Occupancy Percentage: 12. Food cost for next year: $99,000 Computed as follows: Last year’s Food Cost % =

Paid Rooms Occupied Rooms Available

Food Cost Food Sales

52,900 = 60% 87,600

= $45.40

5,868 315 × 30

82,500 250,000

= 33%

Next year’s Food Cost $ = 33% × $300,000 Food Sales = $99,000 13. Estimated sales for next year: $519,750 Computed as follows: Average check Increase prior year’s average check 5% Food covers Increase prior year’s covers 10% Food sales (covers × average check)

Prior Year $ 9.00

77,745 = 71% 109,500

Next Year $

9.45

50,000 55,000 $ 519,750

5,868 9,450

62%

Ratio Analysis of the Income Statement

Activity 2 Have each student complete Handout 8-2. “Exercises for Chapter 8.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 2—Answer Key Formula

Computation

Result

Average food check

Net Food Sales Covers

153,000 17,436

$8.77

Food cost percentage

Cost of Food Sold Net Food Sales

48,960 153,000

32.0%

Labor cost percentage

Total Labor Net Sales

56,549 153,000

37.0%

Prime cost percentage

Cost of Sales + Labor Net Sales

105,509 153,000

69.0%

Food inventory turnover ratio

Cost of Food Used Average Food Inventory

49,960 (1,850 + 2,100) ÷ 2

25.3 Times

Days’ inventory on hand ratio

365 Days (or operating year) Annual Inventory Turnover Ratio

365 25.3

14.4 Days

Profit margin ratio

Net Income Net Sales

5,647 153,000

3.7%

Return on equity ratio

Net Income Average Equity

5,647 (77,353 + 83,000) ÷ 2

7.0%

Net Income Average Common Stock Outstanding

5,647 25,000

$.23

Market Price per Share Earnings per Share

6.75 .23

29.3

Earnings per share ratio

Price earnings ratio

Ratio Analysis of the Income Statement

HANDOUT 8-1: Exercises for Chapter 8 1. Compute the food cost ratio (with 2 decimals) from the following information: Food sales Allowances Cost of food sold

$690,000 4,000 180,000

2. Compute the beverage cost ratio (with 2 decimals) from the following information: Sales Allowances Cost of sales

Food $950,000 3,000 280,000

Beverage $250,000 1,000 50,000

3. Compute the food inventory turnover ratio (with 1 decimal) from the information: Food sales Allowances Net sales Cost of food sold: Beginning inventory Purchases Available Ending inventory Food used Employee meals Cost of food sold Gross profit

$690,000 3,000 687,000 $

4,800 200,800 205,600 3,600 202,000 2,000 200,000 487,000

4. What was a hotel’s current labor expense if its labor cost ratio was 35% and its net sales were $900,000?

5. What was the gross profit percentage if a food service operation had a food cost of 32%?

6. What was a hotel’s current net income if its profit margin ratio was 12% and its net sales were $3,000,000?

Ratio Analysis of the Income Statement

7. If the prime costs for a food service operation were 68% and the food cost was 32%, what was the labor cost ratio?

8. A 240-room hotel with a 365-day year sold 52,900 rooms (paid occupancy of $3,245,619) for the year. Compute its occupancy percentage (as a whole number) and its average room rate for that year.

9. A 300-room hotel with a 365-day year sold 77,745 rooms (paid occupancy of $3,529,623) for the year. Compute its occupancy percentage (as a whole number) and average room rate for that year.

10. A motel had 75 rooms available for sale on December 15. The paid room occupancy was $3,024 on 59 rooms sold for that evening. Compute the following ratios for December 15: Occupancy percentage (Show answer as a whole number.) Average room rate

11. In April,a hotel had a daily capacity of 315 rooms available for sale. The paid room occupancy was $397,557 on 5,868 room nights sold. Compute the occupancy percentage (as a whole number) based on rooms available to sell for the month of April.

12. Part of a restaurant’s income statement appeared as follows: Food Sales (net) Food Cost Gross Profit

$250,000 82,500 $167,500

Next year’s sales are forecasted at $300,000. The $50,000 is due to a volume increase in guests. Assuming there are no changes to food unit costs or quality, estimate the food cost for next year.

13. A restaurant’s average check last year was $9.00 on a volume of 50,000 food covers. Management is confident that with its newly renovated facilities and expanded menu, the average check can be increased by 5% and volume will increase by 10%. What will be the estimated food sales for next year if management’s forecasts are correct?

Ratio Analysis of the Income Statement

HANDOUT 8-2: Exercises for Chapter 8 Instructions: 1. Compute the following ratios. 2. Use the supplementary information and income statement provided to complete this assignment. 3. Write the formula (in words and numbers) and result on this page. 4. Unless the ratio result is stated in dollars and cents, show the computed result with one decimal, properly rounded (xx.x). Formula

Computation

Result

Average food check Food cost percentage Labor cost percentage Prime cost percentage Food inventory turnover ratio Days’ inventory on hand ratio Profit margin ratio Return on equity ratio Earnings per share ratio Price earnings ratio The following supplementary information and income statement are provided for the Garden Bistro, Inc: Supplementary Information Food covers: 17,436 Common stock issued and outstanding: 25,000 shares (all year) Common stock quotation, end of year: $6.75 a share Inventory 12/31/X6: $1,850 Inventory 12/31/X7: $2,100 Shareholders’ equity 12/31 /X6: $77,353 Shareholders’ equity 12/31 /X7: $83,000

Ratio Analysis of the Income Statement

Income Statement For the year ended December 31, 20X7 20X7 REVENUE Food Sales Allowances Net Revenue Cost of Food Used Employee Meals Cost of Food Sold Gross Profit

$ 154,000 1,000 153,000 $49,960 1,000 48,960 104,040

OPERATING EXPENSES Payroll Payroll Taxes and Employee Benefits China, Glassware Kitchen Fuel Laundry and Dry Cleaning Credit Card Fees Operating Supplies Advertising Utilities Repairs and Maintenance Total Operating Expenses

50,490 6,059 2,000 750 1,962 1,614 4,725 3,160 3,616 2,417 76,793

Income Before Fixed Charges and Income Taxes

27,247

FIXED CHARGES Rent Property Taxes Insurance Interest Depreciation Total Fixed Charges

6,000 1,400 3,400 3,600 6,000 20,400

Income Before Income Taxes Income Taxes

6,847 1,200

NET INCOME

$ 5,647

Ratio Analysis of the Income Statement

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

221–223 223–225, 241–242 225–229 229–236 236–241

Ratio Analysis of the Income Statement

Ratio Analysis of the Income Statement NAME: _____________________________________________________ DATE: _________________________________ 1.

Which of the following types of ratios represent the goals of management? a. b. c. d.

The occupancy percentage is computed by dividing: a. b. c. d.

industry ratio return on equity ratio price earnings ratio earnings per share ratio

Ratios that measure operations efficiency include: a. b. c. d.

the beginning inventory amount. the ending inventory amount. the number of days in the operating year. an average of inventories for the period.

Which of the following ratios is popular with the investment community for evaluating whether a stock is reasonably priced? a. b. c. d.

benchmarks prime costs equity expense margin

The inventory turnover ratio formula uses: a. b. c. d.

paid rooms occupied by rooms available. rooms available by paid rooms occupied. paid rooms occupied by net room sales. net room sales by paid rooms occupied.

Which of the following terms refers to the total labor and materials used in a production or selling process? a. b. c. d.

prior-period ratios industry ratios budgeted ratios stock valuation ratios

food cost percentage and labor cost percentage. return on equity and profit margin. EPS and PER. all of the above.

If a city hotel’s food operation has a food inventory turnover ratio of 45 times, the average number of days that inventory is on hand is: a. b. c. d.

12 days. 8 days. 45 days. 1.5 days.

Ratio Analysis of the Income Statement

A hotel provides the following information for its year ended: Room Sales Food Sales Food Cost Statistical Data: 140 Rooms Available for Sale Paid Rooms Occupied: 35,770 Covers: 72,500 70 Tables, 252 Chairs

$ 2,575,440 870,000 295,800

The average room rate was: a. b. c. d. 9.

$96.32. $87.00. $78.00. $72.00.

$ 2,575,440 870,000 295,800

The occupancy percentage (stated as a whole number) was: a. b. c. d.

75%. 70%. 65%. 60%.

10. Use the following corporate data to answer the problem below: Sales Expenses IBIT Income taxes Net income

$ 800,000 600,000 200,000 60,000 140,000

Average number of common shares issued and outstanding: 500,000 shares Shareholders’ equity information: As at this year ended: $900,000 As at last year ended: $500,000 The return on equity (stated as a whole number) is: a. b. c. d.

29%. 22%. 20%. 16%.

Ratio Analysis of the Income Statement

Competencies for Ratio Analysis of the Income Statement 1. Explain the use of ratios in the analysis of a hospitality business income statement, and list the advantages and limitations of their use. 2. Summarize the general categories of popular income statement ratios. 3. List the ratios typically used to analyze a hotel rooms department, and describe their formulas and interpretation. 4. List the ratios typically used to analyze a food and beverage department, and describe their formulas and interpretation. 5. List the ratios typically used to analyze a hotel, and describe their formulas and interpretation.

Transparency Master 1

Ratio Analysis of the Income Statement

Advantages of Ratio Analysis • Ratios are easy to compute and use. • Ratios provide a basis of comparison. • Ratios can point to problem areas. • Ratios provide a basis for establishing trends.

Transparency Master 2

Ratio Analysis of the Income Statement

Limitations of Ratio Analysis • A ratio standing alone cannot be properly evaluated. • Ratios do not solve problems. • Ratios must be properly interpreted. • Income statements contain estimates that may influence results. • A change in accounting procedures may influence ratios.

Transparency Master 3

Ratio Analysis of the Income Statement

Meaningful Ratios for Comparison Purposes •

Prior-period ratios

•

Industry and trade association ratios

•

Budgeted ratios

Transparency Master 4

Ratio Analysis of the Income Statement

Popular Income Statement Ratios • Profitability ratios • Activity ratios • Operating ratios • Occupancy ratios • Stock valuation ratios • Number of times interest earned ratio • Return on assets ratio

Transparency Master 5

Ratio Analysis of the Income Statement

Rooms Department Ratios • Profit margin ratio • Labor cost percentage • Average room rate • Occupancy percentage • RevPAR

Transparency Master 6

Ratio Analysis of the Income Statement

F&B Department Ratios • Profit margin ratio • Labor cost percentage • Food cost percentage • Prime cost percentage • Beverage cost percentage • Average food check • Average beverage check • Average total check • Inventory turnover ratio • Days’ inventory on hand ratio

Transparency Master 7

Ratio Analysis of the Income Statement

Hotel Ratios • Profit margin ratio • Labor cost percentage • Return on equity ratio • Earnings per share ratio • Price earnings ratio

Transparency Master 8

Hotel Balance Sheets Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Hotel Balance Sheets Competency 1:

Describe the purpose, general content, and users of a hotel balance sheet, and explain the elements and conventions used in preparing a balance sheet. (pp. 253–254) Key Concepts: Hotel balance sheet (statement of financial position) Shows assets, liabilities, and owners’ equity Shows financial health of company on certain date (what company owns and owes) Internal and external formats Users: executives, directors, shareholders, creditors, and investors Elements Assets = Liabilities + Equity Assets = Claims (of creditors and owners) Conventions Going concern principle Historical cost principle Principle of conservatism

Competency 2:

Explain assets, and identify current and noncurrent assets. (pp. 254–256) Key Concepts: Asset: Anything of monetary value owned by a business Provides future benefits, rights, or claims Current assets: will be converted to cash within 12 months; listed in descending order of liquidity Cash Short-term investments (marketable securities) Accounts receivable Inventories Prepaid expenses Noncurrent assets: won’t be converted to cash within 12 months Noncurrent receivables Investments Property and equipment (fixed assets) Other assets (intangible assets and deferred charges) Transparency Masters: Transparency Master 2: Current Assets Transparency Master 3: Noncurrent Assets

Competency 3:

Explain liabilities, and identify current and long-term liabilities. (pp. 256–257) Key Concepts: Liabilities Amounts owed creditors Current liabilities: due within 12 months of balance sheet date Current portions of long-term loans Deferred credits Unearned revenue Deferred income tax—permanent vs. timing (temporary) differences Long-term liabilities: due beyond 12 months of balance sheet

Hotel Balance Sheets

Transparency Masters: Transparency Master 4: Liabilities Competency 4:

Describe the items that might appear in the equity section of a balance sheet. (pp. 257–258) Key Concepts: Equity section (shareholders’ or stockholders’ equity) Common stock issued Preferred stock issued Additional paid-in capital Retained earnings Donated capital Treasury stock

Competency 5:

Differentiate between the account and report formats and the internal and external formats for a balance sheet. (pp. 258–260) Key Concepts: Account format: lists asset accounts on left and list equity accounts on right Report format: more popular; assets, liabilities, and owners’ equity sequentially in column Internal vs. external: external more condensed Text Exhibits: Exhibit 1: Balance Sheet—Report Format Exhibit 2: Balance Sheet (Internal)—Hotel DORO Exhibit 3: Balance Sheet (External)—Hotel DORO Transparency Masters: Transparency Master 5: Hotel Balance Sheet Formats

Competency 6:

Explain the preparation and purposes of common-size and comparative balance sheets, and describe their analysis and interpretation. (pp. 260–267) Key Concepts: Common-size balance sheet: measures relationship of each item to total assets Line Amount ÷ Total Assets = Common-Size Percentage Analysis (vertical) Example: Hotel DORO—analysis and interpretation Comparative balance sheet: presents data for two or more periods for comparison Analysis (horizontal) Shows dollar changes, percentage changes Interpretation: special vocabulary (increase, upward; decrease, downward; no change; not measurable) Example: Hotel DORO—comparative balance sheet, interpretation Text Exhibits: Exhibit 4: Common-Size Balance Sheet—Hotel DORO Exhibit 5: Comparative Balance Sheet—Hotel DORO

Competency 7:

Explain the relationship between the statement of retained earnings and the balance sheet. (p. 267) Key Concepts: Statement of retained earnings Link between income statement and balance sheet Brings computed retained earnings amount over to balance sheet Text Exhibits: Exhibit 6: Statement of Retained Earnings—Hotel DORO

Hotel Balance Sheets

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a hotel in your community and interview the accountant about the balance sheet(s) prepared for the property. Or invite the accountant to visit your class to discuss this topic. Discussion could include: • •

An explanation of the formats and the line items used. The differences in the level of detail reported on the hotel’s internal and external balance sheets.

Individual/Group Activities Activity 1 Have each student complete Handout 9-1, “Exercises for Chapter 9.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 1—Answer Key Exercise 1 1.

The balance sheet is also called the statement of financial position.

The balance sheet for a hotel shows its assets, liabilities, and owners’ equity.

The income statement shows the profit for a period, and the balance sheet shows what a company owns and owes.

The accounting equation is Assets = Liabilities + Equity.

The accounting equation can be restated as a financial equation as follows: Assets = Claims of Creditors + Claims of Owners.

The going concern principle and historical cost principle dictate that assets are shown at amounts not greater than their cost.

The conservatism principle dictates that certain kinds of assets are shown at the lesser of their cost or current market value.

In accounting, the term “investments” generally refers to an asset that is classified as a noncurrent asset.

Deferred income taxes arise because of timing (temporary) differences.

10. When a company acquires its own stock, it is called treasury stock and shown in the equity section of the balance sheet.

Hotel Balance Sheets

Exercise 2

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

CA:Current asset IN: Investment PE: Property and equipment

OA: CL: EQ:

Food inventory Accounts payable Common stock issued Customer deposits Prepaid expense Franchise right (acquired) Vehicles Accumulated depreciation Allowance: doubtful accounts Rooms furniture

CA CL EQ CL CA OA PE PE CA PE

Other asset Current liability Equity 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Short-term investments Accounts receivable Preferred stock issued Unearned revenue Goodwill (acquired) China, glassware Office supplies inventory Treasury stock Additional paid-in capital Stoves and ovens

Exercise 3 1.

Cash Inventories Prepaid Expenses Accounts Receivable Short-Term Investments Current Assets

Additional Paid-In Capital Retained Earnings Common Stock Issued Shareholders’ Equity

Land China, Glassware, Silver Building Accumulated Depreciation Furniture and Equipment Fixed Assets

Dividends Payable Current Portion of Long-Term Debt Accrued Payroll Deposits and Credit Balances Accounts Payable Sales Tax Payable Current Liabilities

Current Assets Fixed Assets Total Assets

61,506 10,143 12,165 38,840 25,000 147,654

700,000 278,118 50,000 $ 1,028,118 807,500 49,403 2,500,000 (640,000) 427,814 $ 3,144,717

24,619 70,000 9,218 5,875 18,642 10,899 139,253

147,654 3,144,717 $ 3,292,371

CA CA EQ CL OA PE CA EQ EQ PE

Hotel Balance Sheets

Activity 2 Have each student complete Handout 9-2, “Exercises for Chapter 9.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 2—Answer Key Banner Motel, Inc. BALANCE SHEET December 31, 20X9 ASSETS Current Assets: Cash—House Banks Cash—Demand Deposits Short-Term Investments Accounts Receivable Less: Allowance for Doubtful Accounts Inventories Prepaid Expenses Total Current Assets Property and Equipment: Land Building Furniture and Equipment Less Accumulated Depreciation Total Leasehold Improvements (net) China, Glassware, and Silver (net) Total Property and Equipment Other Noncurrent Assets: Security Deposits Preopening Costs (net) Total Other Assets TOTAL ASSETS

15,000 47,711 73,332 1,827

62,711 28,000 71,505 34,336 13,214 209,766

500,000 2,827,000 1,143,000 997,000 3,473,000 15,000 48,700 3,536,700 3,000 7,500 10,500 $ 3,756,966 LIABILITIES

Current Liabilities: Accounts Payable Current Portion of Long-Term Debt Federal and State Income Taxes Payable Accrued Payroll Other Accrued Items Deposits and Credit Balances Total Current Liabilities Long-Term Debt: Mortgage Payable Less Current Portion TOTAL LIABILITIES

38,522 95,000 4,192 38,600 25,690 5,129 207,133 1,475,000 95,000

1,380,000 $ 1,587,133

Hotel Balance Sheets

SHAREHOLDERS’ EQUITY Common Stock, par value $5, Authorized 300,000 Shares, Issued 150,000 Shares Additional Paid-In Capital Retained Earnings Total Shareholders’ Equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

750,000 1,110,000 309,833 2,169,833 $ 3,756,966

Hotel Balance Sheets

HANDOUT 9-1: Exercises for Chapter 9 Exercise 1 1. The balance sheet is also called the

2. The balance sheet for a hotel shows its

, and

3. The income statement shows the profit for a period, and the balance sheet shows what a company and . 4. The accounting equation is

5. The accounting equation can be restated as a financial equation as follows: =

6. The principle and at amounts not greater than their cost.

principle dictate that assets are shown

7. The principle dictates that certain kinds of assets are shown at the lesser of their cost or current market value. 8. In accounting, the term “investments” generally refers to an asset that is classified as a asset. 9. Deferred income taxes arise because of

differences.

10. When a company acquires its own stock, it is called section of the balance sheet.

and shown in the

Exercise 2 CA: Current asset IN: Investment PE: Property and equipment 1. Food inventory 2. Accounts payable 3. Common stock issued 4. Customer deposits 5. Prepaid expense 6. Franchise right (acquired) 7. Vehicles 8. Accumulated depreciation 9. Allowance: doubtful accounts 10. Rooms furniture

OA: Other asset CL: Current liability EQ: Equity ____ ____ ____ ____ ____ ____ ____ ____ ____ ____

11. Short-term investments 12. Accounts receivable 13. Preferred stock issued 14. Unearned revenue 15. Goodwill (acquired) 16. China, glassware 17. Office supplies inventory 18. Treasury stock 19. Additional paid-in capital 20. Stoves and ovens

____ ____ ____ ____ ____ ____ ____ ____ ____ ____

Hotel Balance Sheets

Exercise 3 From the information below, answer the following questions: 1. 2. 3. 4. 5.

What is the total of current assets? What is the total of shareholders’ equity? What is the total of fixed assets? What is the total of current liabilities? What is the total of assets?

1. 2. 3. 4. 5.

Worksheet for Balance Sheet Preparation December 31, 20X1 debit credit Land $ 807,500 Cash 61,506 Dividends Payable $ 24,619 China, Glassware, and Silver 49,403 Inventories 10,143 Building 2,500,000 Current Portion of Long-Term Debt 70,000 Prepaid Expenses 12,165 Additional Paid-In Capital 700,000 Accrued Payroll 9,218 Retained Earnings 278,118 Accumulated Depreciation 640,000 Deposits and Credit Balances 5,875 Accounts Receivable (net) 38,840 Accounts Payable 18,642 Sales Tax Payable 10,899 Mortgage Payable 2,125,000 (due after 12/31/X2) Common Stock Issued 50,000 Furniture and Equipment 427,814 Short-term investments 25,000

Hotel Balance Sheets

HANDOUT 9-2: Exercises for Chapter 9 Prepare a balance sheet using the internal format for the Banner Motet Inc., as of its year ended December 31, 20X9. The following are selected accounts from the worksheet necessary to prepare this statement: Balance Sheet dr cr Cash—House Banks 15,000 Cash—Regular Checking 46,711 Cash—Payroll Checking 1,000 Short-term investments 28,000 Guest Ledger (debit balances) 47,218 City Ledger 26,114 Allowance for Doubtful Accounts 1,827 Food Inventory 12,718 Beverage Inventory 6,756 Supplies Inventory 14,862 Prepaid Insurance 8,714 Prepaid Rent 4,500 Land 500,000 Building 2,827,000 Furniture 625,000 Equipment 518,000 Allowance for Depreciation: Building 472,000 Allowance for Depreciation: Furniture 275,000 Allowance for Depreciation: Equipment 250,000 Leasehold Improvements 15,000 China, Glassware, and Silver 48,700 Security Deposits 3,000 Preopening Costs (net) 7,500 Accounts Payable 38,522 Income Taxes Payable 4,192 Accrued Payroll 38,600 Other Accrued Items 25,690 Guest Ledger Credit Balances 5,129 Mortgage Payable 1,475,000 Common Stock 750,000 Additional Paid-In Capital 1,110,000 Retained Earnings 276,478 (prior to closing entries) The following notes are an integral part of preparing the balance sheet: 1. Of the $1,475,000 mortgage payable balance, $95,000 is due in the next 12 months. 2. There are 300,000 shares of $5 par common stock authorized; 150,000 shares have been issued. 3. The retained earnings of $276,478 are not the retained earnings as of the period ended December 31 and should be ignored. To compute the retained earnings for December 31, the following data is provided: Retained earnings 1/1/X9 $351,478 Net income for the year ended 12/31/X933,355 Dividends declared during the year 75,000 4. For your convenience, a check point amount for total assets is provided: $3,756,966.

Hotel Balance Sheets

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

253–254 254–256 256–257 257–258 258–260 260–267 267

Hotel Balance Sheets

Hotel Balance Sheets NAME: _____________________________________________________

DATE: _________________________________ 1.

Which of the following is not a major section of a hotel’s balance sheet? a. b. c. d.

Among current assets, cash includes all of the following except: a. b. c. d.

c. d.

It is dependent upon the equity transactions that have occurred. It results when a hotel collects room or banquet deposits from guests before any services have been rendered. It may appear on a balance sheet under another name. b and c

Which of the following types of balance sheets presents data for two or more periods? a. b. c. d.

inventories investments property and equipment other assets

Which of the following is true of unearned revenue? a. b.

checking and savings accounts. bank accounts with restricted use. certificates of deposit. house banks.

China, glassware, silver, and linen belong in which category of assets? a. b. c. d.

revenue assets liabilities equity

comparative common-size account format report format

On a financial statement, if this year’s data is larger than last year’s data, the change is called: a. b. c. d.

a gain. an increase. a cross-check. unearned revenue.

Matching Classify the items below (questions 7–10) using these codes (a–e): Code Classification a Current Asset b Property and Equipment c Current Liability d Long-Term Liability e Equity 7. Beverage inventory 8. The next 12 monthly payments on a 30-year mortgage 9.

Freezers and ovens

10.

Common stock issued

Hotel Balance Sheets

Competencies for Hotel Balance Sheets 1.

Describe the purpose, general content, and users of a hotel balance sheet, and explain the elements and conventions used in preparing a balance sheet.

Explain assets, and identify current and noncurrent assets.

Explain liabilities, and identify current and long-term liabilities.

Describe the items that might appear in the equity section of a balance sheet.

Differentiate between the account and report formats and the internal and external formats for a balance sheet.

Explain the preparation and purposes of common-size and comparative balance sheets, and describe their analysis and interpretation.

Explain the relationship between the statement of retained earnings and the balance sheet.

Transparency Master 1

Hotel Balance Sheets

Current Assets • Cash • Short-term investments • Accounts receivable • Inventories • Prepaid expenses

Transparency Master 2

Hotel Balance Sheets

Noncurrent Assets • Noncurrent receivables • Investments • Property and equipment • Other assets (intangible assets and deferred charges)

Transparency Master 3

Hotel Balance Sheets

Liabilities • Current • Long-term

Transparency Master 4

Hotel Balance Sheets

Hotel Balance Sheet Formats • Account format • Report format

Transparency Master 5

Ratio Analysis of the Balance Sheet Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Ratio Analysis of the Balance Sheet Competency 1:

Describe the use of ratios in the analysis of a hospitality business balance sheet. (pp. 277–278) Key Concepts: Ratio analysis of balance sheet: important in problem diagnosis Analysis: calculating percentages and ratios Interpretation: comparisons to prior-period, industry and trade association, and budgeted ratios Liquidity: ability to pay current liabilities Current ratio Quick ratio Asset management: controlling assets according to company policies and sales volume Accounts receivable turnover ratio Average collection period ratio Inventory turnover ratio Fixed asset turnover ratio Debt management: a measure of solvency (company’s ability to meet long-term obligations) Solvency Debt-to-equity ratio Assets-to-liabilities ratio Transparency Masters: Transparency Master 2: Ratios for Analyzing the Balance Sheet

Competency 2:

Explain the purpose and use of the current ratio, and describe its formula and interpretation. (pp. 278–282) Key Concepts: Current ratio aka working capital ratio Formula: Current Assets ÷ Current Liabilities Interpretation Banks require 2.0 for loan approval Composition—need to take liquidity into account Text Exhibits: Exhibit 1: The Hotel DORO’s Balance Sheet Reference: Reference List of Ratio Formulas (p. 289) Transparency Masters: Transparency Master 3: Current Ratio

Competency 3:

Explain the purpose and use of the quick ratio, and describe its formula and interpretation. (p. 282) Key Concepts: Quick ratio (aka acid-test ratio): includes only highly liquid current assets [Cash + Short-Term Investments + Receivables (Net)] ÷ Current Liabilities Interpretation Banks require quick ratio of 1.0 for loan approval Quick ratio is typically close to current ratio for hospitality operations Text Exhibits: Exhibit 1: The Hotel DORO’s Balance Sheet

Ratio Analysis of the Balance Sheet

Reference: Reference List of Ratio Formulas (p. 289) Transparency Masters: Transparency Master 4: Quick Ratio Competency 4:

Explain the purpose and use of the accounts receivable turnover ratio, and describe its formula and interpretation. (pp. 282–283) Key Concepts: Accounts receivable turnover ratio: measures average number of times that receivables are collected during a period Formula: Net Revenue ÷ Average Accounts Receivable (Net) Interpretation (“times”) Example: Hotel DORO Text Exhibits: Exhibit 1: The Hotel DORO’s Balance Sheet Exhibit 2: Condensed Income Statement—Hotel DORO Reference: Reference List of Ratio Formulas (p. 289) Transparency Masters: Transparency Master 5: Accounts Receivable Turnover Ratio

Competency 5:

Explain the purpose and use of the average collection period ratio, and describe its formula and interpretation. (pp. 283–284) Key Concepts: Average collection period ratio: used to evaluate credit and collection policy Formula: 365 ÷ Accounts Receivable Turnover Interpretation (“days”) Example: Hotel DORO Text Exhibits: Exhibit 1: The Hotel DORO’s Balance Sheet Exhibit 3: Food & Beverage Condensed Income Statement—Hotel DORO Reference: Reference List of Ratio Formulas (p. 289) Transparency Masters: Transparency Master 6: Average Collection Period Ratio

Competency 6:

Identify the formulas for food and beverage inventory turnover. (p. 284) Key Concepts: Food inventory turnover ratio Formula: Cost of Food Used ÷ Average Food Inventory Beverage inventory turnover ratio Formula: Cost of Beverages Used ÷ Average Beverage Inventory Text Exhibits: Exhibit 1: The Hotel DORO’s Balance Sheet Reference: Reference List of Ratio Formulas (p. 289) Transparency Masters: Transparency Master 7: Inventory Turnover Ratio

Competency 7:

Explain the purpose and use of the fixed asset turnover ratio, and describe its formula and interpretation. (p. 285) Key Concepts: Fixed asset turnover ratio: measures management’s effectiveness in using fixed assets to generate revenue; requires both balance sheet and income statement

Ratio Analysis of the Balance Sheet

Formula: Net Revenue ÷ Average Fixed Assets Interpretation Example: Hotel DORO Limitations Subject to wide variation because of depreciation Ignores market value of assets Text Exhibits: Exhibit 1: The Hotel DORO’s Balance Sheet Exhibit 2: Condensed Income Statement—Hotel DORO Reference: Reference List of Ratio Formulas (p. 289) Transparency Masters: Transparency Master 8: Fixed Asset Turnover Ratio Competency 8:

Explain the purpose and use of the debt-to-equity ratio, and describe its formula and interpretation (pp. 285–286) Key Concepts: Debt-to-equity ratio: shows extent of borrowing and whether creditors or owners are financing the most assets; indicator of risk Formula: Total Liabilities ÷ Total Equity Interpretation (use of financial leverage) Example: Hotel DORO Significance Each corporation has optimal credit and debt structure High ratio is not necessarily unfavorable Text Exhibits: Exhibit 1: The Hotel DORO’s Balance Sheet Reference: Reference List of Ratio Formulas (p. 289) Transparency Masters: Transparency Master 9: Debt-to-Equity Ratio

Competency 9:

Explain the purpose and use of the assets-to-liabilities ratio, and describe its formula and interpretation (pp. 286–287) Key Concepts: Assets-to-liabilities ratio aka solvency ratio: greater than 1.00 for a solvent operation Formula: Total Assets ÷ Total Liabilities Interpretation Example: Hotel DORO Variations Debt-to-assets ratio (liabilities-to-assets ratio) All produce same result Text Exhibits: Exhibit 1: The Hotel DORO’s Balance Sheet Reference: Reference List of Ratio Formulas (p. 289) Transparency Masters: Transparency Master 10: Assets-to-Liabilities Ratio

Competency 10:

Describe the computation, composition, and importance of working capital. (pp. 287–289) Key Concepts: Working capital: mismanagement is a leading cause of business failure Computation: Current Assets – Current Liabilities Composition (converting to percentages)

Ratio Analysis of the Balance Sheet

Adequate Enables business operation and response to emergencies without danger of financial disaster Benefits Inadequate: causes Excess: causes Factors affecting working capital requirements Transparency Masters: Transparency Master 11: Computation of Working Capital

Individual/Group Activities Activity 1 Have each student complete Handout 10-1, “Exercises for Chapter 10.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 1—Answer Key Exercise 1 1. Actual 2.9 1.5 25.3 3.2 1.3 1.8

Current ratio Quick ratio Accounts receivable turnover ratio Fixed asset turnover ratio Debt-to-equity ratio Assets-to-liabilities ratio

Budgeted 2.5 1.8 15.0 2.4 1.5 1.7

2. a.

Assets 2.20

= =

Claims of Creditors 1.20

+ +

Claims of Owners 1.00

Assets 100%

= =

Claims of Creditors 55%

+ +

Claims of Owners 45%

The creditors are financing most of the assets.

3. a.

Assets 1.83

= =

Claims of Creditors 1.00

+ +

Claims of Owners .83

Assets 100%

= =

Claims of Creditors 55%

+ +

Claims of Owners 45%

The creditors are financing most of the assets.

Interpretation favorable unfavorable favorable favorable favorable favorable

Ratio Analysis of the Balance Sheet

Exercise 2 Cash Marketable Securities Accounts receivable Inventories Prepaid expenses Total current assets

$120,000 450,000 36,000 60,000 15,000 $681,000

17.6% 66.1 5.3 8.8 2.2 100.0%

Exercise 3 a. 2.65 b. 2.65 c. 4.00 Current Assets Cash Marketable Securities Receivables Inventories Total Current Liabilities Accounts payable Other Total

(a) $ 30,000 0 15,000 8,000 53,000

(b) 10,000 20,000 15,000 8,000 53,000

$ 9,000 11,000 20,000

9,000 11,000 20,000

0 11,000 11,000

Current Ratio:

53,000 20,000

44,000 11,000

Current Ratio:

2.65

4.00

Activity 2 Have each student complete Handout 10-2, “Exercises for Chapter 10.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 2—Answer Key Exercise 1 1. Current ratio: Current Assets Current Liabilities

25,000 13,000

1.92

2. Quick ratio: Cash + Marketable Securities + Net Receivables Current Liabilities

21,500 13,000

16.36 Times

3. Accounts receivable turnover ratio: Net Revenue Average Net Accounts Receivable

180,000 11,000

4. Average collection period ratio: 365 Accounts Receivable Turnover

365 16.36

22.31 Days

1.65

Ratio Analysis of the Balance Sheet

5. Assets-to-liabilities ratio: Total Assets Total Liabilities

191,000 115,000

1.66

115,000 76,000

6. Debt-to-equity ratio: Total Liabilities Total Shareholders’ Equity

1.51

7. Number of times interest earned ratio: Income before income taxes + Interest Expense Interest Expense

10,000 + 5,000 5,000

= 15,000 5,000

20,000 2,000

10 Times

3 Times

8. Food inventory turnover: Cost of Sales Average Inventory

20,000 (2,000 + 2,000) ÷ 2

9. Return on shareholders’ equity: Net Income Average Shareholders’ Equity

7,000 (70,000 + 76,000) ÷ 2

7,000 73,000

10. Net income to sales ratio: Net Income Net Sales

7,000 180,000

3.9%

11. Return on assets ratio: Net Income Average Total Assets

7,000 (179,000 + 191,000) ÷ 2

120,000 6,000

12. Average room rate: (Net) Rooms Revenue Rooms Sold

$20.00

13. Average food check: Net Food Sales Number of Covers

50,000 12,000

$4.17

20,000 50,000

40%

14. Food cost percentage: Cost of Food Sold Net Food Sales

15. Change % for cash: Beginning Balance Ending Balance Change Change % 16. Change % for prepaid expenses: Beginning Balance Ending Balance Change Change %

$5,000 9,500 4,500 Increase 90% (4,500 ÷ 5,000) $2,000 1,500 500 Decrease (25%) (500 ÷ 2,000)

7,000 185,000

3.8%

9.6%

Ratio Analysis of the Balance Sheet

HANDOUT 10-1: Exercises for Chapter 10 Exercise 1 Interpreting Ratio Results 1. Executive managers of the Degdon & Dale Hotels, Inc., have completed analyzing the balance sheet for the current period. Compare the results against the budgeted goals and provide a preliminary indication of whether the results are favorable or unfavorable. Do not consider any other factors but the ratio numbers provided.

Current ratio Quick ratio Accounts receivable turnover ratio Fixed asset turnover ratio Debt-to-equity ratio Assets-to-liabilities ratio

Actual Budgeted

Interpretation

2.9 1.5 25.3 3.2 1.3 1.8

____________ ____________ ____________ ____________ ____________ ____________

2.5 1.8 15.0 2.4 1.5 1.7

2. The debt-to-equity ratio is 1.20 at the end of a hospitality corporation’s current year. a. State this result in the form of the financial (accounting) equation. __________________________________________ __________________________________________ b. Restate this result using percentages (rounded to a whole number) in the financial equation. __________________________________________ __________________________________________ c. Who is financing most of the assets? __________________________________________ 3. The assets-to-liabilities ratio is 1.83 at the end of a hospitality corporation’s current year. a. State this result in the form of the financial (accounting) equation. __________________________________________ __________________________________________ b. Restate this result using percentages (rounded to a whole number) in the financial equation. __________________________________________ __________________________________________ c. Who is financing most of the assets? __________________________________________

Ratio Analysis of the Balance Sheet

Exercise 2 Composition of Working Capital Compute the percentage composition of the current asset section of the Beemar Hotels, Inc., from the information provided below. Carry your answers to one decimal. Cash Marketable securities Accounts receivable Inventories Prepaid expenses Total current assets

$120,000 450,000 36,000 60,000 15,000 $681,000

____________ ____________ ____________ ____________ ____________ ____________

Exercise 3 Effect of Changes to Components of Working Capital The following are the current assets and current liabilities for a hospitality company: Current Assets Cash Marketable securities Receivables Inventories Current Liabilities Accounts payable Other

$30,000 0 15,000 8,000 $ 9,000 11,000

Requirements: (Carry answers to 2 decimals.) a. What is the current ratio from the above information? b. Assume that management invests $20,000 of excess cash into marketable securities. What would be the current ratio? c. Instead of investing in marketable securities, assume that management pays all its accounts payable. What would be the current ratio?

Ratio Analysis of the Balance Sheet

HANDOUT 10-2: Exercises for Chapter 10 Comprehensive Analysis Problem Using Balance Sheet and Income Statement The balance sheet, statement of income, and supplementary information are presented for the Sample Motel. The requirements for this assignment are listed at the end of the financial data. STUDENT NOTE: The end-of-year data is in the right-most column. SAMPLE MOTEL BALANCE SHEET Beginning of Year ASSETS CURRENT ASSETS Cash Accounts Receivable Food Inventory Prepaid Expenses Total PROPERTY AND EQUIPMENT, AT COST Land Building Accumulated Depreciation—Building Furniture and Equipment Accumulated Depreciation—Furniture and Equipment Total Total Assets

5,000 10,000 2,000 2,000 19,000

End of Year

9,500 12,000 2,000 1,500 25,000

50,000 400,000 (300,000) 40,000

50,000 400,000 (307,000) 48,000

(30,000) 160,000 $179,000

(25,000) 166,000 $191,000

LIABILITIES CURRENT LIABILITIES Accounts Payable Wages Payable Mortgage Payable—Current Portion Total LONG-TERM DEBT Mortgage Payable Note—Local Bank Total Total Liabilities

7,000 2,000 0 9,000 100,000 0 100,000 109,000

6,000 2,000 5,000 13,000 95,000 7,000 102,000 115,000

OWNERS’ EQUITY Capital Stock Retained Earnings Total Total Liabilities and Owners’ Equity

10,000 60,000 70,000 $179,000

10,000 66,000 76,000 $191,000

Ratio Analysis of the Balance Sheet

SAMPLE MOTEL STATEMENT OF INCOME Cost of Sales

Revenue Operated Departments Rooms Food Rentals and Other income Total Operated Departments

$120,000 50,000 10,000 180,000

-020,000 -020,000

Undistributed Operating Expenses Administrative and General Marketing Property Operation and Maintenance Energy Costs Total Undistributed Operating Expenses Income Before Fixed Charges

$180,000

$ 20,000

Payroll and Related Expenses

Other Expenses

Income (Loss)

$ 30,000 15,000 -045,000

$ 30,000 8,000 -038,000

$ 60,000 7,000 10,000 77,000

20,000 -05,000 -0$ 25,000

2,000 5,000 3,000 12,000 $ 22,000

22,000 5,000 8,000 12,000 47,000

$ 70,000

$ 60,000

30,000

Rent, Property Taxes, and Insurance Interest Expense Depreciation Expense Total Income Before Gain on Sale of Property and Income Taxes Gain on Sale of Property Income Before Income Taxes Income Taxes Net Income

8,000 2,000 10,000 3,000 $ 7,000

SAMPLE MOTEL SUPPLEMENTARY INFORMATION Business year: 365 days Food covers for the year: 12,000 Number of rooms sold for the year: 6,000 FINANCIAL STATEMENT ANALYSIS TO BE PERFORMED 1. Current ratio (Carry answer to 2 decimals.) 2.

7,000 5,000 10,000

Quick ratio (Carry answer to 2 decimals.)

3. Accounts receivable turnover ratio (Carry answer to 2 decimals.) 4. Average collection period ratio (Carry answer to 2 decimals.) 5. Assets-to-liabilities ratio (Carry answer to 2 decimals.) 6. Debt-to-equity ratio (Carry answer to 2 decimals.) 7. Number of times interest earned ratio (whole number)

Ratio Analysis of the Balance Sheet

8. Food inventory turnover (whole number) 9. Return on shareholders’ equity (Carry answer to 1 decimal.) 10. Net income to sales ratio (Carry answer to 1 decimal.) 11. Return on assets ratio (Carry answer to 1 decimal.) 12. Average room rate 13. Average food check 14. Food cost percentage (whole number) 15. What is the change % for cash? (whole number) 16. What is the change % for prepaid expenses? (whole number)

Ratio Analysis of the Balance Sheet

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

Optional Test A ready-to-use test containing questions related to the competencies covered by this chapter is included in this session. These questions are similar in format and content to the questions on the Final Exam that the Educational Institute provides and grades for students who are enrolled in this course with the Institute. (If your students are not enrolled in Institute’s course, they will not receive this Final Exam.) The answers to this session’s optional test are: 1-a-C2, 2-d-C7, 3-b-C2, 4-b-C3, 5-c-C4, 6-c-C6, 7-c-C7, 8-d-C8, 9-d-C9, 10-b-C10 Each question is linked to a competency. Competencies are listed on the first page of the chapter and in the Sample Lesson Plan. An answer reading 3-b-C4 translates to: 3: the question number b: the correct answer C4: the competency number The pages in the text that are associated with this chapter’s competencies are as follows: C1: C2: C3: C4: C5: C6: C7: C8: C9: C10:

277–278 278–282 282 282–283 283–284 284 285 285–286 286–287 287–289

Ratio Analysis of the Balance Sheet

Ratio Analysis of the Balance Sheet NAME: _____________________________________________________ DATE: _________________________________ 1.

Which of the following ratios indicates the ability of a company to meet its short-term obligations? a. b. c. d.

current ratio debt-to-equity ratio fixed asset turnover ratio return on shareholders’ equity ratio

The fixed asset turnover ratio requires the use of which of the following financial statements? a. b. c. d.

income statement working capital worksheet balance sheet a and c

For questions 3 through 10, refer to the following financial statements for the Doray Restaurant: Balance Sheet—December 31, 20X9 and 20X8 Current Assets 20X9 20X8 Cash $ 34,500 $ 30,269 Accounts Receivable 1,450 1,897 Food Inventory 4,100 1,850 Supplies Inventory 3,900 3,100 Prepaid Expenses 2,600 2,460 Total Current Assets 46,550 39,576 Property and Equipment Total 146,300 146,493 Less Accumulated Depreciation 35,000 29,000 Net Property and Equipment 111,300 117,493 Other Assets 4,500 5,000 Total Assets $ 162,350 $162,069 Current Liabilities 36,350 28,536 Long-Term Liabilities 40,000 46,000 Total Liabilities 76,350 74,536 Total Shareholders’ Equity 86,000 87,533 Total Liabilities and Shareholders’ Equity $ 162,350 $ 162,069 Income Statement—For the year ended December 31, 20X9 Net Revenue $ 173,000 Cost of Food Sold 58,960 Gross Profit 114,040 Total Operating Expenses 76,793 Income before Fixed Charges and Income Taxes 37,247 Total Fixed Costs 20,400 Income before Income Taxes 16,847 Income Taxes 1,200 Net Income $ 15,647

Ratio Analysis of the Balance Sheet

The current ratio is: a. b. c. d.

The quick ratio is: a. b. c. d.

.9. 1.1. 1.5. 10.4.

The debt-to-equity ratio is: a. b. c. d.

11.4. 14.4. 19.8. 58.2.

The fixed asset turnover ratio is: a. b. c. d.

.03. 9.3. 103.3. 119.3.

The food inventory turnover ratio is: a. b. c. d.

.88. .99. 1.11. 1.28.

The accounts receivable turnover ratio is: a. b. c. d.

1.64. 1.28. .78. .61.

.22. .44. .47. .89.

The assets-to-liabilities ratio is: a. b. c. d.

.47. 1.0. 1.46. 2.13.

10. The working capital is: a. b. c. d.

$30,000 deficit. $10,200. $86,000. $126,000.

Ratio Analysis of the Balance Sheet

Competencies for Ratio Analysis of the Balance Sheet 1.

Describe the use of ratios in the analysis of a hospitality business balance sheet.

Explain the purpose and use of the current ratio, and describe its formula and interpretation.

Explain the purpose and use of the quick ratio, and describe its formula and interpretation.

Explain the purpose and use of the accounts receivable turnover ratio, and describe its formula and interpretation.

Explain the purpose and use of the average collection period ratio, and describe its formula and interpretation.

Identify the formulas for food and beverage inventory turnover.

Explain the purpose and use of the fixed asset turnover ratio, and describe its formula and interpretation.

Explain the purpose and use of the debt-to-equity ratio, and describe its formula and interpretation.

Explain the purpose and use of the assets-to-liabilities ratio, and describe its formula and interpretation.

10. Describe the computation, composition, and importance of working capital.

Transparency Master 1

Ratio Analysis of the Balance Sheet

Ratios for Analyzing the Balance Sheet • Current ratio • Quick ratio • Accounts receivable turnover ratio • Average collection period ratio • Inventory turnover ratio • Fixed asset turnover ratio • Debt-to-equity ratio • Assets-to-liabilities ratio

Transparency Master 2

Ratio Analysis of the Balance Sheet

Current Ratio Current Assets Current Liabilities

Transparency Master 3

Ratio Analysis of the Balance Sheet

Quick Ratio Cash + Short-Term Investments + Receivables (Net) Current Liabilities

Transparency Master 4

Ratio Analysis of the Balance Sheet

Accounts Receivable Turnover Ratio Net Revenue Average Accounts Receivable (Net)

Transparency Master 5

Ratio Analysis of the Balance Sheet

Average Collection Period Ratio 365 Accounts Receivable Turnover

Transparency Master 6

Ratio Analysis of the Balance Sheet

Inventory Turnover Ratio Cost of X Used Average X Inventory

Transparency Master 7

Ratio Analysis of the Balance Sheet

Fixed Asset Turnover Ratio Net Revenue Average Fixed Assets

Transparency Master 8

Ratio Analysis of the Balance Sheet

Debt-to-Equity Ratio Total Liabilities Total Equity

Transparency Master 9

Ratio Analysis of the Balance Sheet

Assets-to-Liabilities Ratio Total Assets Total Liabilities

Transparency Master 10

Ratio Analysis of the Balance Sheet

Computation of Working Capital Current Assets - Current Liabilities Working Capital

Transparency Master 11

Statement of Cash Flows Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Statement of Cash Flows Competency 1:

Explain the purpose and use of the statement of cash flows. (pp. 297–298) Key Concepts: Statement of cash flows (SCF) Provides information about cash receipts and cash payments for specific period Used by management, creditors, and investors SFAS 95

Competency 2:

Summarize how and why items may be treated as cash in preparing a statement of cash flows. (pp. 298–299) Key Concepts: Cash Savings and checking accounts Need to define other items that represent cash Cash equivalents: readily convertible to cash, near maturity U.S. Treasury bills Commercial paper Money market funds Marketable securities are not cash equivalents.

Competency 3:

Identify the general format for a statement of cash flows. (p. 299) Key Concepts: Cash inflow Cash outflow (negative cash flow) Sections of SCF Operating activities Investing activities Financing activities Labels for net totals Net total: net cash provided by (name of activity); net cash used in (name of activity) All 3 sections: increase (decrease) in cash for period Text Exhibits: Exhibit 1: Format of the Statement of Cash Flows Transparency Masters: Transparency Master 2: Cash Flow Classification

Competency 4:

Differentiate between income and cash flow from operating activities, and explain the preparation of the operating activities section of a statement of cash flows. (pp. 299–305, 308–312) Key Concepts: Income from operating activities Includes: Revenue from operating centers Interest income Dividends income Less: Expenses of operating and support centers Energy costs Fixed charges Income taxes

Statement of Cash Flows

SFAS 115: cash flow from sale of marketable securities categorized as trading securities Cash flow from operating activities: not the same as income Direct method of computing Indirect method of computing (faster, easier): Adjustments for noncash items Adjustments for nonoperating gains and losses Adjustments for changes in current assets and liabilities (converting from accrual to cash basis accounting) Preparing the operating activities section Text Exhibits: Exhibit 2: Condensed Hotel Income Statement (Example) Exhibit 3: Accrual Accounting versus Cash Basis Accounting Exhibit 4: Procedures Reference Chart—Statement of Cash Flows Exhibit 5: Demonstration Problem—Income Statement and Balance Sheet Exhibit 6: Demonstration Problem—Statement of Cash Flows Appendix: Additional Preparation Information Competency 5:

Explain the preparation of the investing activities section of a statement of cash flows. (pp. 305–306, 312–313) Key Concepts: Investing activities section Cash inflows: proceeds from sale of assets Cash outflows: cash used to purchase assets Preparing the investing activities Text Exhibits: Exhibit 4: Procedures Reference Chart—Statement of Cash Flows Exhibit 5: Demonstration Problem—Income Statement and Balance Sheet Exhibit 6: Demonstration Problem—Statement of Cash Flows

Competency 6:

Explain the preparation of the financing activities section of a statement of cash flows. (pp. 306–307, 313) Key Concepts: Financing activities section Cash inflows: issue capital stock, issue bonds, sell treasury stock, cash borrowings Cash outflows: pay dividends, purchase treasury stock, pay debt principal Preparing the financing activities section Text Exhibits: Exhibit 4: Procedures Reference Chart—Statement of Cash Flows Exhibit 7: Current and Long-Term Portion Presentation

Competency 7:

Describe the use of footnotes and disclosures on a statement of cash flows. (pp. 307–308, 314) Key Concepts: Footnotes and disclosures required for: Income taxes and interest paid in period (when using indirect method) Accounting policy regarding cash Noncash investing and financing transactions

Statement of Cash Flows

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a hospitality firm in your community and interview the financial controller about the preparation of the statement of cash flows. Or invite the controller to visit your class to discuss this topic. Discussion questions could include: • •

Does the controller prepare the SCF using the direct or indirect method? Why? What role does the SCF play in the firm’s dealings with creditors and investors?

Or have students interview the financial officer from a local bank about SCFs. Discussion questions could include: •

What does the institution look for when analyzing SCFs from hospitality operations?

Individual/Group Activities Activity 1 Have each student complete Handout 11-1, “Exercises for Chapter 11.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 1—Answer Key Name of Section

Add

Sales Payroll expense Net income

N/A N/A Operating

Accumulated depreciation Gain on sale of land Loss on sale of investments

N/A Operating Operating

New long-term debt Dividends payable Increase in cash

Financing N/A N/A

Increase in accounts receivable Decrease in food inventory Decrease in accounts payable

Operating Operating Operating

Decrease in sales tax payable Amortization expense Increase in property taxes payable

Operating Operating Operating

Decrease in accounts receivable Increase in prepaid items Increase in dividends payable

Operating Operating N/A

Depreciation expense Loss on sale of land Payments on old debt—cash borrowings

Operating Operating Financing

x x

Payments on new debt—cash borrowings Gain on sale of property, equipment, investments Loss on sale of property, equipment, investments

Financing Operating Operating

Minus

x x x

x ____ x x

x x

x x x x

Statement of Cash Flows

Purchase of treasury stock Cash selling price of hotel van Cash selling price of old computer

Financing Investing Investing

Cash purchase cost of new van Cash purchase cost of new computer Dividends paid

Investing Investing Investing

x x x x x x

Activity 2 Have each student complete Handout 11-2, “Exercises for Chapter 11.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 2—Answer Key Bellosette Bistro Statement of Cash Flows For the year ended 12/31/X2 Cash Flows From Operating Activities: Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Loss on sale of investments Increase in accounts receivable Increase in inventories Increase in prepaid expenses Decrease in accounts payable Decrease in wages payable Net cash provided by operating activities

32,000

12,000 44,000

70,000 10,000 (20,000) (3,000) (2,000) (42,000) (1,000)

Cash Flows From Investing Activities: Proceeds from sale of short-term investments Proceeds from sale of equipment Purchase of equipment Net cash provided by investing activities

25,000 25,000 (22,000)

Cash Flows From Financing Activities: Cash proceeds from borrowing Payments on debt—cash borrowings Dividends declared and paid this year Purchase of treasury stock Proceeds from issuance of no par common stock Net cash used by financing activities

10,000 (100,000) (15,000) (8,000) 12,000

Increase (Decrease) in cash for the year Cash at the beginning of the year Cash at the end of the year

28,000

(101,000) (29,000) 50,000 $ 21,000

Statement of Cash Flows

HANDOUT 11-1: Exercises for Chapter 11 Content and Mathematics of the SCF Instructions: 1. Name the section in which each item below will be found on the SCF. If the item is not part of the operating, investing, or financing activities sections, then enter N/A under the “Name of Section.” 2. Describe whether the amount for each item will be added or subtracted within the SCF section. Name of Section

Add

Minus

Sales Payroll expense Net income

____________ ____________ ____________

____ ____ ____

Accumulated depreciation Gain on sale of land Loss on sale of investments

____________ ____________ ____________

____ ____ ____

New long-term debt Dividends payable Increase in cash

____________ ____________ ____________

____ ____ ____

Increase in accounts receivable Decrease in food inventory Decrease in accounts payable

____________ ____________ ____________

____ ____ ____

Decrease in sales tax payable Amortization expense Increase in property taxes payable

____________ ____________ ____________

____ ____ ____

Decrease in accounts receivable Increase in prepaid items Increase in dividends payable

____________ ____________ ____________

____ ____ ____

Depreciation expense Loss on sale of land Payments on old debt—cash borrowings

____________ ____________ ____________

____ ____ ____

Payments on new debt—cash borrowings Gain on sale of property, equipment, investments Loss on sale of property, equipment, investments

____________ ____________ ____________

____ ____ ____

Purchase of treasury stock Cash selling price of hotel van Cash selling price of old computer

____________ ____________ ____________

____ ____ ____

Cash purchase cost of new van Cash purchase cost of new computer Dividends paid

____________ ____________ ____________

____ ____ ____

Statement of Cash Flows

HANDOUT 11-2: Exercises for Chapter 11 Based on the information provided, prepare a complete SCF for the Bellosette Bistro using the indirect method for the operating activities section. Income Statement Sales Cost of Sales Gross Profit Depreciation Other Expenses Operating Income Loss on Sale of Investments Income Before Income Taxes Income Taxes Net Income Balance Sheet Cash Short-Term Investments Accounts Receivable Inventories Prepaid Expenses Total Current Assets Property and Equipment (net) Total Assets Accounts Payable Wages Payable Bank Loan Payable Current Maturities of Long-Term Debt Total Current Liabilities Long-Term Debt Total Liablities Shareholders’ Equity Total Liabilities and Equity

20X2 $920,000 300,000 620,000 70,000 496,000 54,000 (10,000) 44,000 12,000 $ 32,000 20X2 $ 21,000 0 110,000 38,000 4,000 $173,000 257,000 $430,000

20X1 $ 50,000 35,000 90,000 35,000 2,000 $212,000 330,000 $542,000

Change $ (29,000) (35,000) 20,000 3,000 2,000 $ (39,000) (73,000) $(112,000)

$30,000 7,000 10,000 12,000 $ 59,000 0 $ 59,000 371,000 $430,000

$ 72,000 8,000 0 12,000 $ 92,000 100,000 $192,000 350,000 $542,000

$ (42,000) (1,000) 10,000 0 $ (33,000) (100,000) $(133,000) 21,000 $(112,000)

Supplementary information: 1. Marketable securities transactions during the year were as follows: Sold securities with original cost of $35,000 for $25,000. 2. Sold old equipment with a basis of $25,000 for $25,000; cash purchase of new equipment for $22,000. 3. In the last month of the year, transacted a cash borrowing of $10,000, which is classified as a bank loan payable in the balance sheet. 4. Cash payments of $100,000 were made on the long-term loan. 5. $15,000 of dividends were declared and paid this year. 6. Treasury stock was purchased at a cost of $8,000. 7. $12,000 was received from the issuance of no-par common stock.

Statement of Cash Flows

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

297–298 298–299 299 299–305, 308–312 305–306, 312–313 306–307, 313 307–308, 314

Statement of Cash Flows

Statement of Cash Flows NAME: _____________________________________________________ DATE: _________________________________ 1.

Which of the following financial statements provides information about cash receipts and cash payments? a. b. c. d.

Cash equivalents are highly liquid investments such as: a. b. c. d.

marketable securities, such as common and preferred stock. commercial paper. money market funds. b and c

Which of the following transactions requires footnotes and/or disclosures? a. b. c. d.

income statement balance sheet statement of cash flows statement of retained earnings

income taxes and interest paid in the period the company’s accounting policy regarding cash noncash investing and financing transactions all of the above

Exchanging vacant land for vacant land owned by another party is an example of: a. b. c. d.

cash received from borrowings. a noncash investing/financing transaction. equity financing. a marketable security transaction.

For Questions 5-10, state where the transactions below would appear on the SCF. The indirect method is used to prepare the operating activities section. Mark your answers as follows: a. b. c. d.

operating activities investing activities financing activities none of the above

Payment of dividends

Proceeds from sale of a hotel vehicle

Payment of principal on debt

Cash used to acquire land to expand operations

Proceeds from cash borrowings

10. Proceeds from the sale of property and equipment

Statement of Cash Flows

Competencies for Statement of Cash Flows 1.

Explain the purpose and use of the statement of cash flows.

Summarize how and why items may be treated as cash in preparing a statement of cash flows.

Identify the general format for a statement of cash flows.

Differentiate between income and cash flow from operating activities, and explain the preparation of the operating activities section of a statement of cash flows.

Explain the preparation of the investing activities section of a statement of cash flows.

Explain the preparation of the financing activities section of a statement of cash flows.

Describe the use of footnotes and disclosures on a statement of cash flows.

Transparency Master 1

Statement of Cash Flows

Cash Flow Classification • From operating activities • From investing activities • From financing activities

Transparency Master 2

Interim and Annual Reports Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Interim and Annual Reports Competency 1:

Summarize the role of and criteria for an independent certified accountant. (pp. 329–330) Key Concepts: Independent CPA: in public practice, impartial Code of Professional Conduct (AICPA) Criteria for CPA’s independence Not an employee of client Free of financial interest in or obligation to client No circumstances that make independence seem doubtful Accountant’s report: letter accompanying financial statements Scope of service, degree of responsibility, type of service Audit Review Compilation

Competency 2:

Explain the purpose and scope of an audit, and describe an auditor’s report. (pp. 330–332) Key Concepts: Audit Required for financial statements issued by publicly owned company Performed in accordance with generally accepted auditing standards Purpose Ensures that financial statements present fairly and conform to generally accepted accounting principles “Present fairly”—meaning/criteria Scope Does not express judgment or make evaluations Might detect fraud and irregularities The only service that is a comprehensive investigation and examination of items on the financial statements and footnotes CPA must have/obtain working knowledge of client and industry CPA examines sampling of accounts and transactions Functions performed Auditor’s report: opinion as to fairness of financial statements Introduces financial statements audited Describes what audit is Presents opinion regarding fairness of financial statements and consistent application of GAAP Opinion: clean Text Exhibit: Exhibit 1: Auditor’s Report for the Hotel DORO

Competency 3:

Explain the purpose and scope of a review, and describe a review report. (pp. 332–334) Key Concepts: Review For quarterly/interim financial statements (instead of burdensome audit) Performed in accordance with standards for accounting and review services

Interim and Annual Reports

Purpose Expresses limited assurance that no material changes to financial statements are necessary to be consistent with GAAP Scope CPA must have/obtain working knowledge of client and industry CPA makes inquiries and performs analysis to form reasonable basis for limited assurance Does not require comprehensive investigation of the company’s financial records Inquiries and analytical procedures performed Does not express opinion on fairness Not designed to assure CPA awareness Review report: level of negative assurance; limited assurance Introduces financial statements reviewed Describes what review is Contains CPA’s level of assurance as to conformity of financial statements with GAAP Clean review Text Exhibit: Exhibit 2: Review Report for the Hotel DORO Competency 4:

Explain the purpose and scope of a compilation, and describe a compilation report. (pp. 334–335) Key Concepts: Compilation Least expensive, lowest-level service Performed in accordance with standards for accounting and review services Purpose Presents information that represents client’s management Scope Does not express opinion or level of assurance CPA must have/obtain working knowledge of client and industry CPA does not inquire or perform other procedures to verify/review client information Functions performed Compilation report Introduces financial statements compiled Describes what compilation is States that statements were prepared based on management information without audit or review; disclaims level of assurance Clean compilation Text Exhibit: Exhibit 3: Compilation Report for the Hotel DORO

Competency 5:

Describe the purpose and preparation of consolidated financial statements. (pp. 335–338) Key Concepts: Acquisitions Parent company: owns controlling interest Subsidiary: controlled company Minority interest: portion of shares not owned by parent Parent and subsidiary maintain separate accounting records Consolidated financial statements Provide financial data of parent company and subsidiaries Issued by parent company Intercompany transactions: transaction between a parent and any subsidiaries or transactions among subsidiaries Eliminated from financial statements

Interim and Annual Reports

Investment in subsidiary account Eliminated from consolidated financial statements Consolidated worksheet: used to prepare consolidated financial statements Text Exhibits: Exhibit 4: Trial Balances of Parent and Subsidiary Exhibit 5: Starting the Consolidated Worksheet Exhibit 6: Completing the Consolidated Worksheet Competency 6:

Summarize the federal government’s authority regarding reporting by public companies, and discuss the SEC, the Sarbanes-Oxley Act, and the 10-K report. (pp. 338–341) Key Concepts: Securities and Exchange Commission (SEC) mission: to protect investors and maintain integrity of securities markets Stock Market Crash, October 1929 Government oversight important because securities can lose their value Monitors publicly held companies; oversees stock exchanges, broker-dealers, investment advisors, mutual funds, public utility holding companies Sarbanes-Oxley Act of 2002 passed by Congress to protect investors from fraudulent accounting activities engaged in by publicly held corporations 2000–2002: Enron Corporation, WorldCom, Inc.,Tyco International, Ltd., stock market downturn Improves accuracy and reliability of corporate disclosures under securities laws Contains criminal provisions 11 “titles”: more important ones relative to compliance within them are sections 302, 401, 404, 409, 802 10-K Report Official annual business and financial report filed by public companies with the SEC Contains: comprehensive info about the company, including financial statements and more; business summary; list of properties, subsidiaries, legal proceedings, and other info not usually in annual report Transparency Masters: Transparency Master 2: Important Sections of Sarbanes-Oxley Act Transparency Master 3: The 10-K Report

Competency 7:

List and describe the major components of the annual report to shareholders and explain its purpose. (pp. 341–346) Key Concepts: Annual reports: provide detailed picture of company’s financial condition and results of operations Management’s discussion of previous year Analysis of important company events Company’s stock price history Financial date: income statement, balance sheet, SCF Section 409, Sarbanes-Oxley Act: financial statement issuers required to disclose information on material changes in financial condition or operations SEC requires audited financial reports sent to shareholders at end of fiscal year Also: description of company’s operations and future outlook Content: varies somewhat from company to company Some companies include 10-K Report All reports should contain: Letter to shareholders Financial statements Notes to financial statements Management assessment of internal controls Report of independent public accountants Certification of annual report by executives

Interim and Annual Reports

How to read annual report Starting point President’s letter Financial statements Conclusion Investor relations department Transparency Masters: Transparency Master 4: CPA’s “Opinions” Transparency Master 5: What Annual Reports Should Contain

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a CPA firm that has provided services for hospitality operations and interview a CPA about those services. Or invite the CPA to visit your class to discuss this topic. Discussion questions could include: • •

What role does the CPA play in issuing reports to shareholders, creditors, and other third parties? What level of service does the firm provide most often? Why?

Obtain or have students obtain copies of as many hospitality companies’ annual reports as possible. Activities could include: • •

Have students each read and prepare a presentation on a different annual report. Have students present their interpretations of the reported information, applying what they learned from the chapter’s discussion of how to read these reports. Have students compare the annual reports and discuss the quality and usefulness of the annual reports’ designs, reporting, and content.

Ask a certified public accountant that provides services to hospitality companies to discuss: • • • •

The Securities and Exchange Commission. The impact of the Sarbanes-Oxley Act of 2002. How a 10-K report is created. How an annual report to shareholders is created.

Individual/Group Activities Activity 1 Have each student complete Handout 12-1, “Exercises for Chapter 12.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 1—Answer Key 1. An independent CPA is in public practice and is without bias with respect to his/her client. 2. The three different kinds of accountant’s reports based on the level of service are audit, review, and compilation. 3. Audits are performed in accordance with generally accepted auditing standards, which are technical guidelines established by the AICPA. 4. The purpose of an audit is to issue financial statements that present fairly and are in conformity with generally accepted accounting principles.

Interim and Annual Reports

5. The phrase “present fairly” represents the following: a. The accounting principles used by the company have general acceptance. b. The financial statements and accompanying notes are informative and not misleading as to their use, understanding, and interpretation. c. The financial information is neither too detailed nor too condensed. d. The financial data is within a range of acceptable limits that are reasonable and practicable to attain in the preparation of any financial statements. 6. The phrase “generally accepted accounting principles” is a technical term that includes broad guidelines and detailed procedures relating to the conventions and rules that define the accepted accounting practice of that particular industry and the certified public accounting profession. 7. Before a CPA begins an audit, he/she must have or obtain a working knowledge of the client company and its industry. 8. In an audit, instead of testing all transactions, samples are randomly selected and tested. 9. In an audit, some requirements that a CPA must perform are as follows: a. Observe the physical inventory-taking by the client company and test the reliability of the counts, condition, and cost valuation of the inventory. b. Confirm the receivables with the company’s customers. c. Confirm the payables with the company’s creditors. d. Verify the existence of the marketable securities and their valuation at market. e. Review the minutes of the corporate meetings. f. Communicate with management, the board of directors, and outside legal counsel of the client. 10. In an auditor’s report: The first paragraph introduces the financial statements audited. The second paragraph describes what an audit is. The third paragraph contains the auditor’s opinion regarding the fairness of the financial statements. 11. A clean opinion in an auditor’s report is one that clearly states that the financial statements are presented fairly and in accordance with GAAP. 12. The purpose of a review is to express limited assurance that no material changes are required to the financial statements. 13. A review is not designed to express an opinion. 14. The objective of a compilation is to present in the form of financial statements information that is the representation of management without the CPA expressing an opinion or any level of assurance. 15. A company owning a controlling interest in another company is called a parent company and the controlled company is a subsidiary. 16. In a parent-subsidiary relationship, the parent must issue consolidated financial statements. 17. Consolidated financial statements include the financial results of the parent and its subsidiary, but any intercompany transactions are eliminated.

Interim and Annual Reports

Activity 2 Have each student complete Handout 12-2, “Exercises for Chapter 12.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 2—Answer Key 1. The letter to the shareholders discusses the company’s activities during the past year, especially its acquisitions and the opening of new outlets. 2.

Some companies include their 10-K report in their annual report, since it contains all the financial statements and other shareholder information required for inclusion in the annual report.

In the auditor’s report, a qualified opinion is given when the financial statements fairly present the company’s financial position, results of operations, and cash flows in conformity with GAAP.

In the auditor’s report, the auditor may express no opinion on the financial statements, in cases when the scope of the audit was insufficient or impreded by the company’s management or staff.

5. Two certifications of the annual report are required. One relates to the 10-K report and is usually signed by the CEO. The second certification relates to the annual report and is usually signed by the CEO and chief financial officer (CFO). 6. The Sarbanes-Oxley Act requires that financial statements in the annual report be accurate and contain no incorrect statements. 7. Notes to the financial statements serve as disclosures. 8. The notes to the financial statements explain the following: a. Composition of certain line amounts on the financial statements. b. Meaning or calculation of certain line items on the statements. c. Critical facts about a company that cannot be shown in the body of the statements due to limitation of statement formats. d. Critical events that have affected or might affect the company. 9. The accounting policies note is usually the first note. 10. Contingent liabilities for which the amount can be estimated and the loss is probable are shown in the financial statements and also explained in the notes. 11. Contingent liabilities for which the amount cannot be estimated and the loss is probable or possible are explained in the notes but do not appear in the financial statements. 12. If a contingency is remote, it is not shown in the financial statements and there is no requirement for disclosure in the notes to the financial statements unless the contingency applies to a loan guarantee.

Interim and Annual Reports

HANDOUT 12-1: Exercises for Chapter 12 Instructions: Complete the following statements: 1. An independent CPA is in public practice and is without __________________________ with respect to his/her client. 2. The three different kinds of accountant’s reports based on the level of service are ______________________, ______________________, and ______________________. 3. Audits are performed in accordance with _______________________________________ __________________ , which are technical guidelines established by the AICPA. 4. The purpose of an audit is to issue financial statements that _________________ and are _______________________________________________________________________ . 5. The phrase “present fairly” represents the following: a. _____________________________________________________________________ ____________________________________________________________________ . b. _____________________________________________________________________ ____________________________________________________________________ . c. _____________________________________________________________________ ____________________________________________________________________ . d. _____________________________________________________________________ ____________________________________________________________________ . 6. The phrase “generally accepted accounting principles” is a technical term that includes ________________________________________________________________________ ________________________________________________________________________ _______________________________________________________________________ . 7. Before a CPA begins an audit, he/she must _____________________________________ _______________________________________________________________________ . 8. In an audit, instead of testing all transactions, ___________________________________ ________________________________________________________________________ 9. In an audit, some rquirements that a CPA must perform are as follows: a. _____________________________________________________________________ ____________________________________________________________________ . b. _____________________________________________________________________ ____________________________________________________________________ . c. _____________________________________________________________________ ____________________________________________________________________ .

Interim and Annual Reports

d. _____________________________________________________________________ ____________________________________________________________________ . e. _____________________________________________________________________ ____________________________________________________________________ . f. _____________________________________________________________________ ____________________________________________________________________ . 10. In an auditor’s report: The first paragraph introduces the ___________________________________________ . The second paragraph describes ____________________________________________ . The third paragraph contains _______________________________________________ . 11. A _________________________________ in an auditor’s report is one that clearly states that the financial statements are presented fairly and in accordance with GAAP. 12. The purpose of a review is to express _________________________________________ that no material changes are required to the financial statements. 13. A review is not designed to express an _______________________________________ . 14. The object of a complilation is to ____________________________________________ ________________________________________________________________________ _______________________________________________________________________ . 15. A company owning a controlling interest in another company is called a _____________ and the controlled company is a _____________________________________________ . 16. In a parent-subsidiary relationship, the parent must issue __________________________ financial statements 17. Consolidated financial statements include the financial results of the ________________ and its _____________________________ , but any _____________________________ are eliminated.

Interim and Annual Reports

HANDOUT 12-2: Exercises for Chapter 12 1.

The letter to the shareholders discusses especially its

during

Some companies include their in their annual report, since it contains all the financial statements and other shareholder information required for inclusion in the annual report.

In the auditor’s report, a is given when the financial statements fairly present the company’s financial position, results of operations, and cash flows in conformity with GAAP.

In the auditor’s report, the auditor may express on the financial statements, in cases when the scope of the audit was insufficient or impreded by the company’s management or staff.

Two certifications of the annual report are required. One relates to is usually signed by and is usually signed by and

The accurate and contain

Notes to the financial statements serve as _____________________________________________________ .

The notes to the financial statements explain the following:

and . The second certification relates to .

requires that financial statements in the annual report be .

a. ___________________________________________________________________________________ __________________________________________________________________________________ . b. ___________________________________________________________________________________ __________________________________________________________________________________ . c. ___________________________________________________________________________________ __________________________________________________________________________________ . d. ___________________________________________________________________________________ __________________________________________________________________________________ . 9.

The accounting policies note is usually the _________________________________________________ note.

10.

Contingent liabilities for which the amount can be ___________________________________________ and the loss is _________________________________________________ are shown in the financial statements and also explained in the notes.

11.

Contingent liabilities for which the amount cannot be estimated and the loss is _________________________________________________ or ________________________________________ are explained in the notes but do not appear in the financial statements.

12.

If a contingency is _____________________________ , it is not shown in the financial statements and there is no requirement for disclosure in the notes to the financial statements unless the contingency applies to a ____________________________________________ .

Interim and Annual Reports

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

329–330 330–332 332–334 334–335 335–338 338–341 341–346

Interim and Annual Reports

Interim and Annual Reports NAME: _____________________________________________________ DATE: _________________________________ 1.

Violation of the AICPA Code of Professional Conduct can result in __________ for a CPA. a. b. c. d.

In a compilation, the CPA __________ an opinion or level of assurance on the financial statements. a. b. c. d.

long-term contractual obligations for operating leases discontinued operations significant accounting policies diversified corporate activities

Examples of contingent liabilities that may need disclosure on financial statements include: a. b. c. d.

at the end of each month. quarterly. every six months. at the end of the company’s fiscal year.

In the notes to financial statements, information about which of the following should appear first? a. b. c. d.

any transaction between a parent and subsidiary. any transaction between subsidiaries. any transaction reported on an interim report. a and b

The Securities and Exchange Commission requires that audited financial reports be sent to a publicly held company’s shareholders: a. b. c. d.

expresses does not express formally guarantees asks his or her manager to express

An intercompany transaction is: a. b. c. d.

revocation of license suspension from public practice limited assurance a and b

pending lawsuits. possible tax assessments. loan guarantees. all of the above

The purpose of an audit is to: a. b. c. d.

examine all the bookkeeping accounts. guarantee the exactness of the financial statements. comply with internal revenue laws. express an opinion that the financial statements present financial information fairly and are in conformity with generally accepted accounting principles.

Interim and Annual Reports

The scope of an audit requires the CPA to: a. b. c. d.

have or obtain a working knowledge of the client company and its industry. observe the physical inventory–taking by the client company and test the reliability of the counts and cost valuation. confirm the receivables with the company’s customers. do all of the above.

A company owning a controlling interest in another company is called a parent company and the controlled company is called a: a. b. c. d.

minority interest company. compilation company. branch operation. subsidiary.

10. The annual business and financial report that public companies must file with the Securities and Exchange Commission is called the __________ report. a. b. c. d.

Annual SEC Sarbanes-Oxley 10-K Annual IRS Business/Financial

Interim and Annual Reports

Competencies for Interim and Annual Reports 1.

Summarize the role of and criteria for an independent certified accountant.

Explain the purpose and scope of an audit, and describe an auditor’s report.

Explain the purpose and scope of a review, and describe a review report.

Explain the purpose and scope of a compilation, and describe a compilation report.

Describe the purpose and preparation of consolidated financial statements.

Summarize the federal government’s authority regarding reporting by public companies, and discuss the SEC, the Sarbanes-Oxley Act, and the 10-K report.

List and describe the major components of the annual report to shareholders and explain its purpose.

Transparency Master 1

Interim and Annual Reports

Important Sections of Sarbanes-Oxley Act • 302: Corporate Responsibility for Financial Reports • 401: Disclosures in Periodic Reports • 404: Assessment of Internal Controls • 409: Disclosures • 802: Criminal Penalties

Transparency Master 2

Interim and Annual Reports

The 10-K Report • Contains comprehensive information about company, including financial statements • A business summary • A list of properties, subsidiaries, legal proceedings, other information not usually in annual reports

Transparency Master 3

Interim and Annual Reports

CPA “Opinions” • Unqualified opinion (“clean”) • Qualified opinion • Adverse opinion • No opinion

Transparency Master 4

Interim and Annual Reports

What Annual Reports Should Contain • Letter to shareholders • Financial statements • Notes to financial statements • Management assessment of internal controls • Report of independent public accountants • Certification of report by executives

Transparency Master 5

Budgeting Expenses Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Budgeting Expenses Competency 1:

Define responsibility accounting and explain how it affects a manager’s role and duties. (p. 355) Key Concepts: Responsibility accounting—only costs that a manager can control are charged to the manager’s department; manager has responsibility for and authority and control over the department’s expenses Cost-cutting—not practical when it negatively affects customer service/satisfaction or product quality Today’s hospitality manager—well educated in financial areas to make profit-making decisions

Competency 2:

Define and create budgets for variable, fixed, and semi-variable expenses. (pp. 356–363) Key Concepts: Variable expenses—direct relationship with volume: if volume goes up by one unit, variable expense also goes up by one unit Typical variable expenses in hospitality—cost of food sold, cost of beverage sold, any cost of sales Linear relationship based on a relevant range (the linear relationship is based on normal operations) Variable expenses simple to budget because the variable expense percentage remains constant: if food cost is 34% at one level of sales dollar volume, it will be 34% at any level Static percentage true as long as menu prices do not change Fixed expenses—expenses that are not affected by volume; when volume goes up by one or more units, the fixed expense is not affected Fixed expenses in hospitality are: depreciation, amortization, rent, interest, property taxes, insurance Fixed expenses are incurred even if volume is zero However, a fixed expense remains fairly constant as volume increases New analysis of fixed expense required if business expands or changes its relevant range Semi-variable expenses—consist of mixed elements: one portion is variable and another is fixed Semi-variable expenses do not have a predictable reaction to volume Semi-variable expenses include payroll and related expenses and any expense that is not variable or fixed A semi-variable expense can be precisely estimated if separated into its fixed and variable components High-low method (maximum-minimum method). Limitations of: uses high volume and low volume points for a period; if volume fluctuates significantly from month to month, the fixed cost result might not be as precise as desired Regression analysis method (aka least squares method)—more accurate than high-low method because it correlates all data for a period instead of just two points Manual procedure tedious and complex; computer spreadsheet applications quick, easy Limitations of regression analysis: provides only an estimate; user must ascertain that a relationship exists between the expense and volume Text Exhibits: Exhibit 1: Graphic Presentation of Variable Expense Exhibit 2: Graphic Presentation of Fixed Expense Exhibit 3: Graphic Presentation of Semi-Variable Expense Exhibit 4: Regression Analysis Computerized Spreadsheet

Budgeting Expenses

Chapter Appendix: Appendix: Regression Analysis (pp. 372–373) Transparency Masters: Transparency Master 2: Determining Cost Transparency Master 3: Types of Expenses Competency 3:

Determine breakeven points, contribution margins, and profit targets. (pp. 363–365) Key Concepts: Breakeven point: level of sales at which there will be no profit or loss before income taxes; zero profit or loss is not the breakeven point All expenses listed on a working paper, grouped as variable and fixed (Exhibit 5) Semi-variable expenses require separation into variable and fixed elements Once all expenses are grouped, total is taken to arrive at variable costs and fixed costs Breakeven point = Fixed Costs 100% – Variable Cost % Customary to round variable cost percentages to whole percentages and to round computed breakeven sales volume and all monetary calculations to whole dollars, to condense data and avoid implication that any planning formula produces exactness Profit target formula: Sales $ = FC + Profit Objective 100% – VC% Text Exhibits: Exhibit 5: Worksheet to Group Costs Transparency Masters: Transparency Master 4: Breakeven Point Transparency Master 5: Contribution Margin Transparency Master 6: Profit Target

Competency 4:

Describe the effects of a price increase on costs. (pp. 365–366) Key Concepts: A change in menu price has no effect on actual variable, semi-variable, or fixed costs However, menu price changes affect both sales dollars and variable cost percentages A menu price increase results in a decrease in food cost percentage, but there is no change in food dollar cost Increasing menu price is one technique management can apply to reduce food cost percentage without affecting quality or quantity A menu price change requires a new computation of percentage relationship to sales for all variable costs and semi-variable costs Since relationship to sales for fixed costs is based on fixed cost dollars, fixed costs not affected

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit two hospitality firms, one small and one large. At each firm, the students should interview a financial manager about budgeting expenses. Or invite the financial managers to visit your class to discuss this topic. Discussion questions could include: • •

What methods does the financial manager use to budget expenses? How does the financial manager decide which methods to use?

Budgeting Expenses

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

355 356–363 363–365 365–366

Budgeting Expenses

Budgeting Expenses NAME: _____________________________________________________ DATE: _________________________________ 1.

Which of the following are action traits of expenses? a. b. c. d.

Which of the following describes a variable expense? a. b. c. d.

Sales volume and the expense have a linear relationship. The percentage of the expense to volume remains constant. The expense has two components: fixed and variable. All of the above.

Which of the following can be used to separate semi-variable costs into their fixed and variable components? a. b. c. d.

Rent Interest Depreciation All of the above

Which of the following describes a semi-variable expense? a. b. c. d.

Property tax Wait staff payroll (servers payroll) Manager’s salary Cost of food sold

Which of the following is a fixed expense? a. b. c. d.

If sales volume is zero, the expense is zero. The percentage of the expense to volume remains constant. As volume increases, the expense increases. All of the above.

Which of the following is a variable expense? a. b. c. d.

The expense acts in a direct relationship with sales volume. If the quantity sold goes up by one unit, the expense also goes up by one unit of expense. Sales volume and the expense have a linear relationship. All of the above.

Which of the following is true of variable expenses? a. b. c. d.

variable fixed semi-variable all of the above

Breakeven point High-Low Method Regression Analysis b and c

Which of the following describes breakeven point? a. b. c. d.

a profit of zero a loss of zero the level of sales at which there will be no profit or loss a and b

Budgeting Expenses

Which is the correct formula for computing contribution margin? a. b. c. d.

Sales minus Income Before Income Taxes Sales minus Variable Costs Sales minus Total Costs Sales minus Variable Costs minus Fixed Costs

10. If food menu prices are changed, which of the following also change(s)? a. b. c. d.

dollar cost of food sold cost of sales food cost percentage a and c

Budgeting Expenses

Competencies for Budgeting Expenses 1.

Define responsibility accounting and explain how it affects a manager’s role and duties.

Define and create budgets for variable, fixed, and semivariable expenses.

Determine breakeven points, contribution margins, and profit targets.

Describe the effects of a price increase on costs.

Transparency Master 1

Budgeting Expenses

Determining Cost Total Cost = Variable Cost + Fixed Cost

Transparency Master 2

Budgeting Expenses

Types of Expenses • Variable expenses: the only expenses with a direct relationship with volume. • Fixed expenses: not affected by volume. • Semi-variable expenses: one portion is variable and another is fixed.

Transparency Master 3

Budgeting Expenses

Breakeven Point The level of sales at which there will be no profit or loss before income taxes.

Transparency Master 4

Budgeting Expenses

Contribution Margin The amount of sales revenue that is contributed toward fixed costs and/or profit, calculated by subtracting variable costs from sales.

Transparency Master 5

Budgeting Expenses

Profit Target • A specific profit goal, determined by management • Calculated as follows: Sales $ = Fixed Costs + Profit Objective 100% – Variable Cost %

Transparency Master 6

Forecasting Sales Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Forecasting Sales Competency 1:

Define and apply the concept of price elasticity of demand in a hospitality setting. (p. 375) Key Concepts: Price elasticity of demand: changes in demand due to price sensitivity Elastic demand: small change in price followed by large changes in demand Fast-food operations and budget motels Inelastic demand: price change followed by no significant change in demand Resorts, luxury hotels, fine dining establishments Competition, advertising, reputation, and other factors affect it Transparency Masters: Transparency Master 2: Price Elasticity of Demand

Competency 2:

Identify the elements of revenue and describe how changes in one element may affect revenue. (pp. 376–377) Key Concepts: Sales dollars (or revenue) are consequence of volume and price Revenue goes up if price increase has no effect on volume Revenue can go up despite price decrease when linked with a volume increase Revenue can go up after price increase despite a decrease in volume Revenue can go down after a price increase because of a decrease in volume Revenue can go down after a price decrease despite an increase in volume Fundamental marketing questions: Should prices be changed? If so, how? Will price increases generate increased profits? Will price decreases raise profits by creating a volume large enough to offset increased costs? A given percentage increase applied to either price or volume produces same increase to sales dollars Variable costs are incremental; so volume increase raises variable costs

Competency 3:

Describe and apply the moving average method and the percentage method of revenue forecasting. (pp. 377–379) Key Concepts: Moving average formula: Volume in Base Period Weeks in Base Period More suitable for short-term forecasting than long As each new week’s data becomes available, it is added to total, and oldest week deleted May use any number of weeks in base period Using more weeks helps smooth out the randomness in data Percentage Method: simplest, and accurate Used for year-to-year estimates Percentage may be applied to volume, price, or both revenue elements Uses a base period and increases it by expected growth percentage Transparency Masters: Transparency Master 3: Sales Forecasting Methods

Forecasting Sales

Competency 4:

Describe and apply several statistical models that can be used to forecast rooms, food, and beverage sales. (pp. 379–386) Key Concepts: Rooms revenue statistical model: Rooms  Occupancy Percentage  Average Room Rate  Days Open Accurate results easily obtained if calculations performed separately for each season or cyclical business swings Food revenue statistical model: Seats  Turnover  Average Food Check  Days Open Accurate use requires individual calculations for breakfast, lunch, dinner Beverage revenue statistical model: May use historical averages and percentages, for example, percentage of liquor sales to food sales Not unusual for bar/lounge sales to follow patterns that vary by day of week Beverage Percentage x Food Sales [for liquor sales in dining room] + Comparable Day’s Sales [for liquor sales in bar/lounge] = Total Beverage Sales Average Room Rate (ARR) aka Average Daily Rate (ADR) With historical sales data: Room Revenue ÷ Number of Paid Rooms Occupied = ARR (ADR) New business could use this instead: Forecasted Sales Dollars ÷ Forecasted Rooms Sold Two methods that don’t rely on historical or forecasted data: Weighted average method Hubbart formula Weighted average method: 1. Rooms quantity  room rate for each type of room = hypothetical daily sales 2. Total rooms quantity and hypothetical sales 3. Hypothetical sales ÷ rooms quantity = ADR Hubbart formula Independent of planned or existing rates Bottom-up approach; starts with data line IBIT Next, departmental data entered until required rooms revenue is determined; then, rooms revenue ÷ forecasted rooms sales to arrive at theoretical ARR Ignores competitive rates Data listed in detail or in summary totals 1. Enter desired pretax income 2. Add fixed charges, utility costs, support centers 3. Total represents desired IBIT plus expenses of nonrevenue centers 4. Enter departmental income from revenue centers excluding rooms department 5. Subtract total in Step 4 from total in Step 3 6. Add in only expenses from rooms department 7. Total = sales required by rooms to achieve profit determined in Step 1 8. Total in Step 7 ÷ forecasted rooms sales = ARR Alternative is to be more precise and compute differential rates Contribution margin (CM): portion of revenue that contributes to fixed costs and/or profit Sales – Variable Costs = CM CM% = CM$ ÷ Sales $ Weighted contribution margin percentage Joint costs Sales mix: proportion of each revenue’s sales to total sales Text Exhibits: Exhibit 1: Hubbart Formula for Hotel DORO Exhibit 2: Assigning Single and Double Room Rates for Hotel DORO Exhibit 3: Contribution Margin and Sales Mix

Forecasting Sales

Competency 5:

Use CVP analysis to forecast both revenue and unit sales. (pp. 387−392) Key Concepts: Assumptions: 1. Variable costs and sales maintain their linear relationship. 2. Fixed costs remain stable during forecasting period. 3. Semi-variable costs have been properly separated into variable and fixed elements. Forecasting sales dollars: Sales = FC + Objectives Or: Sales = FC + Objectives 100% – VC% CM% Forecasting sales units (rooms, guests) Units = FC + Objectives Price – Variable Cost Forecasting rooms Forecasting food covers Income tax considerations: 1. IBIT = Desired Net Income ÷ 100% - Income Tax Rate 2. Use applicable CVP formula: Covers = FC + Objectives ÷ CM Forecasting without financial statements Text Exhibits: Exhibit 4: Single Product Lodging Business Exhibit 5: Multiple-Product Hospitality Company Exhibit 6: Fixed Costs, Sales Mix, and Contribution Margin Percentage for a MultipleProduct Business

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a hospitality firm to interview a financial manager about forecasting sales. Or invite the financial manager to visit your class to discuss this topic. Discussion questions could include: • • •

What methods does the financial manager use to forecast sales? How does the financial manager decide which methods to use? How often does the financial manager forecast sales? monthly? annually?

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

Forecasting Sales

Each question is linked to a competency. Competencies are listed on the first page of the chapter and in the Sample Lesson Plan. An answer reading 3-b-C4 translates to: 3: the question number b: the correct answer C4: the competency number The pages in the text that are associated with this chapter’s competencies are as follows: C1: C2: C3: C4: C5:

375 376–377 377–379 379–386 387–392

Forecasting Sales

Forecasting Sales NAME: _____________________________________________________ DATE: _________________________________ 1.

Which of the following are elements of revenue? a. b. c. d.

Ignoring price elasticity, which of the following is the best contributor to larger profits? a. b. c. d.

Hubbart formula weighted average method Forecasted Rooms Sales Dollars  Forecasted Rooms Sold all of the above

Which of the following is called a bottom-up approach to pricing? a. b. c. d.

There is no relationship between food and beverage sales. Food sales are more than liquor sales. Liquor sales average 20% of food sales. Liquor prices should be increased.

Which of the following can be used to calculate an average room rate if there is no actual sales data available? a. b. c. d.

Rooms  Occupancy  Days Open Rooms  Average Room Rate  Days Open Rooms  Occupancy  Average Room Rate Rooms  Occupancy Percentage  Average Room Rate  Days Open

If food sales average $50,000 and liquor sales average $10,000, what relationship can be concluded? a. b. c. d.

statistical models CVP moving average method all of the above

Which of the following is the correct statistical model to forecast room sales? a. b. c. d.

increase in menu prices increase in customers increase in advertising inelastic demand

Which of the following can be used to forecast sales? a. b. c. d.

food and beverage volume and price profits and cash flow advertising and profits

statistical models Hubbart formula weighted average method all of the above

What is the definition of contribution margin? a. b. c. d.

the portion of revenue that contributes to fixed costs and/or profit the amount of income before income taxes (IBIT) the amount of income after income taxes the amount necessary to cover variable costs

Forecasting Sales

What is the definition of sales mix? a. b. c. d.

10.

food and beverage and other items sold sales from all departments the proportion of each revenue center’s sales to total sales sales shared by two or more departments

Which of the following is the CVP formula to forecast sales dollars? a. b. c. d.

(Fixed Costs + Objectives)  (100% – VC%) (100% – VC%)  (Fixed Costs + Objectives) (Fixed Costs + Objectives)  CM% a and c

Forecasting Sales

Competencies for Forecasting Sales 1.

Define and apply the concept of price elasticity of demand in a hospitality setting.

Identify the elements of revenue and describe how changes in one element may affect revenue.

Describe and apply the moving average method and the percentage method of revenue forecasting.

Describe and apply several statistical models that can be used to forecast rooms, food, and beverage sales.

Use CVP analysis to forecast both revenue and unit sales.

Transparency Master 1

Forecasting Sales

Price Elasticity of Demand • Elastic demand: a small change in price causes a large change in demand • Inelastic demand: a price change causes no significant change in demand

Transparency Master 2

Forecasting Sales

Sales Forecasting Methods • Moving average method • Percentage method • Statistical models • CVP (cost-volume-profit) analysis

Transparency Master 3

Budgetary Reporting and Analysis Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Budgetary Reporting and Analysis Competency 1:

Identify various kinds of budgets and the role they play in planning and operating a hospitality operation. (pp. 401–402, 414–415) Key Concepts: Master plan = budgets; sets forth objectives, human resource policies, organization hierarchy, steps to achieve goals, progress monitoring methodology Managers at all levels must participate Budgets as strategic plans Capital budget, used to plan and control purchase of major assets Balance-sheet related, with planning emphasis on long run Fixed-asset oriented In capital budgeting process, managers submit list of present and future asset requirements; management sets priorities of asset purchases Cash budget used to monitor cash, plan for cash borrowings Operations budget incorporates all revenue and expenses of the business

Competency 2:

Describe the kinds of information used in preparing a budget and how this information varies depending on whether revenues, expenses, or fixed costs are being budgeted. (pp. 402–403) Key Concepts: An organizational effort: executives, managers, accountants Use financial statistics, financial methods, professional judgment Budget planning meetings agenda might feature: Review of historical operations Review of current operations and finances Analysis of local and national economic data Projections of occupancy, covers, other revenue sources Sales projections forecasted through: CVP analysis Statistical Models Percentage Method Revenue center expenses budgeted through use of financial methods, such as: Study of historical relationships to volume Classification of expenses as variable, semi-variable, fixed High-low or regression analysis Analysis of effect of price and volume increases Non-revenue centers have no sales volume, so expenses aren’t directly related to sales Common centers: undistributed expenses, such as A&G (accounting, information systems, payroll, human resources), marketing, POM, and utility costs Zero-base budgeting (ZBB)—“fresh start”: non-revenue department managers prepare budget from zero and cost-justify each expense item Forces managers to identify inefficiencies, overstaffing, duplication, nonguest services that could be eliminated Fixed costs Insurance, property taxes, rent, interest, depreciation, amortization ZBB not used to budget because fixed costs imposed on the business Easily estimated

Budgetary Reporting and Analysis

Competency 3:

Create budget reports and determine budget variances. (pp. 404–405) Key Concepts: Budget reports: show actual financial data, the budget, and difference between them Revenue centers: monthly income statements Nonrevenue centers: expense statements Typical format Variance: difference between a budgeted amount and actual amount Favorable Unfavorable Sales variance is favorable if actual sales are greater than budgeted sales Expense variance is unfavorable if actual expenses are greater than budgeted expenses “Better” or “worse” “Positive” or “negative” don’t equate with “over” and “under” budgeted amounts (or vice versa) Text Exhibits: Exhibit 1: Budget Variances Exhibit 2: Alternate Format to Display Budget Variances

Competency 4:

Distinguish between master budgets and flexible budgets and use each appropriately. (pp. 405–409) Key Concepts: Master budget: a company’s primary financial planning tool Annual budget prepared for each department and divided into monthly amounts Departmental budgets combined to form integrated plan for organization Short-run budget: one year or less Predetermines sales volume the organization must reach to make desired profit Measures progress toward attaining specific goal Not useful for examining operating efficiency of revenue centers when actual sales volume differs significantly from budgeted volume Fixed expenses not materially affected because they aren’t affected by volume Flexible budgets: designed for many different levels of sales volume For example, budget set up for $30,000, $40,000, $50,000 Each range determined in accordance to variable, semi-variable, fixed costs Is unknown until current month is completed and actual sales volume is known When actual sales is known, flexible budget nearest to sales volume is used in budget report Alternative formats may use percentage comparison Fixed expenses with no dollar variance always show actual percentages that are equal to or lower than budgeted percentages when sales volume higher than budget Text Exhibits: Exhibit 4: Flexible Budget for a Motel’s Restaurant Operation Exhibit 5: Flexible Budgetary Reporting for $31,522 Actual Sales Exhibit 6: Flexible Budgetary Reporting with Percentages of Sales

Competency 5:

Analyze sales and expense variances to determine their causes. (pp. 409–414) Key Concepts: Managers should find out why variance has occurred Manager’s budgetary working papers Supporting detail should be retained for each budgeted expense Variance analysis Requires maintenance of precise background data Variances occur because no budgeting method can precisely predict future Sales variance due to price, quantity, or both Expense variance due to cost, quantity, or both

Budgetary Reporting and Analysis

Several methods can determine causes of variances BAD PQ Determining causes of sales variance Determining causes of expense variance: BAD CQ Examples in text Text Exhibits: Exhibit 7: Manager’s Working Papers and Accounting Department Statistics Exhibit 8: Entering Price and Quantity Data for Sales Variance Exhibit 9: Completed Sales Variance Analysis Exhibit 10: Entering Cost and Quantity Data for Expense Variance Exhibit 11: Completed Expense Variance Analysis Transparency Masters: Transparency Master 2: Variance Analysis Procedure or “BAD PQ”

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a hospitality firm to interview a financial manager about budgetary reporting and analysis. Or invite the financial manager to visit your class to discuss this topic. Discussion questions could include these: • • •

What methods does the financial manager use to plan and analyze budgets? How does the financial manager decide which methods to use? Are department managers involved in planning budgets?

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor's Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor's Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor's Guide.

401–402, 414–415 402–403 404–405 405–409 409–414

Budgetary Reporting and Analysis

Budgetary Reporting and Analysis NAME: _____________________________________________________ DATE: _________________________________ 1.

Which of the following is a major reason to have a budget? a. b. c. d.

Which of the following is characteristic of zero-base budgeting? a. b. c. d.

The sales volume is pre-determined only for the master budget. The flexible budget is only for expenses. Only the flexible budget shows budget variances. a and c.

Which of the following are causes of budget variances? a. b. c. d.

favorable if actual sales are greater than budget. favorable if actual sales are less than budget. favorable if actual expenses are less than budget. a and c.

What is a major difference between a master budget and a flexible budget? a. b. c. d.

It is a budgeting technique using variance analysis. Expenses are cost-justified. The numbers are estimates and not actual in form. All of the above.

Which of the following is correct regarding budget variances? They are: a. b. c. d.

The budget is only for expenses. It is a profit plan. It uses zero-base budget philosophy to budget fixed costs. All of the above.

What is the meaning of the term pro forma? a. b. c. d.

Sales vary from month to month. The budget starts at zero, and each expense item must be justified. It forces managers to identify inefficient or duplicate operations. All of the above.

Which of the following is characteristic of an operations budget? a. b. c. d.

To hold managers accountable for deviations from the plan. The budgeting process forces managers to look forward. A budget serves as a financial plan. All of the above.

price advertising quantity a and c

Which of the following formulas correctly analyzes the cause of a budget variance? a. b. c. d.

Price Difference  Actual Quantity = Price Cause Price Difference  Budgeted Quantity = Quantity Cause Quantity Difference  Actual Price = Quantity Cause a and c

Budgetary Reporting and Analysis

What will be the effect when an actual selling price is higher than the budgeted selling price in analyzing the cause of a budget variance? a. b. c. d.

Unfavorable. Favorable. Favorable or unfavorable determination depends on the quantity. Favorable or unfavorable cannot be determined unless expense is known.

10. Which of the following is true of a capital budget? a. b. c. d.

Sales and expenses are budgeted for all departments. It forecasts cost savings. It forecasts the purchase of property and equipment It is a short-run budget.

Budgetary Reporting and Analysis

Competencies for Budgetary Reporting and Analysis 1.

Identify various kinds of budgets and the role they play in planning and operating a hospitality operation.

Describe the kinds of information used in preparing a budget and how this information varies depending on whether revenues, expenses, or fixed costs are being budgeted.

Create budget reports and determine budget variances.

Distinguish between master budgets and flexible budgets and use each appropriately.

Analyze sales and expense variances to determine their causes.

Transparency Master 1

Budgetary Reporting and Analysis

Variance Analysis Procedure or “BAD PQ” Budget Actual Difference (Variance) Price (or Cost) Quantity

Transparency Master 2

Financial Decision-Making Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Financial Decision-Making Competency 1:

Determine whether a seasonal business should remain open during the offseason. (pp. 426–429) Key Concepts: Quantitative analysis Useful tool: contributory income statement format Identify expenses as variable, fixed, or semi-variable 1: Historical data 2: Separate data into in-season and off-season periods Autry Resort example: off-season’s value: contribution margin Qualitative considerations Community relations Loss of goodwill Local political considerations Employee considerations: loss of morale, uncertain availability, ongoing training and retraining However, owner/manager may need vacation Text Exhibits: Exhibit 1: Contributory Income Statement Format Exhibit 2: Cost Analysis to Determine Variable and Fixed Costs Exhibit 3: Autry Resort: In-Season and Off-Season Data Exhibit 4: Pro forma Autry Resort Income Statement if Closed for the Off-Season

Competency 2:

Describe the many factors and elements that should be examined as part of a decision to acquire a business. (pp. 429–438) Key Concepts: Qualitative considerations: Guest reaction to new ownership Whether key personnel will remain with new ownership Condition of property and equipment Number of times business has been sold in past Competition factors: recent change, or new formidable competition coming? Lease considerations Franchise considerations Covenant not to compete Amortized over 15-year life (Section 197 of IRC) Using seller’s financial statements However, most small businesses have not had audits Buyer should ascertain authenticity of seller’s financial data Skimming Purchase of common stock Buyer’s salary vs. seller’s salary Family-operated business Effect of financing on profits and cash flow Seller’s legal form of organization Proprietorship: buyer purchases the assets, not legal form of business Buyer must use asset method to account for acquired assets Corporation: owners own the business, but corporation owns its own assets Corporation: buyer purchases only assets (asset method used); or purchases common stock from owner Corporation continues in business, keeps legal form of business organization

Financial Decision-Making

The asset method: used when target company is proprietorship and when corporation’s assets are purchased rather than common stock Fair market value Land not depreciated Seller’s salary versus buyer’s needs Family-operated business: staffing and related wages Impact of financing on profits and cash flow Monthly loan payments: principal, interest Interest expense reduces profits Principal portion of payments does not show on income statement Example: emphasizes quantitative approach to buying decision Text Exhibits: Exhibit 5: Business Acquisition via Purchase of Assets: Impact of Depreciation Exhibit 6: Change of Ownership: Impact of Wages When a Family-Owned Business Is Purchased Exhibit 7: Loan Amortization Schedule Exhibit 8: Change of Ownership: Impact of Financing on Profits Exhibit 9: Comparison of Two Restaurants Competency 3:

Identify the advantages and disadvantages of buying a franchise. (pp. 438–439) Key Concepts: Definition of franchise, franchisor, franchisee Acquisition usually requires one-time fee Usually granted for only one location Advantages Established name Technical services Financing advantage National and regional advertising Access to national computerized reservation systems Disadvantages Initial cost and continuing royalties may become unacceptable Franchisor’s mandated standards of operation might mean loss of freedom Products might carry unreasonable mark-up Transparency Masters: Transparency Master 2: Advantages of Buying a Franchise Transparency Master 3: Disadvantages of Buying a Franchise

Competency 4:

Explain the terms of realty leases and how to choose between variable and fixed leases. (pp. 439–440) Key Concepts: Lease, lessee, lessor Operating lease Capital lease Leasing realty Hospitality business on rented property Signing the lease Twice: first as officer of corporation, then as individual Terms of lease should be closely examined before signed Time period, rental charge Responsibility for maintenance and insurance Escalation clause for lessor’s insurance and property taxes Sub-lease by lessee Restrictions on improvements Leasehold improvements Renewal options Termination clauses

Financial Decision-Making

Variable lease: rental charge stated as percentage Fixed lease: set rental charge for specified time period Indifference point and formula Competency 5:

Explain the terms of automobile leases and identify when such leases may be appropriate. (pp. 440–443) Key Concepts: Paying for use of car over a period of time Gap insurance Potential end-of-lease charges Lease-versus-buy decision Advantages of leasing Lower up-front cash outlay Deferred sales tax Lower monthly payments Fewer repair costs More car, more often No used-car selling hassles Disadvantages No ownership equity Mileage charges Excess wear and tear charges Early termination penalty Leasing terminology Acquisition fee Capitalized cost (cap cost) Capitalized cost reductions Net capitalized cost (net cap cost) Lease period or term Residual value Money factor or lease factor Calculating monthly lease payment Calculation provided by dealer and stated in lease agreement Consists of depreciation fee, financing fee (money factor), sales tax Closed-end leases (“walk-away” leases) Open-end leases: lessee takes market value risk Text Exhibits: Exhibit 10: Calculation of Monthly Lease Payment Transparency Masters: Transparency Master 4: Advantages of Auto Leasing Transparency Master 5: Disadvantages of Auto Leasing Transparency Master 6: Leasing Terminology

Competency 6:

State the purpose of capital budgeting and demonstrate two simple capital budgeting methods. (pp. 443–446) Planning for acquisition of land, buildings, furniture, equipment, other long-lived assets Requests must be ranked by priority Governmental requirements: federal, state, local, OSHA Quality of facilities and customer service Financial return: requires information on initial cost, depreciation (tax deduction), annual operating expenses, revenue or savings Average rate of return (ARR) ARR = Net Annual Return (Investment + Salvage) ÷ 2 Minimum ARR generally used to determine purchase Combination of factors determine purchases: initial cash and financing requirements, urgency, project risk, financial return

Financial Decision-Making

Payback method Payback Period =

Purchase Cost Net Annual Return + Annual Depreciation

Text Exhibits: Exhibit 11: Proposal to Invest in New Dishwasher Transparency Masters: Transparency Master 7: Average Rate of Return (ARR) Transparency Master 8: Payback Period

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a large hospitality firm to interview a financial manager about financial decision-making. Or invite the financial manager to visit your class to discuss this topic. Discussion questions could include: • •

What methods does the financial manager use to make financial decisions? How are department managers involved in capital budgeting?

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

426–429 429–438 438–439 439–440 440–443 443–446

Financial Decision-Making

Financial Decision-Making NAME: _____________________________________________________ DATE: _________________________________ 1.

Which of the following is a qualitative factor that might influence a hospitality business to stay open in the offseason while incurring operating losses? a. b. c. d.

Which of the following is a qualitative factor that should be examined in planning a potential business acquisition? a. b. c. d.

b. c. d.

Family members may have worked for little or no wages. The impact of financing on cash flow. Seller’s salary may not be the same as what the new buyer will require. All of the above.

Which of the following is a qualitative factor in examining the buying of a business from several choices? a. b. c. d.

The depreciation of the existing assets is not affected because assets remain at their original cost with respective accumulated depreciation. The depreciation of existing assets starts with a new cost basis. New bookkeeping records are required. a and c

Which is a consideration in any change of ownership? a. b. c. d.

Data may not be reliable due to skimming. Income tax returns are one source of data. Many small businesses never have their financial statements audited. a and c.

Which is a consideration in the acquisition of an existing corporation via the purchase of its common stock? a.

number of times the business has been sold the price future competition a and c

What potential hazard(s) of using seller-provided financial statements must a prospective buyer keep in mind before making a decision to purchase? a. b. c. d.

community relationship fixed costs competitors a and c

location fixed costs customer market a and c

Which of the following is an advantage in buying a franchise? a. b c. d.

royalties mandated standards and hours a recognized name a and c

Financial Decision-Making

What is the indifference point in considering a fixed versus a variable lease? a. Neither lease makes any difference to profits. b. Sales level at which the rent is identical for both either type of lease. c. Time. d. a and c.

What is the purpose of gap insurance as it pertains to leasing or buying an auto? a. b. c. d.

It provides a replacement auto free of charge for a period of time while the auto is in for lengthy repairs. It protects the lessee from paying the difference between what is owed on the balance of the contract and the insurance proceeds. It is available only in purchase financing. a and c.

10. What two popular methods are simple and quick to use in making capital budgeting decisions? a. b. c. d.

net present value and payback initial rate of return and payback average rate of return and payback contribution margin and breakeven point

Financial Decision-Making

Competencies for Financial Decision-Making 1.

Determine whether a seasonal business should remain open during the off-season.

Describe the many factors and elements that should be examined as part of a decision to acquire a business.

Identify the advantages and disadvantages of buying a franchise.

Explain the terms of realty leases and how to choose between variable and fixed leases.

Explain the terms of automobile leases and identify when such leases may be appropriate.

State the purpose of capital budgeting and demonstrate two simple capital budgeting methods.

Transparency Master 1

Financial Decision-Making

Advantages of Buying a Franchise • Established name • Technical services • Financing advantage • National and regional advertising • Access to national computerized reservation systems

Transparency Master 2

Financial Decision-Making

Disadvantages of Buying a Franchise • Initial cost • Royalties may become unacceptable • Loss of freedom (mandated standards) • Products might carry unreasonable mark-up

Transparency Master 3

Financial Decision-Making

Advantages of Auto Leasing • Lower up-front cash outlay • Deferred sales tax • Lower monthly payments • Fewer repair costs • More car, more often • No used-car selling hassles

Transparency Master 4

Financial Decision-Making

Disadvantages of Auto Leasing • No ownership equity • Mileage charges • Excess wear and tear charges • Early termination penalty

Transparency Master 5

Financial Decision-Making

Leasing Terminology • Acquisition fee • Capitalized cost (cap cost) • Capitalized cost reductions • Net capitalized cost (net cap cost) • Lease period or term • Residual value • Money factor or lease factor

Transparency Master 6

Financial Decision-Making

Average Rate of Return (ARR) Net Annual Return (Investment + Salvage) ÷ 2

Transparency Master 7

Financial Decision-Making

Payback Period Purchase Cost Net Annual Return + Annual Depreciation

Transparency Master 8

Cash Management and Planning Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Cash Management and Planning Competency 1:

Define cash, cash flow, and cash flow analysis and explain the relationship of cash to profit. (pp. 456–458) Key Concepts: Cash: money in the bank the business can use Liquidity Cash flow: movement of money into and out of a business Positive: Cash inflow exceeds cash outflow Negative: Cash outflow exceeds cash inflow Solvency Cash flow analysis: the study of the cycle of cash inflows and outflows with the objective of maintaining adequate cash to meet the business’s requirements Profit and cash aren’t the same thing Profit amount on income statement has no direct relation to cash balance amount, for several reasons: 1. Income statement prepared on accrual basis 2. Payment of loan principals does not appear on income statement 3. Payment of prepaid items doesn’t appear on income statement 4. Certain expenses—depreciation and amortization, say—are non-cash expenses that affect profit, but not cash Businesses want both profits and positive cash flow A business spends cash, not profits Text Exhibits: Exhibit 1: Examples of Cash Inflows and Outflows

Competency 2:

State the purpose and benefits of cash management and use cash management terminology accurately and effectively. (pp. 458–459) Key Concepts: Cash management: process of monitoring and controlling cash to meet business’s needs Major objective: to plan for the company’s cash flow so cash is available when company needs it Related goal: to invest any idle cash so as to provide maximum return Benefits of (see Transparency Master 2) Cash budget: overall plan for a future period or series of periods; cash management process begins here Operations budget: good place to start when gathering cash management data Cash management vocabulary (see Exhibit 2) Text Exhibits: Exhibit 2: Cash Management Vocabulary Transparency Masters: Transparency Master 2: Benefits of Cash Management

Competency 3:

Create a cash budget from appropriate data using the method appropriate to meet either short-term or long-term needs. (pp. 458–465) Key Concepts: Operations budget based on accrual accounting, but projection deals only with cash received and paid; ignores non-cash expenses like depreciation and amortization Other modifications must be made to operations budget because: Sales might not be 100% cash sales Purchases might have extended payment terms

Cash Management and Planning

Principal payments on loans don’t appear on operations budget or income statement, but require cash payment Prepaid assets from balance sheet are written off and appear monthly in operations budget, but might be paid only once a year Study of accounting records and management plans to determine: Estimated percentage of sales that are cash sales or cash equivalent Collection schedule of accounts receivable Cash inflows from bank loans Cash inflows from sale of fixed assets or securities Planned expansions or purchases of fixed assets Loan principal and interest Dividend payments Adjusted net income approach: for long-term planning Indirect approach: starts with net income and modifies it for non-cash expenses and changes to certain assets and liabilities Two major sections: sources of cash and uses of cash Logic used to prepare this type of cash budget similar to logic used in preparing SCF (indirect method): increases to assets like accounts receivable or inventory are considered uses of cash since such increases require cash outlays; increases to accounts payable also increases to cash, since using credit allows business to purchase inventory. Easy way to learn this approach: study a comprehensive statement showing plus and minus functions of each line, such as that in Exhibit 3 Cash receipts and disbursements approach: for short-term planning and cash projections Easy to use and understand because of itemized format Takes more time to gather data than to prepare report Logic: Beginning Cash + Cash Receipts – Cash Payments = Ending Cash Balance Demonstration case: Gather preliminary data Prepare budgeted income statement Prepare cash flow analysis Text Exhibits: Exhibit 2: Cash Management Vocabulary Exhibit 3: Cash Budget—Adjusted Net Income Approach Exhibit 4: Budgeted Income Statement for May, June, July Exhibit 5: Cash Flow for May, June, July Transparency Masters: Transparency Master 3: Preparing a Cash Budget Transparency Master 4: Cash Receipts and Disbursements Approach Competency 4:

Explain the uses of such cash management tools as float management, lockbox systems, and zero balance and sweep accounts. (pp. 465–467) Key Concepts: Cash management more than monitoring cash flow Cash float Payment float Disbursement float Collection float Net float Mail float Processing float Clearing float Lockbox system Zero balance account (ZBA) Sweep account

Cash Management and Planning

Competency 5:

Describe two popular shortcut measures of cash flow and demonstrate why they can be misleading. (pp. 467–469) Key Concepts: Shortcut methods of measuring cash flow fail to measure: Cash required for working capital Deb payments Capital expenditures EBITDA (Earnings before Interest, [Income] Taxes, Depreciation, and Amortization Sometimes called EBITIDA Computer by taking net income from income statement and adding back deductions for income taxes, interest, depreciation, and amortization First used during leveraged buyout craze of 1980s as measure of company’s ability to service its debt Doesn’t represent cash flow Fails to measure true cash flow because it ignores balance sheet Fails to consider debt payments and capital expenditures Computation based on financial statements prepared using accrual basis accounting rather than cash basis accounting Free cash flow (FCF): a measure of financial performance sometimes used to examine cash flow One method of measuring FCF subtracts capital expenditures from cash flow from operations—but this is just one method; there’s no single standard definition of FCF The many different ways to compute it create problems with uniformity and comparability

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a large hospitality firm to interview a financial manager about cash management and planning. Or invite the financial manager to visit your class to discuss this topic. Discussion questions could include: • •

Does the financial manager conduct cash flow analyses? If so, when? How often? What steps are in the process? What are the benefits of analyzing the cash flow? What cash management tools does the property use?

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

Cash Management and Planning

456–458 458–459 458–465 465–467 467–469

Cash Management and Planning

Cash Management and Planning NAME: _____________________________________________________ DATE: _________________________________ 1.

Which of the following statements about cash is true? a. b. c. d.

What is cash flow? a. b. c. d.

the adjusted net income approach the cash receipts and disbursements approach either the adjusted net income approach or the cash receipts and disbursements approach neither the adjusted net income approach nor the cash receipts and disbursements approach

What is a cash float? a. b. c. d.

a negotiable instrument the interest rate generated by an investment an interest-bearing note the holder of a negotiable instrument

Which approach to preparing a cash budget is especially suited for the non-accounting hospitality professional? a. b. c. d.

Treasury bills promissory notes checks all of the above

What is a bearer? a. b. c. d.

It is a business’s ability to pay its debt and stay in business. It is the movement of money out of a business. It is the period between when a check is issued and when it’s made available by the bank. It is the movement of money into and out of a business.

Which of the following are negotiable instruments? a. b. c. d.

Cash consists of property, inventory, and accounts receivable. Cash is a noncurrent asset on the balance sheet. Cash is money in the bank the business can use. The amount of cash a business has equals its profit amount.

the interval between when a check is issued and when it is paid by the bank the difference between collection float and payment float the period between when a business deposits a check in its bank account and when the bank makes the funds available a bank loan made to a bank’s business customer

What is a payment float? a. b. c. d.

the period between when a business deposits a check in its bank account and when the bank makes the funds available the difference between when a check is written by a business and entered in its accounting records and when the check has gone through the bank’s check-clearing process. a disbursement float b and c

Cash Management and Planning

A sweep account combines a business checking account with: a. b. c. d.

a business savings account. a master checking account. a lockbox account. an investment account such as a money market mutual fund.

Which of the following is a shortcoming of using EBITDA to measure a company’s ability to service its debt? a. b. c. d.

EBITDA consistently measures true cash flow. EBITDA’s computation is based on information from financial statements prepared using cash basis accounting. EBITDA’s computation fails to consider capital expenditures and debt payments. EBITDA is commonly quoted and used in financial circles.

10. Which of the following statements about free cash flow (FCF) is false? a. b. c. d.

FCF is important to measure a company’s financial capability to expand operations. There is only one method that effectively computes FCF. FCF computations consider dividend payments and long-term debt payments. b and c.

Cash Management and Planning

Competencies for Cash Management and Planning 1.

Define cash, cash flow, and cash flow analysis and explain the relationship of cash to profit.

State the purpose and benefits of cash management and use cash management terminology accurately and effectively.

Create a cash budget from appropriate data using the method appropriate to meet either short-term or long-term needs.

Explain the uses of such cash management tools as float management, lockbox systems, and zero balance and sweep accounts.

Describe two popular shortcut measures of cash flow and demonstrate why they can be misleading.

Transparency Master 1

Cash Management and Planning

Benefits of Cash Management • Can pay bills when due • Can take advantage of purchase discounts • Can take advantage of special purchases • Can properly plan for upgrades, replacement, expansion • Can meet inventory demands for seasonal cycles or special events • Can earn a good credit rating

Transparency Master 2

Cash Management and Planning

Preparing a Cash Budget • Gather preliminary data. • Prepare budgeted income statement. • Prepare cash flow analysis.

Transparency Master 3

Cash Management and Planning

Cash Receipts and Disbursements Approach • For short-term planning and cash projections • Easy to use and understand itemized format • Takes more time to gather data than to prepare report • Beginning Cash + Cash Receipts – Cash Payments = Ending Cash Balance

Transparency Master 4

Casino Accounting Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Casino Accounting Competency 1:

Provide a brief history of gaming from ancient times to the present. (p. 478) Key Concepts: Dice in Egyptian tombs Chinese, Greeks, Japanes, Romans gambled as early as 2300 B.C.E. America: dice/card games in roadside inns and nightclubs 13 colonies—lotteries Casino riverboats California Gold Rush U.S. outlawed almost all gaming by 1910 1929 U.S. stock market crash: bingo, horse racing, casinos legalized to raise funds Today: casino gambling popular in many states Indian gaming growing Horse racing, dog racing, state-run lotteries; bingo & bingo-style games Usually illegal sports pools Rejected by some, embraced by others

Competency 2:

Provide casino industry statistics, including those for gaming associations, commercial and Indian casinos, and racinos. (pp. 479–484) Key Concepts: American Gaming Association (AGA) Fundamental goal: create better understanding of gaming Public education program First national information clearinghouse National Indian Gaming Association (NIGA) Formed in 1985 184 gaming nations, and non-voting associate members Commitment: "to advance lives of Indian peoples economically, socially, and politically" Provides educational info Casinos: currently 445+ commercial casinos in U.S. Nevada: most gaming revenue, followed by New Jersey Gross gambling revenue (GGR) = amount wagered minus player’s winnings Tax rate: ranges from low of 6.75% (Nevada) to high of 70% (Illinois) Revenues from taxes goes to education, public safety, economic development, infrastructure improvements Indian Casinos Indian Gaming Regulatory Act, 1988 Class I Class II Class III 200+ tribal governments in nearly 30 states provide Class II or III gaming Indian Gaming Regulatory Act: net revenues used only for: Racinos: horse or dog racetracks with casino facilities Live and simulcast races Computerized slots, blackjack, poker, keno Table games not allowed by regulations Legal because provide revenue Transparency Masters: Transparency Master 2: Indian Gaming: Three Classes

Casino Accounting

Competency 3:

Provide basic information about the casino games baccarat, blackjack, craps, keno, roulette, and slot machines. (pp. 480–484) Key Concepts: Baccarat: card game with 8 decks of cards Player winning House winning Tie “Natural” Blackjack: likely world’s most popular casino game aka “21” Players play against dealer Craps: two dice; no skill or experience required Come-out roll Pass line bets Keno: similar to lotto and bingo Tickets Pick 1-20 numbers, according to house rules Each selection called a “spot” Keno runners Roulette Roulette wheel: in U.S., 38 slots: 36 numbers, 2 zeros Player gambles on number or numbers, color, or odd or even Slot machines “Arm” and display window Today, electronic machines, including video poker Progressive slots: jackpot meter always changing Nonprogressive slots (also called straight slots, flat tops, or base slots): predetermined jackpot, largest possible displayed Text Exhibits: Exhibit 1: Blackjack Table Exhibit 2: Craps Table Exhibit 3: Roulette Wheel and Roulette Layout Transparency Masters: Transparency Master 3: Popular Casino Games

Competency 4:

Explain principles of money handling, accounting and internal control, and revenue accounting in casinos. (pp. 484–489) Key Concepts: Internal control, a system with these objectives: Safeguard assets. Ensure compliance with company policies. Facilitate operational efficiency. Ensure accurate financial information. State licencing authorities demand casinos have a system of internal control in place before granting license Controller, in some casinos, supervises: Internal audits of gaming centers Cage cashier Vault supervisor Money counting Payroll Financial accounting Data processing Casino’s primary goal: to make profit Key element of internal control: Separation of duties Chips as good as cash

Casino Accounting

Markers and foreign chips Cage cashiering controls Imprest system Floating cage balance system Fills and credits Slot machine controls Slot hopper Coin-in meter, coin-out meter Table game controls: table inventory, par method, drop box, table drop, fill slip, credit slip Count room controls Vault controls Handle Win Drop Text Exhibits: Exhibit 4: Fill Slip Exhibit 5: Credit Slip Competency 5:

Explain the principles of casino financial accounting, including those affecting gaming revenue, a casino’s financial statements, complimentary items and allowances, and payroll and other expenses. (pp. 489−492) Key Concepts: Casino is primary revenue center in casino organization Charged for its direct operating expenses GAAP for casinos similar to those for hotels Gaming revenue: the casino’s winnings Amount gambled minus players’ winnings Slot machine revenue accounting depnds on type of slot machine: Nonprogressive: pay off set, predetermined jackpots. If expected payout is significant, estimated jackpots can be deducted over period prior to payout Progressive: jackpots that increase every time played until won; unpaid jackpots recorded as liability and a reduction of slot gaming revenue Participating: owned by another party; profits shared with casino; total winnings recorded as casino’s slot gaming revenue, and payment to owner recorded as expense Casino financial statements Income statement Balance sheet Statement of cash flows Departmental statement for each revenue and support department Income statement: different from hotel’s Accompanied by supporting schedules explaining line items Complimentary items and allowances Incentive to gamble at casino Approximate retail value used to account for items If Rooms, say, or F&B, provides complimentary items, retail value of items included in sales of providing department If Casino department provides items, accounting procedure depends on revenue accounting method organization uses Complimentary Allowance account Payroll, employee benefits, and most other expenses for casino department are accounted largely as they are in other operating departments Credit and collection: charged to casino Gaming taxes, licenses, regulatory fees: charged to casino department Postage: charged to A&G department, but casino postage expense directly charged to casino

Casino Accounting

Complimentaries: appear as separate line items under Other Expenses on statement for gaming operations Text Exhibits: Exhibit 6: Casino Department Income Statement

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a casino to interview an accounting manager about casino financial accounting. Or invite the accounting manager to visit your class to discuss this topic. Discussion questions could include: • • •

What financial statements and schedules does the accounting department prepare for casino management? Does this particular casino have slot machines? Are they progressive and nonprogressive machines? What accounting procedures does the casino have in place for these machines? What jackpots do the machines pay out? Does the casino have a designated count room? What accounting personnel are present during counts, if any? Does the casino have separation-of-duties procedures in place for cashiering and the count room?

Individual/Group Activities Activity 1 Have each student complete Handout 18–1, “Exercise for Chapter 18.” Correct the assignments using the following answer key and return them, or go over the answers in class. Activity 1—Answer Key 1. F 2. F 3. F 4. TR 5. TR 6. F 7. F 8. F 9. TR 10. F 11. TR 12. TR 13. TR 14. TR 15. TR 16. F 17. TR

Casino Accounting

HANDOUT 18-1: Exercise for Casino Accounting Student: ________________________________________________ Assignment: 18-1

Period: ________

Use TR for True and F for False to answer the following statements. 1. The American Gaming Association is a branch of the federal government regulating casino operations.

1.____

2. The only gambling a racino offers is gambling on its own dog or horse racing.

2.____

3. Baccarat is a table dice game.

3.____

4. Nonprogressive slot machines have a set jackpot.

4.____

5. Progressive slot machines have a growing jackpot.

5.____

6. The casino manager supervises the cage cashiers.

6.____

7. Foreign chips are those made outside the United States.

7.____

8. A floating cage balance system refers to an internal control system wherein the cashiers are rotated daily.

8.____

9. The slot hopper in a slot machine contains coins for operations.

9.____

10. A table inventory is the money on the table.

10.____

11. Setting the starting value of table chips is called the par method.

11.____

12. A table drop procedure involves removing the drop boxes from a game table under supervision.

12.____

13. A chip run involves exchanging chips with other casinos.

13.____

14. Slot Machine Handle = Total Wagered = Coin-In Meter

14.____

15. Table Drop = Money in Drop Box

15.____

16. Table Drop = Total Gambled

16.____

17. Gaming Revenue = Win

17.____

Casino Accounting

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

478 479–480 480–484 484–489 489–492

Casino Accounting

Casino Accounting NAME: _____________________________________________________ DATE: _________________________________ 1.

When did Nevada become the center of gaming in the United States? a. b. c. d.

Class I Indian gaming pertains to: a. b. c. d.

b. c. d.

the kind with three reels displaying horseshoes, diamonds, hearts, and more electronic slot machines featuring many games mechanical slot machines offering only poker electronic slot machines featuring one game apiece

Which of the following casino games are card games? a. b. c. d.

"to create a better understanding of the gaming industry by bringing facts about the industry before the public, elected officials, other decision makers, and the media" "to provide educational information about gaming to tribes, the public, the government, and the media" "to advance the lives of Indian peoples economically, socially and politically" "to establish the jurisdictional framework that governs Indian gaming"

What kind of slot machine do today’s casinos offer? a. b. c. d.

infrastructure improvements education and public safety economic development all of the above

What is the National Indian Gaming Association’s commitment? a.

It is the total amount of money wagered by players. It is the revenue total a gaming operation earns before taxes, salaries, and other expenses. It equals the amount wagered minus the players’ winnings. b and c.

In most states, revenue from casino industry taxes is used for which of the following? a. b. c. d.

bingo and similar games of chance gaming referred to as casino-style gaming non-banked card games played exclusively against other players traditional Indian gaming and social gaming

Which of the following is true about "gross gambling revenue"? a. b. c. d.

during the American Revolution in 1910 in 1848 in 1931

baccarat and blackjack blackjack, baccarat, and keno bingo, keno, and craps bingo and baccarat

Which of the following is not a casino table game? a. b. c. d.

craps blackjack keno baccarat

Casino Accounting

In casinos, an internal audit of the cashier cage fund is conducted: a. b. c. d.

hourly. daily. weekly. twice a day.

10. What does the term drop mean in casino industry accounting? a. b. c. d.

the total amount gambled by players the total casino revenue the money in a slot machine drop bucket or table game drop box the total amount kept in a cashier’s cage

Casino Accounting

Competencies for Casino Accounting 1.

Provide a brief history of gaming from ancient times to the present.

Provide casino industry statistics, including those for gaming associations, commercial and Indian casinos, and racinos.

Provide basic information about the casino games baccarat, blackjack, craps, keno, roulette, and slot machines.

Explain principles of money handling, accounting and internal control, and revenue accounting in casinos.

Explain the principles of casino financial accounting, including those affecting gaming revenue, a casino’s financial statements, complimentary items and allowances, and payroll and other expenses.

Transparency Master 1

Casino Accounting

Indian Gaming: Three Classes • Class I: traditional & social gaming for minimal prizes: regulatory authority by tribal governments • Class II: bingo and similar games, non-banked card games; tribes regulate gaming with Tribal Gaming Commission oversight • Class III: casino-style gaming; tribal authority for conducting Class III gaming is restricted

Transparency Master 2

Casino Accounting

Popular Casino Games • Baccarat • Blackjack • Craps • Keno • Roulette • Slot Machines

Transparency Master 3

Inventory Accounting Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Inventory Accounting Competency 1:

Describe how inaccurate inventory records can affect the financial statements. (pp. 500–502) Key Concepts: Inaccurate inventory records Lead to inaccuracy in inventory reporting, total current assets, total assets, cost of sales, and net income (balance sheet) Ultimately affect equity section of balance sheet Affect cost of sales on income statement and distort net income Ending error affects at least two periods Text Exhibits: Exhibit 1: Sample Report of Gross Profit Exhibit 2: Computation of Gross Profit with Corrected Inventory

Competency 2:

Explain the gross profit method of estimating inventory levels. (pp. 502–503) Key Concepts: Gross profit method For estimating inventory or losses Uses estimate of the gross profit percentage on sales Gross profit ÷ net sales = gross profit percentage Sales mix affects gross profit percentage Separate gross profit percentages and estimates for food and beverages Assumptions Procedure Text Exhibits: Exhibit 3: Steps in the Gross Profit Method Exhibit 4: Estimating Inventory by the Gross Profit Method

Competency 3:

Explain the basis of accounting for inventory, and differentiate between inventory valuation approaches according to their emphasis on product flow or cost flow. (pp. 504–505) Key Concepts: Cost is primary basis of accounting for inventory Include transportation charges if significant Not purchase discounts, which are recorded as revenue Effects of price fluctuations Inventory valuation approaches Emphasis on product flow (specific identification) Emphasis on cost flow (FIFO, LIFO, and weighted average)

Competency 4:

Describe the specific identification approach to inventory valuation. (pp. 505–508) Key Concepts: Specific identification approach Basis of inventory valuation is actual purchase price of unit Specific identification perpetual method Perpetual inventory cards Same result as FIFO perpetual method if oldest issued first Issues—separate costing of different cost items

Inventory Accounting

Specific identification periodic method Labor-saving benefits Text Exhibits: Exhibit 5: Example of FIFO Perpetual Inventory Card Competency 5:

Explain the FIFO approach to inventory valuation and how it differs from the specific identification approach. (pp. 508–509) Key Concepts: FIFO approach—oldest costs will be first costs out FIFO perpetual method Perpetual inventory cards FIFO periodic method Costs ending inventory at most recent cost Same results as FIFO perpetual method Text Exhibits: Exhibit 5: Example of FIFO Perpetual Inventory Card

Competency 6:

Describe the LIFO approach to inventory valuation, and compare it with the FIFO approach. (pp. 509–511) Key Concepts: LIFO approach—most recent costs will be first costs out LIFO perpetual method Perpetual inventory cards LIFO periodic method Results may differ from those of LIFO perpetual method Text Exhibits: Exhibit 6: Example of LIFO Perpetual Inventory Card

Competency 7:

Describe the weighted average approach to inventory valuation and how it differs from the approaches previously discussed. (pp. 511–513) Key Concepts: Weighted average approach—uses average unit cost for inventory valuation Weighted average perpetual method (moving average method) New average computed after each purchase Perpetual inventory cards Weighted Average = Total Cost of Inventory on Hand ÷ Total Units in Inventory Weighted average periodic method Average computed on total goods available Results will differ slightly from those of weighted average perpetual method New average computed only at end of accounting period Procedure Weighted Average = Total Cost of Inventory on Hand ÷ Total Units in Inventory Text Exhibits: Exhibit 7: Example of Weighted Average Perpetual Inventory Card Transparency Masters: Transparency Master 2: Weighted Average

Competency 8:

Compare the three cost flow approaches to inventory valuation with respect to cost of sales and ending inventory. (pp. 513–514) Key Concepts: Comparison of cost flow methods Ending inventory on balance sheet FIFO produces highest LIFO produces lowest Weighted average falls between

Inventory Accounting

Cost of sales expense on income statement FIFO produces lowest LIFO produces highest Weighted average falls between Competency 9:

Summarize the benefits and drawbacks of the LIFO approach. (pp. 514–515) Key Concepts: Choice of inventory valuation method depends on major concern of management Matching physical flow with cost flow, FIFO better Relating cost of sales to current costs, deferring income taxes, LIFO better Financial vs. tax reporting—IRS permission needed to change valuation methods LIFO advantages Better measure of income Income tax benefits LIFO disadvantages Lower figure for income Lower figure for inventory on balance sheet Income tax benefits not guaranteed Impractical for fast-turnover food and beverage inventories Transparency Masters: Transparency Master 3: LIFO Advantages/Disadvantages

Optional Class Activities Suggested Guest Speakers/Field Trips Have students visit a large hospitality operation in your community and interview the food and beverage controller about his or her responsibilities. Or invite the controller to visit your class to discuss this topic. Discussion questions could include: • What role does the controller play in the supervision of receiving and/or storeroom personnel? • How does the controller participate in end-of-period inventory valuation? Or have students interview the controller of a local hospitality operation about the inventory methods used at the operation. Discussion questions could include: • •

Which items are maintained using perpetual recordkeeping? Which method does the operation use to valuate inventory: LIFO, FIFO, weighted average, or some other approach?

Individual/Group Activities Activity 1 Have each student complete Handout 19-1, “Exercises for Inventory Accounting.” Correct the assignments using the following answer key and return them, or go over the answers in class.

Inventory Accounting

Activity 1—Answer Key Exercise 1

1. M

2. L

3. G

4. C

5. B

6. F

7. A

Exercise 2

Sales Cost of Sales: Beginning Inventory Purchases Cost of Goods Available Ending Inventory Cost of Sales Gross Profit

Month of March $ 175,159

Month of Year-to-date April April 195,000 580,625

10,865 67,080 77,945 15,000 $ 62,945 $ 112,214

15,000 63,463 78,463 12,754 65,709 129,291



Up $4,000

Down $4,000

9,925 199,371 209,296 12,754 196,542 384,083

 No change, counterbalancing errors.

Exercise 3

Sales Cost of Sales: Beginning Inventory Purchases Cost of Goods Available Ending Inventory Cost of Sales Gross Profit

$127,647 12,465 37,215 49,680 7,556 (C) 42,124 (B) 85,523 (D)

100%

33% (A) 67%

(A) 100% – 67% Gross Profit = 33% Cost of Sales (B) 33% Cost of Sales × $127,647 Sales = $42,124 Cost of Sales (C) $49,680 Goods Available – $42,124 Cost of Sales = $7,556 (D) PROOF: 1. $127,647 Sales – $42,124 Cost of Sales = $85,523 Gross Profit 2. 67% Gross Profit × $127,647 Sales = $85,523 Gross Profit

8. N

Inventory Accounting

Exercise 4

1. Ending inventory under FIFO = $266.85 FIFO = Most recent costs remain in inventory. 4/25 4/27 4/30

Purchased 25 units at $6.35 each Purchased 10 units at $6.40 each Purchased 30 units at $6.55 each  Start

1 × 10 × 30 × 41

6.35 6.40 $6.55

= = =

6.35 64.00 196.50 266.85

10 × 12 × 19 × 41

$6.00 6.10 5.90

= = =

60.00 73.20 112.10 245.30

2. Ending inventory under LIFO = $245.30 LIFO = Oldest costs remain in inventory. Purchased 10 units at $6.00 each  Start Purchased 12 units at $6.10 each Purchased 25 units at $5.90 each

4/1 4/4 4/9

3. Ending inventory under Weighted Average = $252.87 4/1 Purchased 10 units at $6.00 4/4 Purchased 12 units at $6.10 4/9 Purchased 25 units at $5.90 4/13 Purchased 10 units at $6.02 4/17 Purchased 25 units at $5.98 4/20 Purchased 17 units at $6.05 4/23 Purchased 15 units at $6.10 4/25 Purchased 25 units at $6.35 4/27 Purchased 10 units at $6.40 4/30 Purchased 30 units at $6.55 179

= = = = = = = = = =

60.00 73.20 147.50 60.20 149.50 102.85 91.50 158.75 64.00 196.50 $ 1,104.00

$1,104 = $6.1676 Weighted Average Cost per Unit 179 41 units on hand × $6.1676 = $252.87 Exercise 5

Product A B C D E F G Total

Inventory Count

Acquisition Cost

50 units 15 units 24 units 75 pounds 1/2 pound 1/2 crate 20 units

$1.25 per unit $7.50 per unit $4.00 per dozen $50 per 100 pounds $75 per pounds $15 per crate $6 per unit

Inventory Value $

62.50 112.50 8.00 ($4 × 24/12) 37.50 ($50 × 75/100) 37.50 7.50 120.00 $ 385.50

Inventory Accounting

Individual/Group Activity 2 Have each student complete Handout 19-2, “Exercises for Chapter 19.” Correct the assignments using the following answer key and return them, or go over the answers in class. Individual/Group Activity 2—Answer Key

1. Cost of Sales = $130.70

Ending Inventory = $4.15 PURCHASES

Date

Ref.

9/1 9/3 9/10

ISSUES

Units

Unit Cost

Total

4.00

40.00

4.10

4.15

Units

Unit Cost

Total

4.00

28.00

3 6 9

4.00 4.10

12.00 24.60 36.00

6 10 16

Unit Cost

10 3 3 12

4.00 4.00 4.00 } 4.10

40.00 12.00

4.10

24.60

6 11

4.10 } 4.15

70.25

24.60 41.50 66.10

4.15

4.19

130.70

45.65

9/30

Total

Units

49.20

9/15

9/22

BALANCE ON HAND

134.85

4.10 4.15

2. Cost of Sales = $134.85

Date 9/1 9/3 9/10

Ref.

4.15

PURCHASES

ISSUES

BALANCE ON HAND

Units

Unit Cost

Total

Units

Unit Cost

Total

Units

Unit Cost

4.00

40.00 7

4.00

28.00

4.10

36.00

4.00 4.00 4.00 } 4.10 4.00 } 4.10 4.00 4.10 } 4.15

40.00 12.00

10 3 3 12 3 3 3 3 11

4.00

4.10

49.20

4.15

45.65

9/30

Total

61.20

Ending Inventory = $4.00

9/15 9/22

Total

11 3 2 16

134.85

4.15 4.10 4.00

45.65 12.30 8.00 65.95

130.85

Total

61.20 24.30 69.95

4.00

Inventory Accounting

3. Cost of Sales = $130.72

Ending Inventory = $4.13 PURCHASES

Unit Cost

Total

9/1 9/3 9/10 9/15 9/22 9/30

4.00

40.00

Total

Ref.

12 11

4.10 4.15

BALANCE ON HAND

ISSUES

Units

Date

Units

Unit Cost

Total

Units

Total Cost

Unit Cost

4.00

28.00

40.00 12.00 61.20 24.48 70.13 4.13

4.00

66.00

10 3 15 6 17 1

4.08

36.72

4.125

130.72

4.13

49.20 45.65

134.85

4.08 4.125

Inventory Accounting

HANDOUT 19-1: Exercises for Inventory Accounting Exercise 1 Select from the following list the term that best represents each statement. Selections do not apply to more than one statement. A. Cost of sales B. Cost of goods available C. Specific identification D. Weighted average E. Net income

F. Gross profit method G. Gross profit H. Perpetual I. Revenue J. Operating income

K. Value L. FIFO M. Periodic N. LIFO O. Cost

1. Does not use perpetual inventory cards. Cost of sales is determined by an estimate of the ending inventory or physical inventory. 1. 2. Inventory valuation is a result of the most recent costs. 2. 3. Sales less cost of sales. 3. 4. Inventory valuation is a result of the acquisition cost. 4. 5. Beginning inventory + purchases. 5. 6. A method used to estimate ending inventory. 6. 7. Cost of goods available to sell – goods not sold. 7. 8. Inventory valuation is a result of the oldest costs. 8.

__________ __________ __________ __________ __________ __________

Exercise 2 Inventory Errors March Reported $175,159

Sales Cost of sales: Beginning inventory 10,865 Purchases 67,080 Goods available 77,945 Ending inventory 11,000 Cost of sales $ 66,945 Gross profit $108,214

March Corrected ______

April April YTD April YTD April Reported Corrected Reported Corrected 195,000 ______ 580,625 _____

______ ______ ______ ______ ______ ______

11,000 63,463 74,463 12,754 61,709 133,291

______ ______ ______ ______ ______ ______

9,925 199,371 209,296 12,754 196,542 384,083

_____ _____ _____ _____ _____ _____

It is discovered that the ending inventory should have been $15,000 on March 31. What is the corrected gross profit for these periods?

Inventory Accounting

Exercise 3 Estimating the Ending Inventory Monthly financial statements are due and management has decided not to take a physical inventory at the end of the month since several audits were performed during the month. To arrive at an ending inventory for financial statement purposes, the gross profit method will be used to estimate the April 30 ending inventory based on the following information: Food inventory March 31 April food sales April food purchases Estimated gross profit %

$12,465 127,647 37,215 67 %

What is the estimated ending food inventory on April 30? Round all computations to the nearest dollar. $____________ Exercise 4 Inventory Valuation Using Periodic Methods A new inventory product shows the following information: 4/1 Purchased 10 units at $6.00 each 4/4 Purchased 12 units at $6.10 each 4/9 Purchased 25 units at $5.90 each 4/13 Purchased 10 units at $6.02 each 4/17 Purchased 25 units at $5.98 each 4/20 Purchased 17 units at $6.05 each 4/23 Purchased 15 units at $6.10 each 4/25 Purchased 25 units at $6.35 each 4/27 Purchased 10 units at $6.40 each 4/30 Purchased 30 units at $6.55 each Because the facility uses a periodic system, perpetual recordkeeping cards are not maintained; therefore, the issues are not known. A physical inventory shows that 41 units are on hand at the close of business, April 30. Compute the value of the ending inventory under the following periodic methods. (Show answers in $ and ¢.) 1. 2. 3.

FIFO periodic LIFO periodic Weighted average periodic (Use a minimum 4 decimal weighted average to compute the inventory value.) Answer and Computation Area

1. FIFO periodic $

___________________

2. LIFO periodic $ _____________________

3. Weighted average periodic $ _________________________

Inventory Accounting

Exercise 5 Specific Identification Method A physical inventory is taken on December 31. Your responsibility is to value the ending inventory. (Show answers in $ and ¢.)

Total

Product

Inventory Count

Acquisition Cost

Inventory Value

A B C D E F G

50 units 15 units 24 units 75 pounds 1/2 pound 1/2 crate 20 units

$1.25 per unit $7.50 per unit $4.00 per dozen $50 per 100 pounds $75 per pound $l5 per crate $6 per unit

_________ _________ _________ _________ _________ _________ _________

Inventory Accounting

HANDOUT 19-2: Exercises for Inventory Accounting Perpetual Recordkeeping Systems A new inventory item is purchased on September 1. Record the receipts and issues, and maintain a day-to-day balance on hand for the following inventory transactions. After the last transaction, compute the cost of sales and ending inventory for this particular product. 9/1 Purchased 10 units at $4.00 each 9/3 Issued 7 units 9/10 Purchased 12 units at $4.10 each 9/15 Issued 9 units 9/22 Purchased 11 units at $4.15 each 9/30 Issued 16 units 1. Use the FIFO method to cost issues. PURCHASES

Date

Ref.

Units

Unit Cost

Total

BALANCE ON HAND

ISSUES

Units

Unit Cost

Total

Units

Cost of Sales: $ _____________ Ending Inventory: $ _____________

Total Cost

Unit Cost

Inventory Accounting

2. Use the LIFO method to cost issues. PURCHASES

Date

Ref.

Units

Unit Cost

Total

BALANCE ON HAND

ISSUES

Units

Unit Cost

Total

Units

Total Cost

Unit Cost

Cost of Sales: $ _____________ Ending Inventory: $ ____________

3. Use the weighted average method to cost issues. Carry the weighted average cost to 3 decimals. Do not calculate a new weighted average after any issues. PURCHASES

Date

Ref.

Units

Unit Cost

Total

BALANCE ON HAND

ISSUES

Units

Unit Cost

Total

Units

Cost of Sales: $ _____________ Ending Inventory: $ _____________

Total Cost

Unit Cost

Inventory Accounting

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Solution to Case Study The solution to the case study in the text is in the “Solutions” section at the end of this Instructor’s Guide.

500–502 502–503 504–505 505–508 508–509 509–511 511–513 513–514 514–515

Inventory Accounting

Inventory Accounting NAME: _____________________________________________________ DATE: _________________________________ True (T) or False (F) 1.

If the gross profit method is used, estimating procedures should be carried out separately for food and beverage inventories.

Good inventory procedures require that the most recent products in the storeroom be the first products issued.

The FIFO periodic method may produce results for ending inventory that differ from those produced by the FIFO perpetual method.

The weighted average perpetual method is sometimes called the moving average method because a new average is computed after each purchase.

Multiple Choice 5.

Hospitality operations are likely to use a perpetual recordkeeping system for: a. b. c. d.

Inaccurate inventory measurements affect: a. b. c. d.

A physical inventory has not been taken at the end of an accounting period. The financial statements need to be prepared. Inventory losses need to be assessed due to a recent theft. Purchase discounts need to be tracked to achieve better cost savings.

Which of the following is not an example of a cost flow approach to inventory valuation? a. b. c. d.

the current assets section of the balance sheet. the equity section of the balance sheet. the income statement. all of the above.

Which of the following would not represent a valid consideration relating to the gross profit method? a. b. c. d.

supply items only. inventory items with low cost per unit. inventory items with high cost per unit. all inventory items.

weighted average specific identification LIFO FIFO

The FIFO approach to inventory valuation values units of ending inventory at: a. b. c. d.

the oldest costs. the most recent costs. the highest costs. the average costs.

10. Which of the following approaches to inventory valuation produces cost of sales measurements that most closely reflect current costs? a. b. c. d.

LIFO FIFO weighted average specific identification

Inventory Accounting

Competencies Inventory Accounting 1.

Describe how inaccurate inventory records can affect the financial statements.

Explain the gross profit method of estimating inventory levels.

Explain the basis of accounting for inventory, and differentiate between inventory valuation approaches according to their emphasis on product flow or cost flow.

Describe the specific identification approach to inventory valuation.

Explain the FIFO approach to inventory valuation and how it differs from the specific identification approach.

Describe the LIFO approach to inventory valuation, and compare it with the FIFO approach.

Describe the weighted average approach to inventory valuation and how it differs from the approaches previously discussed.

Compare the three cost flow approaches to inventory valuation with respect to cost of sales and ending inventory.

Summarize the benefits and drawbacks of the LIFO approach.

Transparency Master 1

Inventory Accounting

Weighted Average Weighted Average = Total Cost of Inventory on Hand Total Units in Inventory

Transparency Master 2

Inventory Accounting

LIFO Advantages/Disadvantages Advantages • Better measure of income • Income tax benefits Disadvantages • Lower figure for income • Lower figure for inventory on balance sheet • Income tax benefits not guaranteed • Impractical for fast-turnover F&B inventories

Transparency Master 3

Assorted Topics Sample Lesson Plan Transparency Masters: Transparency Master 1: Competencies for Assorted Topics Competency 1:

Describe the purpose and typical content of a feasibility study. (pp. 521–524) Key Concepts: A preliminary study made before a project is begun It determines project’s likelihood of succeeding It also: Guides planners and architects Helps in obtaining financing Is a viable tool in negotiating franchising, leasing, management, and other prerequisites Guides preparation of operating and marketing plans Guides in preparing capital and operating budgets Any feasibility study should contain: Proposal letter Opening section: letter of transmittal, table of contents, introduction, summary and conclusions Description of market area Evaluation of area and site: location, accessibility, visibility; site’s adaptability; zoning, licensing, building codes; conclusion Analysis of competition Demand analysis Recommended facilities and services Estimated income statement Transparency Masters: Transparency Master 2: Feasibility Study

Competency 2:

Identify undistributed operating expenses and fixed charges and use various methods to allocate those costs to one or more departments. (pp. 524–526) Key Concepts: USALI 9 and 10 present undistributed operating expenses and fixed charges after revenue center revenue and expenses on the summary income statement and the summary operating statement, respectively Service center expenses and fixed charges deducted from total income Allocating service center expenses to revenue departments is an extension of responsibility accounting Undistributed operating expenses: expenses incurred by a service center (A&G, Marketing, POM, Utility costs) that benefits revenue centers Fixed charge: expenses incurred by property as a whole; don’t change from period to period (rent, property taxes, insurance, interest, depreciation) Direct method of allocation popular; basis may be percentage of: Payroll Square footage Total revenue Any other equitable basis Step method: undistributed expenses from one service department allocated to other service departments as well as revenue centers One service center is allocated, new totals taken, a second service center is allocated, and so on Formula method: allocation of each department made simultaneously Computerized

Assorted Topics

Text Exhibits: Exhibit 1: Income Statement Excerpt with A&G Allocations Competency 3:

Distinguish between historical cost and fair value accounting and explain why this distinction has recently become important. (pp. 526–529) Key Concepts: GAAP held that fixed assets should be shown at historical cost Arguments against historical cost: Does not provide current values Not comparable between companies and assets purchased at different times FASB recently decided in favor of fair value as the relevant measurement attribute Permits or requires businesses to use FASB 157 effective after November 15, 2007 Fiscal year statements and interim periods Defines fair value Provides basis for measuring in accordance with GAAP Issued because there were various definitions and limited guidance for applying under GAAP If available, quoted market price in active market is best evidence of FV Exchange price is price in orderly transaction between seller and buyer in principal or most advantageous market

Competency 4:

Define fair value and describe the FASB’s three levels of fair value measurement. (pp. 527–528) Key Concepts: Fair value definition: Asset Liability Fair Value hierarchy: Level 1: direct reference to quoted prices, active market, identical assets or liabilities Level 2: directly or indirectly observable price; similar assets or liabilities; active or inactive market; other inputs Level 3: unobservable inputs based on best information available, including business’s own data Transition adjustment IASB prefers FV accounting International Financial Reporting Standards (IFRS) support FV Limitations of Reliability and measurement: when there’s no active market Management bias Transparency Masters: Transparency Master 3: Definition of Fair Value Transparency Master 4: Fair Value Hierarchy

Competency 5:

Determine when compound and present value calculations are required and perform those calculations. (pp. 529–532) Key Concepts: Compound value Compound interest Objective of compound value calculation: to determine future value of amount invested today Compound value tables (aka future value tables) Calculate compound value. 1. Interest rate per period 2. Number of interest periods 3. Factor at intersection of interest rate and interest period

Assorted Topics

4. Amount invested × factor = future amount Present value = value today of a known future amount Essentially the reverse of compound value Present value tables make it easy to compute amount needed now to achieve future goal Procedure: 1. Interest rate per period 2. Number of interest periods 3. Factor at intersection of #1 and #2 4. Goal Amount × factor = amount invested today Text Exhibits: Exhibit 2: Compound Value Factors for a Single Cash Flow Exhibit 3: Present Value Factors for a Single Cash Flow Competency 6:

Apply compound and present value concepts to annuities and perform those calculations. (pp. 533–535) Key Concepts: Annuity Ordinary annuity Annuity due Only difference: when investments are made Ordinary annuity calculation objection: to calculate future value of series of investments Series of payments made at end of each period 1. Interest rate per period 2. Number of interest periods 3. Factor at intersection of #1 and #2 4. Investment × Factor = value at end of period Objection of annuity due calculation: identical to ordinary annuity calculation; major difference is payments are made at beginning, so # of total periods increased by 1 1. Interest rate per period 2. Number of interest periods + 1 3. Factor at intersection of #1 and #2 4. Investment × factor = amount at end Objection of present value of an ordinary annuity calculation: what amount must be invested now to receive a stated stream of payments for a stated # of years 1. Interest rate per period 2. Number of interest periods 3. Factor at intersection of #1 and #2 4. Investment × factor = amount that must be invested now Text Exhibits: Exhibit 4: Ordinary Annuity Table (Future Value Factors) Exhibit 5: Present Value Factors for an Annuity

Optional Class Activities Suggested Guest Speakers Have students visit a large hotel in your community and interview accounting personnel about preparing financial statements using fair value accounting or using historical costs. Or invite a hotel accounting representative to visit your class and discuss this topic. Discussion questions could include: • • • •

Which does the guest speaker prefer: fair value accounting or accounting for fixed assets on a historical-cost basis? Is the speaker’s accounting department prepared to switch over to fair value reporting on financial statements? What advantages of using fair value accounting does the speaker anticipate? What disadvantages, if any, of using fair value accounting does the speaker foresee?

Assorted Topics

Alternatively, students could visit a large hotel and interview accounting personnel about allocating service center expenses, fixed expenses, and utility expenses to revenue and service centers that benefit from them. Or invite the accounting representative to visit your class and discuss this topic. Discussion questions could include: • • • •

Does the speaker’s accounting department currently allocate expenses to service and revenue centers? Why or why not? If the accounting department allocates charges, what method does it use to do so? What are the advantages of allocating such expenses? What disadvantages of allocating such expenses does the speaker experience?

Answers to Review Questions The answers to the review questions in the text are in the “Solutions” section at the end of this Instructor’s Guide.

Answers to Problems The answers to the problems in the text are in the “Solutions” section at the end of this Instructor’s Guide.

521–524 524–526 526–529 527–528 529–532 533–535

Assorted Topics

Assorted Topics NAME _____________________________________________________ DATE _________________________________ 1.

The opening section of a feasibility study should include the following: a. b. c. d.

Allocating service center expenses to revenue departments is an extension of: a. b. c. d.

replacement cost historical cost current cost future value cost

In the measurement of fair value of fixed assets, the emphasis in Level 1deals with: a. b. c. d.

the accountant’s job the service center manager’s job revenue accounting responsibility accounting

The traditional mandate in preparing financial statements according to GAAP was that land, building, equipment, and other assets should be shown at: a. b. c. d.

the consultant’s proposal letter a letter of transmittal a description of the zoning, licensing, and building codes an analysis of the competition

either a directly or indirectly observable price. unobservable inputs. quoted prices in active markets for identical assets. quoted prices in inactive markets for identical assets.

Which of the following is a cash flow stream for a finite number of periods where all the cash flows are equal in amount? a. b. c. d.

compound value compound interest an annuity a compound annuity

Assorted Topics

Competencies for Assorted Topics 1.

Describe the purpose and typical content of a feasibility study.

Identify undistributed operating expenses and fixed charges and use various methods to allocate those costs to one or more departments.

Distinguish between historical cost and fair value accounting and explain why this distinction has recently become important.

Define fair value and describe the FASB’s three levels of fair value measurement.

Determine when compound and present value calculations are required and perform those calculations.

Apply compound and present value concepts to annuities and perform those calculations.

Transparency Master 1

Assorted Topics

Feasibility Study • Determines project’s likelihood of succeeding • Guides planners and architects • Helps in obtaining financing • Helps in negotiating franchising, leasing, management, and more • Guides preparation of operating and marketing plans

• Guides in preparing capital and operating budgets

Transparency Master 2

Assorted Topics

Definition of Fair Value • Of an Asset: the amount at which the asset could be bought or sold in a current transaction between a willing buyer and seller, other than in liquidation of a business • Of a Liability: the amount at which the liability could be settled in a current transaction between willing parties, other than in liquidation of a business

Transparency Master 3

Assorted Topics

Fair Value Hierarchy Level 1: • direct reference to quoted prices • in active market • for identical assets or liabilities Level 2: • directly or indirectly observable price • quoted price for similar assets or liabilities • in active or inactive market • other inputs Level 3: • unobservable inputs based on best information available, including business’s own data

Transparency Master 4

Chapter 1 Hotel Revenue Accounting Review Questions 1. Which revenue bookkeeping account is used to record each of the following activities? a. Sales of coffee, tea, and milk—Food Sales b. Sales of alcoholic beverages—Beverage Sales c. Rentals of guestrooms—Room Sales d. Price adjustment on a food tab, granted because of a customer’s complaint—Food Allowances (contra-sales account) e. Complimentary room provided to a guest—Room Allowances f. Room service: sale of food—Food Sales 2. Which bookkeeping account is credited for each of the following activities? (Assume a debit to cash.) a. Sales of gum and novelty items in the dining room—Other Income (Food Department) b. Interest income—Interest Income (a hotel “other income” account) c. Sales of grease and bones from the kitchen—Cost of Food Sold d. Separate charges for housekeeping or linen service—Room Sales e. Concessions fees—Concessions Income (a hotel “other income” account) 3. What are the two major methods of recording invoices and treating cash discounts? Two methods for recording invoices are the gross method (gross recording method) and the net method (net purchases recording method). The difference between these methods occurs when the discount is recorded. Under the gross method, the discount is recorded when the invoice is paid. Under the net method, the discount is recorded before payment; if the discount is lost, a charge is made to a Discounts Lost account. Discounts may be treated as revenue or nonrevenue. Under the revenue procedure, discounts are recorded to a Cash Discounts Earned account. Under the nonrevenue procedure, discounts are used to reduce the cost of the item purchased.

Chapter 1

4. Which internal control document is used to record each of the following activities? a. Guest checks issued to servers—Servers’ signature book b. Price adjustments—Allowance voucher c. Detection of errors or intentional omissions from room sales—Housekeeper’s report d. Issuance of food by the kitchen to the server—Duplicate checks (or precheck system) 5. Which bookkeeping account is debited for each of the following activities? (Assume a credit to a sales account.) a. Payment by personal check—Cash b. Payment by a bankcard—Cash c. Payment by a nonbank credit card—Accounts Receivable d. Guest signs the tab using open account privileges—Accounts Receivable 6. Which accounts receivable subsidiary ledger(s) will be affected by the following situations? Specify whether the posting will be a debit or a credit. a. Debit guest ledger for sale of a room to a registered guest who will stay for several days. b. Credit guest ledger for payment by a registered guest. c. Debit city ledger and credit guest ledger when guest checks out and charges his or her bill with an American Express card. d. Debit city ledger when a company rents a conference room on an open account. 7. Which member of the front office is responsible for each of the following functions? a. The accounts receivable clerk posts food and beverage guest charges to the guest ledger. b. The night auditor posts room charges to the guest ledger. 8. Which departments are responsible for maintaining each of the following ledgers? In what sequence are the ledgers maintained? a. The accounting department maintains the city ledger. The city ledger is maintained in alphabetical sequence by customer name. b. The front office maintains the guest ledger. The guest ledger is maintained in room number sequence.

Chapter 1

Problems Problem 1 F

1. Rooms, food and beverage, and marketing are revenue centers.

2. Food sold in the course of room service is credited to Room Sales.

3. Other Income—Food Department and Other Income on the schedule of rentals and other income are the same items.

4. If food sales are $2,000 and food allowances are $25, net food sales are $1,975.

5. If food sales are $2,000, food allowances are $25, and cost of food sold is $600, gross profit is $1,375.

6. The gross method refers to a method for recording discounts.

7. The nonrevenue procedure refers to a procedure for recording invoices.

8. A sale to a guest using a credit card such as VISA is recorded to Accounts Receivable.

Problem 2

Beverage

Food

Rentals and Other Income

1. Commission from vending machine company

2. Cash discounts earned

3. Coffee, tea, milk

Problem 3 Discount = $4 (2% × $200) Problem 4 $9,000 ($12,000 less 25%) (Trade discounts are not recorded.) Problem 5 a. 6/15 (15 days after end of next month) b. 6/10 (10 days after receipt of goods, 5/31) c. 11/10 (Prox. invoice dated 9/26 is treated as 10/1 billing)

Chapter 1

Problem 6 a. Invoice amount 2% Discount (paid 6/17) Check amount

$200 4 (Discount good till 6/17) $196

b. Invoice amount No discount (paid 6/20) Check amount

$200 0 (Discount good till 6/18) $200

c. Invoice amount 2% discount (paid 8/4) Check amount

$500 10 (Discount good till 8/10) $490

d. Invoice amount No discount (paid 9/10) Check amount

$60 0 (Discount good till 9/5) $60

e. Invoice amount 5% discount (paid 9/14) Check amount

$150.00 7.50 (Discount good till 9/15) $142.50

f. Invoice amount 3% discount (paid 8/4) Check amount

$400 12 (Discount good till 8/10) $388

Problem 7 Food Sales Food Allowances Net Sales Cost of Food Sold Gross Profit

$50,000 400 $49,600 15,000 $34,600

Problem 8 a. Food Purchases Accounts Payable

700

b. Accounts Payable Cash

700

c. Accounts Payable Cash Cash Discounts Earned

700

700 700 686 14

Chapter 1

Problem 9 a. Food Purchases Accounts Payable

700

b. Accounts Payable Cash

700

c. Accounts Payable Cash Food Purchases

700

700 700 686 14

Chapter 1

Case Study 1. Identify the areas that make theft attractive and possible. •

90% of the transactions are made for cash.

•

The owner cannot monitor operations full-time because of the demanding operating hours.

2. Describe how cash could be stolen. •

The use of a register does not deter cash theft. An employee could pocket a customer’s cash payment without ringing up the sale. Such a theft could occur on any shift.

•

Collusion among employees could also lead to cash theft.

3. Explain whether and why the owner should be concerned that friends and relatives might steal cash from him. •

One would hope that friends and relatives could be trusted. However, the lure of easy cash is sometimes too tempting.

•

Also, friends and relatives may have financial or gambling problems that would tempt them to be dishonest.

4. Identify some basic requirements of internal control for cash. •

In all cases, the cash register tapes must be retained, and income must be deposited intact.

•

The number of employees authorized to handle the cash register should be restricted.

•

Perform register readings and count receipts at the end of each shift.

5. Explain several procedures the owner could use to examine the validity of sales. •

One method is the unit volume markup method. This method uses the ingredient costs, which are then marked up to the selling price. The limitation of this method is that it is difficult to apply on a daily basis since purchases of ingredients may not equal usage of ingredients.

•

The best daily method is the pizza boxes used. This requires an inventory count of the pizza boxes for each shift. The number of boxes used times the selling price should reflect the sales receipts. A policy regarding accounting for soiled or damaged boxes should be in effect. Only a adequate supply of boxes (with a safety margin for high volume) should be on hand for each shift. Excess inventory should be in a locked stockroom. A trusted employee on each shift should have a key. Of course, collusion may weaken the internal controls, but no system can be perfect because of the human element.

Chapter 2 Hotel Expense Accounting Review Questions 1. What is the concept of responsibility accounting? The purpose of responsibility accounting is to provide financial information that may be used as a management tool in evaluating the performance of managers and department heads. 2. What is business segmentation? Business segmentation is the division of work into specialized departments so a business may operate more efficiently and profitably. Managers are assigned to each business segment to monitor its day-to-day operations and make decisions. For example, a large hotel chain will assign a general manager in charge of each specific hotel property. Each hotel property will be divided into various revenue and non-revenue centers directed by a department head and other supervisory personnel. 3. What is a support center? What are some of the support centers found in a hotel? A support center is a department that does not generate sales; its purpose is to service or support the revenue-producing centers or the hotel as a whole. Examples of support centers are administrative and general, data processing, human resources, marketing, and property operations and maintenance. 4. How are the terms “direct expense” and “indirect expense” defined? Direct expense refers to an expense incurred solely for the benefit of a specific department. The expense is the responsibility of and controllable by the department head. Indirect expense refers to an expense incurred for the benefit of the hotel as a whole; the expense cannot be identified as being incurred for the benefit of any specific department. 5. How is the term “fixed charges” defined? What kinds of expenses are classified as fixed charges? Fixed charges are those expenses incurred regardless of sales volume and may be incurred even if the hotel is closed. Examples of fixed charges are property insurance, interest expense, property taxes, rent expense, depreciation, and amortization.

Chapter 2

6. What is included in the Cost of Food Sales account? Do these items increase or decrease the cost of food sold? Purchase cost of food provisions (increase) Delivery costs (increase) Trade discounts (decrease) Sale of grease and bones (decrease) (Note: Cash discounts are other income of the hotel.) 7. What types of items are considered Payroll and Related Expenses? Salaries and Wages Payroll Taxes Employee Meals Workers’ Compensation Insurance Employee Group Plans (Health, Life, Retirement, and other) 8. What accounts are commonly used to record repairs and maintenance expenses? Building Supplies Electrical and Mechanical Equipment Engineering Supplies Furniture, Fixtures, Equipment, and Decor Grounds and Landscaping Swimming Pool (Note: All these accounts are in the POM Department.) 9. What is the major difference between the allowance method and the direct write-off method in terms of when a bad debt is recorded? Under the allowance method, actual bad debts are charged to the Allowance account. Under the direct write-off method, actual bad debts are charged to the Provision for Doubtful Accounts (Bad Debts Expense) account. 10. What is the major difference between the percentage of sales procedure and the percentage of receivables procedure in the recording of the estimated bad debts calculation under the allowance method? When the accounts receivable balance is used as a basis in computing potential bad debts, the Allowance account is adjusted to the computed amount. When sales are used as a basis in computing potential bad debts, the Allowance account is increased by the computed amount.

Chapter 2

Problems Problem 1 T

1. Dividing a corporation into reporting areas by hotel location is a form of business segmentation.

2. Dividing a particular hotel into reporting areas by department is a form of business segmentation.

3. The payroll expense for housekeepers is charged to the rooms department.

4. The salary of the general manager is charged to the A&G department.

5. The payroll expense for the night auditor and front office bookkeeper is charged to the A&G department.

6. Repairs to an oven located in the restaurant are charged to the F&B department.

7. The cost of food sold includes employee meals expenses.

8. Contracting with an outside maintenance company to clean the restaurant is charged to the F&B department.

9. The expense for water used by registered guests is charged to the rooms department.

10. The percentage of sales procedure and the percentage of receivables procedure are classified as allowance methods.

Problem 2 Credit Card Commissions Cash—Checking Account

175 175

Problem 3 Cash Credit Card Commissions Accounts Receivable

3,800 200 4,000

Problem 4 Provision for Doubtful Accounts Accounts Receivable

210 210

Problem 5 Provision for Doubtful Accounts Accounts Receivable

210 210

Chapter 2

Problem 6 Percentage of receivables procedure Provision for Doubtful Accounts Allowance for Doubtful Accounts

600 600

Prior to this entry, the Allowance account had a credit balance of 1,200. The new estimate is $1,800. Under the percentage of receivables procedure, the Allowance account is adjusted to reflect the estimated amount of doubtful accounts. Allowance for Doubtful Accounts Bal 1,200 AE 600 Bal 1,800

Balance now equals new estimate. Problem 7 Percentage of sales procedure Provision for Doubtful Accounts Allowance for Doubtful Accounts

1,800 1,800

To record the estimated potential uncollectible accounts of $1,800 under the percentage of sales procedure. Allowance for Doubtful Accounts Bal 1,200 AE 1,800 Bal 3,000 Represents the amount used to increase expense. Problem 8

+ = – = – =

Beginning food inventory Food purchases for the period Cost of food available Ending inventory Cost of food used Employee meals Cost of food sold

$1,500 1,000 $2,500 1,200 $1,300 20 $1,280

Chapter 2

Problem 9 – = – =

Sales Sales allowances Net sales Cost of food sold Gross profit

$90,000 1,000 $89,000 24,000 $65,000

Chapter 2

Case Study Answer: The inventory destroyed by fire was $44,000 (at cost). From the information given, the gross profit method of estimating inventories is applicable. The preliminary information that can be determined is as follows: The cost of sales is 28% ($420,000 ÷ $1,500,000) using the financial statement information of January 1 to May 31. The gross profit method can now be applied to determine the inventory on June 10 as follows: Solution Sequence 1 Sales June 1–10 2 Beginning Inventory 3 Purchases 4 Available → 6 Ending Inventory → 5 Cost of Sales

Comments $200,000 $ 35,000 65,000 $100,000 44,000 56,000

Net sales = 100% Ending inventory May 31 June 1 to June 10 Beginning Inventory + Purchases Available less Cost of Sales Sales $200,000 × 28%

Chapter 3 Property and Equipment Accounting Review Questions 1. How are the following terms defined? a. A capital expenditure generally relates to the purchase of an asset. b. A revenue expenditure relates to day-to-day expenses such as rent, utilities, advertising, and other items charged directly to an expense account. c. Acquisition cost includes all expenditures to purchase an asset, installation, and associated costs in getting it ready for use. d. Tangible assets have a long life and physical substance; examples are land, building, furniture, equipment, and similar assets. e. Intangible assets also have a long life but have no physical substance; examples are trademarks and purchased goodwill. 2. What is the major difference between a capital lease and an operating lease? A capital lease is in reality a long-term financing device where the ownership is constructively passed on to the lessor at the end of the lease. In an operating lease, the asset reverts to the lessor and the asset still has a substantial remaining economic life. 3. What is the major difference between the Depreciation account and the Accumulated Depreciation account? The Depreciation account is an expense account that reflects depreciation charges only for the current accounting year. The Accumulated Depreciation account is a contra-asset account reflecting depreciation charges for all accounting periods. 4. What are three common time-factor depreciation methods? The time-factor depreciation methods are straight-line, declining balance, and sum-of-theyears-digits methods. 5. What three common methods may be used to account for the acquisition and replacement of china, glassware, and silver? Three common methods to account for china, glassware, and silverware acquisitions and replacements are as follows:

Chapter 3

Capitalize Original Purchase 1. 2. 3.

Capitalize Replacements

x x x

Expense Replacements

Adjust to Physical

x x x

x x

6. Is the gain (or loss) recognized for the following transactions involving like-kind assets? Exchange of like-kind assets: a. A material loss is recognized for financial reporting purposes. b. A loss is not recognized for tax reporting purposes. c. A gain is not recognized for financial reporting purposes. d. A gain is not recognized for tax reporting purposes. 7. Is the gain (or loss) recognized for the following transactions involving dissimilar assets? Exchange of dissimilar assets: a. A loss is recognized for financial reporting. b. A loss is recognized for tax reporting. c. A gain is recognized for financial reporting. d. A gain is recognized for tax reporting.

Chapter 3

Problems Problem 1 Purchase price Legal fees Brokerage fees Delinquent taxes paid by buyer Remove existing building Site grading Salvage proceeds from old building Land Acquisition Cost

$150,000 1,500 15,000 7,000 12,000 28,000 ( 2,000) $211,500

Problem 2 Allocation % Determination: Land appraised value Building appraised value

$ 99,000 341,000 $440,000

Allocation of lump-sum purchase price: Land (22.5% × $500,000) $112,500 Building (77.5% × $500,000) 387,500 $500,000

22.5% 77.5% 100.0% (Recorded to Land account) (Recorded to Building account)

Problem 3 a.

Cost $10,000 – Salvage $2,000 = $2,000 annual depreciation. Useful Life 4 years Year 1 2 3 4

Computation Upon Acquisition 1/4 × $8,000 1/4 × $8,000 1/4 × $8,000 1/4 × $8,000

Depreciation Expense – $2,000 2,000 2,000 2,000 $8,000

Accumulated Depreciation – $2,000 4,000 6,000 8,000

Cost $10,000 10,000 10,000 10,000 10,000

Book Value $10,000 8,000 6,000 4,000 2,000

Cost $10,000 10,000 10,000 10,000 10,000

Book Value $10,000 5,000 2,500 2,000 2,000

Alternative computation of annual depreciation: 100% = 25%. 4 years b.

25% × $8,000 = $2,000.

Straight-line rate = 25%. Year 1 2 3 4

Computation Upon Acquisition 50% × $10,000 50% × $5,000 * $2,500 – $2,000 (Book = Salvage)

Double declining rate = 50%. Depreciation Expense – $5,000 2,500 500 0 $8,000

Accumulated Depreciation – $5,000 7,500 8,000 8,000

Chapter 3

* If 50% × $2,500 were used, the resulting book value would go below salvage value (permissible floor). Previous Book Value 50% × 2,500 Resulting Book Value

$2,500 1,250 1,250

2,000 Permissible Floor

Therefore, the depreciation for this year is “squeezed.” Cost $10,000 – Salvage $2,000 = Depreciable Basis $8,000

Year 1 2 3 4

Years Reversed 4 3 2 1 10

Computation Upon Acquisition 4/10 × $8,000 3/10 × $8,000 2/10 × $8,000 1/10 × $8,000

Depreciation Expense

Accumulated Depreciation

Cost

Book Value

– 3,200 2,400 1,600 800 $8,000

– 3,200 5,600 7,200 8,000

$10,000 10,000 10,000 10,000 10,000

$10,000 6,800 4,400 2,800 2,000

Problem 4 Since depreciation is recognized to the nearest whole month, assets purchased from the 1st to the 15th are depreciated as if they were purchased on the 1st of the month.

$11,100 – $1,500 = $1,200 annually or $100 per month 8 Asset purchased on 3/15 3/31 Depreciation Expense 100 Accumulated Depreciation 4/30

Depreciation Expense Accumulated Depreciation

100

100 100

Asset purchased on 5/18 5/31 No entry 6/30

Depreciation Expense Accumulated Depreciation

100 100

Problem 5 a. b. c.

Depreciation—Building Accumulated Depreciation—Building

1,300

China and Glassware Expense China and Glassware (asset account)

275

Amortization Expense Leasehold

300

1,300 275 300

Chapter 3

Problem 6 Cash Accumulated Depreciation—Transportation Equipment Loss on Disposal of Equipment Transportation Equipment Record outright sale of truck at a loss. Selling Price Book Value ($12,500 – $6,000) Loss on Disposal

4,500 6,000 2,000 12,500 $4,500 6,500 $2,000

Problem 7 Cash Accumulated Depreciation—Transportation Equipment Transportation Equipment Gain on Disposal of Equipment Record outright sale of truck at a gain. Selling Price Book Value ($12,500 – $9,200) Gain on Disposal

4,500 9,200 12,500 1,200 $4,500 3,300 $1,200

Problem 8 Cash Accumulated Depreciation—Transportation Equipment Transportation Equipment Record outright sale of truck at no gain or loss. Selling Price Book Value ($12,500 – $8,000) Difference

4,500 9,200 12,500 $4,500 4,500 $ 0

Problem 9 This is an exchange of like-kind assets with a gain. Computation of nonrecognized gain: Trade-in allowance on old equipment Book Value of old equipment ($17,000 – $15,000) Nonrecognized Gain (Reduce cost basis of new equipment)

$4,800 2,000 $2,800

Cost basis of new equipment: List price of new equipment Less nonrecognized gain on trade-in of old equipment Recorded cost basis of new equipment

$25,000 2,800 $22,200

Chapter 3

Journal Entry: Computer Equipment (new) Accumulated Depreciation—Computer Equipment (old) Computer Equipment (old) Cash Note Payable

22,200 15,000 17,000 2,200 18,000

Problem 10 This is an exchange of like-kind assets with a material loss. Computation of recognized loss: Trade-in allowance on old equipment Book Value of old equipment ($17,000 – $10,000) Recognized Loss

$4,800 7,000 $2,200

Journal entry: Computer Equipment (new) Accumulated Depreciation—Computer Equipment (old) Loss on Disposal of Equipment Computer Equipment (old) Cash Note Payable

25,000 10,000 2,200 17,000 2,200 18,000

Problem 11 This is an exchange of dissimilar assets at a gain. Computation of recognized gain: Trade-in allowance on old equipment Book Value of old equipment ($17,000 – $15,000) Recognized Gain

$4,800 2,000 $2,800

Journal Entry: Transportation Equipment Accumulated Depreciation—Computer Equipment Computer Equipment Cash Note Payable Gain on Disposal of Equipment

25,000 15,000 17,000 2,200 18,000 2,800

Problem 12 This is an exchange of dissimilar assets at a loss. Computation of recognized loss: Trade-in allowance on old equipment Book Value of old equipment ($17,000 – $10,000) Recognized Loss

$4,800 7,000 $2,200

Chapter 3

Journal entry: Transportation Equipment Accumulated Depreciation—Computer Equipment Loss on Disposal of Equipment Computer Equipment Cash Note Payable

25,000 10,000 2,200 17,000 2,200 18,000

Chapter 3

Case Study 1. In one sentence, define a lease. A lease is a legal agreement conveying the right to use property or equipment for a stated period of time. 2. In one sentence, identify and define the parties to a lease. The owner of the property is called the lessor, and the renter is called the lessee. 3. Explain the basic difference between an operating lease and a capital lease. •

In an operating lease, the lessor (owner) transfers only the right for a lessee to use the property. At the end of the lease period, the lessee returns the property to the lessor.

•

In a capital lease, the lessee owns the property.

4. Explain the accounting treatment of an operating lease and a capital lease and explain the effect each lease has on the financial statements •

With an operating lease, the lease expense is treated as an operating expense in the income statement, and the lease does not affect the balance sheet

•

With a capital lease, the lease, when signed, is recognized both as an asset and as a liability (for the lease payments) on the balance sheet. The firm gets to claim depreciation each year on the asset and also deducts a computed interest expense component of the lease payment each year.

5. Explain the economic rationale (operational and financial) for an operating lease rather instead of an asset purchase. The operational advantages are: •

Leasing avoids having to buy an asset that will be required only seasonally or temporarily.

•

Leasing for short periods provides protection against obsolescence.

The financial advantages are: •

Lease payments can be tailored to suit the lessee's cash flows.

•

Leasing usually requires less cash up front than purchasing an asset does.

•

Operating leases are “off-balance sheet.” This means current ratios are better. Also, debtcovenant restrictions can be avoided.

•

Leasing provides tax advantages.

6. Identify what an operating lease conceals on the balance sheet. Off-balance sheet financing hides future liabilities of the firm. The reader must read the lease disclosures in the notes to the financial statements to assess the impact on future liabilities.

Chapter 4 Other Noncurrent Assets Accounting Review Questions 1. How are the following intangible assets defined? a. Preopening expenses are start-up expenditures incurred for investigating potential businesses, markets, and other associated costs incurred before the business is operational. Examples of start-up costs are as follows: •

Market and feasibility studies

•

Travel costs for securing suppliers and customers

•

Consultation fees

•

Employee training costs

•

Executive salaries and other professional services

•

Advertisements of the grand opening

•

Labor costs to prepare for the opening

Start-up expenses do not include any organization costs for a corporation. b. Franchise cost is the purchase of a franchise right to sell certain products or services in a specified geographical area. c. Organization cost refers to the costs in forming a corporation, such as state incorporation fees, legal fees for incorporation, stock certificates, and other related costs. d. A liquor license is an intangible asset when it had to be purchased on the open market. The renewal fee is an expense. e. Goodwill is recorded only when it is purchased. If it is not separately stated in the buy/sell agreement, it represents the amount paid in excess of the assets of a going concern due to its ability to earn above an average rate of return. This above-average earning power is the result of competitive advantage, customer recognition, favorable location, or other factors. f. A covenant not to compete is the agreement by a seller not to compete in a particular geographical area for a specified period of time. Generally, this agreement should be allocated within part of the purchase price. No-compete payments are tax-deductible over the life of the agreement. If no allocation is made, the IRS may allocate any excess of the purchase price over the fair value of the assets to goodwill, which is not tax-deductible until the buyer ultimately sells the business. 2. What is the maximum write-off period for organization costs under generally accepted accounting principles? Under GAAP, the maximum write-off period for any intangible asset is 40 years.

Chapter 4

3. What is the write-off treatment for goodwill under generally accepted accounting principles? Under GAAP, goodwill may be amortized over a maximum period of 40 years. 4. What is the major difference between term life insurance and whole life insurance? The basic difference is the buildup of cash values. Term life insurance does not build up any cash value, while whole life insurance does. 5. In accounting for company-owned whole life policies, which of the following are expensed and which are capitalized? a. Portion of premium representing life insurance coverage—expensed b. Portion of premium that builds cash value—capitalized c. Cash dividend earned on insurance policy—reduction of expense

Chapter 4

Problems Problem 1 a. Goodwill Cash

50,000

b. Organization Costs Cash

3,000

c. Franchise (Cost) Cash

25,000

d. Preopening Costs Cash

40,000

50,000 3,000 25,000 40,000

Problem 2 a. Amortization Expense Goodwill To amortize Goodwill at $60,000/240 months.

250

b. Amortization Expense Goodwill

250

Problem 3 a. Amortization Expense Organization Costs $8,100/60 months.

135

b. Amortization Expense Organization Costs

135

Problem 4 Employees’ Group Life Insurance Expense ** Cash

567 567

** The exact title is immaterial provided an appropriate expense account is selected. Problem 5 Cash Value of Life Insurance (asset account) (Life) Insurance Expense ** Prepaid Life Insurance

300 800 1,100

** The exact title is immaterial provided an appropriate expense account is selected. Problem 6 Cash

500

(Life) Insurance Expense ** ** The exact title is immaterial provided an appropriate expense account is selected.

500

Chapter 4

Case Study 1. Briefly define franchising, franchise agreement, franchisor, franchisee. •

A franchise is a legal relationship between the owner of a trademark or trade name and an individual or group seeking the right to use that identification in a business.

•

The franchise agreement governs the method for conducting business between the two parties.

•

A franchisor owns the right to a name or trademark and sells that right to a franchisee.

2. Name some of the services available from a franchisor. •

Site selection

•

Training

•

Product supply

•

Marketing plans

•

Financing

•

Generally, a franchisee sells goods or services that are supplied by the franchisor or that meet the franchisor’s quality standards.

3. Identify some of the benefits of franchising. •

Experience and expertise of the franchisor's organization

•

A proven method of operating a business

•

Selling an established product

•

U.S. Department of Commerce statistics show a significantly lower failure rate for franchised businesses than for other business start-ups.

4. List some investigative questions the potential investors might ask about the franchisor. •

How long has the franchisor been in business?

•

How long has franchising been part of its business?

•

What is the financial condition of the franchisor?

•

How many franchisees does the company have?

•

How many franchisees will compete with you in the geographic area?

•

Who are the principal officers, and what is their background?

•

What is the legal history of the franchisor and the executives?

•

Is the franchise a member of the International Franchise Association (IFA)?

Chapter 4

5. List some particulars that might be included in the initial franchise package offered by a franchisor.

A franchisor might include in the initial franchise package: •

Training

•

Assistance with determining the location decision

•

Set-up planning and assistance

•

Operations manuals

•

Promotions, advertising, and marketing planning

•

Restriction of competitive franchised locations

•

Opportunity for other franchised locations

6. List any ongoing costs that could be paid to a franchisor. •

In addition to the one-time franchise fee, the franchisor will incur royalty fees, or similar ongoing payments, usually a percentage of sales; however, these fees can also be a fixed amount or based on a sliding scale.

•

Franchisees may also be required to buy supplies from the franchisor.

•

The franchisee might also be required to pay periodic advertising costs, which the franchisor uses for national and regional promotion for the entire chain.

7. Identify any other concerns the investors might express about the franchise right. •

The franchise right might have many restrictive covenants, such as one stating that the franchisee cannot operate another similar business that would compete with the franchise during the term of the franchise agreement.

•

The franchise right might also have a covenant prohibiting the franchisee from operating a similar business after the franchise agreement has expired.

Chapter 5 Hospitality Payroll Accounting Review Questions 1. What wage and salary areas are not covered by the Fair Labor Standards Act? The FLSA: •

Does not require extra pay for work on Saturdays, Sundays, or holidays.

•

Has no provisions for vacation, holiday, or severance pay.

•

Says that if an employee does work on a weekend or holiday, the employer is not required to pay time-and-a-half if the employee has not worked in excess of 40 hours in that week.

•

Does not limit the working hours for any person 16 years of age or over, providing that overtime pay provisions are met.

•

Does not address rest periods, coffee breaks, and sick pay.

2. What are the major provisions of the following federal acts or laws? a. Fair Labor Standards Act (FLSA). FLSA is a law that covers the following provisions: •

Minimum wage

•

Overtime pay

•

Equal pay for equal work

•

Recordkeeping requirements

•

Child labor

This law is commonly known as the Federal Wage and Hour Law. The employer is required to display a poster, available from any federal wage and hour division office. This poster informs employees of their rights under this law. b. Federal Insurance Contributions Act (FICA). FICA is part of the Social Security program to provide economic security for workers and their families. This act basically provides Social Security benefits and Medicare. FICA is funded by both the employee and the employer. Benefits of this act also apply to self-employed persons under provisions of the SelfEmployment Tax Act, which imposes a tax on the profits of the business as declared on the owner’s personal income tax return. c. Federal Income Tax Withholding Law. Federal income tax deductions are based on gross pay and are withheld from the employee’s pay by the employer, who acts as a fiduciary for these taxes. The employees’ withheld FICA and income tax deductions and the employer’s FICA tax are remitted in a lump sum to a bank or financial institution qualified as a depository for federal taxes or to a Federal Reserve Bank serving that geographical area.

Chapter 5

d. Federal Unemployment Tax Act (FUTA). The FUTA tax is imposed on the employer only, based on the FUTA taxable portion of each employee’s gross earnings. Generally, a partial credit may be taken for amounts paid into state unemployment tax funds. 3. An employer is interviewing job candidates for a server’s position. The employer states that the person hired will be considered self-employed by mutual agreement. Is this arrangement in accordance with federal payroll provisions? Justify your answer. No. An employer/employee relationship exists because of the following facts: •

The restaurant is providing the place for the server to work and has the right to fire the server.

•

The server’s services are controlled by the restaurant.

•

If an employer/employee relationship does in fact exist, it does not matter what it is called.

4. In each of the following situations, which federal form is required? a. A new business is formed and employees will be hired. IRS Form SS-4 b. A new employee is hired. IRS Form W-4 c. An employee requests a change in withholding status. IRS Form W-4 d. An employer reports annual wages and taxes withheld to employees. IRS Form W-2 5. What are two methods of computing overtime pay? Describe how each method calculates overtime pay. The two methods for computing overtime pay are the overtime pay method and the overtime premium method. Overtime pay method: Only the regular hours are computed using the regular hourly rate. For overtime hours, an overtime hourly rate of 1.5 times the regular hourly rate is used. For example, if the regular workweek is 40 hours and an employee earning $4 per hour worked 46 hours, the payroll is computed as follows: Regular Pay = Regular Hours (not to exceed 40) × Regular Hourly Rate Regular Pay = 40 hours × $4.00 = $160.00 Overtime Pay = Overtime Hours × Overtime Rate Overtime Rate = $4.00 × 1.5 = $6.00 Overtime Pay = 6 hours × $6.00

36.00

Gross Pay

$196.00

Chapter 5

Overtime premium method: All hours worked (regular and overtime hours) are computed at the regular hourly rate. A premium is then computed on the overtime hours by multiplying a factor of .5 times the overtime hours and regular hourly rate. Using the same example, the employee’s pay is computed as follows: Regular Pay

Overtime Premium

46 hours × $4.00 =

$184.00

6 hours × $4.00 × .5 =

12.00

$196.00

Gross Pay Both methods produce identical gross pay results.

6. A restaurant where tipping is customary has 15 employees who collectively work 70 hours per business day. Are the employees of the establishment subject to the minimum eight percent tip regulation? Explain your answer. The eight percent tip regulation is not applicable. While the establishment has more than 10 employees, they do not collectively work more than 80 hours per business day.

Chapter 5

Problems Problem 1 a.

7 hours + 16 minutes = 7.3 hours 60

4 hours + 37 minutes = 4.6 hours 60

9 hours + 57 minutes = 10 hours 60

7 hours + 50 minutes = 7.8 hours 60

Problem 2 a. b. c. d.

3:00 P.M. = 3:00 A.M. = 6:45 A.M. = 6:45 P.M. =

1500 hours 0300 0645 1845

Problem 3 a.

$416 = $11.093 hourly rate 37.5

$295 = $ 7.867 37.5

$325 = $ 8.667 37.5

Problem 4 a.

Annualized salary = $1,500 × 12 = $18,000 $18,000 = $18,000 = $9.231 hourly 37.5 weekly hours × 52 weeks 1,950

$1,200 × 12 = $14,400 = $7.385 37.5 × 52 1,950

$2,150 × 12 = $25,800 = $13.231 37.5 × 52 1,950

Problem 5 a.

Overtime Pay Method: Regular Pay Overtime Pay Gross Pay

= =

$8.15 × 40 hours $8.15 × 1.5 × 9 hours

= = =

$326.00 110.03 $436.03

Chapter 5

Overtime Premium Method: Regular Pay Overtime Pay Gross Pay

= =

$8.15 × 49 hours 9 hours × .5 $8.15

= = =

Problem 6 a.

Hours Worked Sunday Monday Tuesday Wednesday Thursday Friday Saturday Total Regular Pay Overtime Pay Gross Pay

5 8 12 12 8 0 0 45 = =

= =

4 4

45 × $12.00 8 × .5 × $12.00

Hours Worked for the week Regular workweek Overtime Hours Regular Pay Overtime Pay Gross Pay

Overtime Hours

= =

45 × $12.00 5 × .5 × $12.00

= = =

$540.00 48.00 $588.00

= =

$540.00 30.00 $570.00

45 40 5

$399.35 36.68 $436.03

Chapter 5

Case Study 1. List some components that make up the calculation of gross pay. •

Hours worked

•

Rate of pay

•

Overtime

•

Tips

•

Commissions

•

Bonuses

•

Making sure that the employee has earned a governmental minimum wage

•

Vacation pay

•

Holiday pay

•

Severance pay

2. How might these elements affect Global Gourmet's choice between off-the-shelf or customdesigned software? Maintaining payroll is a very complicated process and it is crucial to get it right. Employees expect to be paid the right amounts on time. Many reports and forms must by law be filed with federal, state, and sometimes local governments. And management needs to pay close attention to payroll cost, as it is a significant cost of business in hospitality. Determining whether to purchase off-the-shelf software or to design customized software will be greatly influenced by the cost of the two options and by whether the property has payroll concerns that are not met by off-the-shelf programs. A property may need a payroll software system that can deal with employees working more than one job, sometimes at different rates for each job and in different locations. It will likely need to accommodate the use of tipped employees and the additional tax ramifications such employees present. Management may have very specific reports it wants or needs the system to provide. If management must alter its preferred mode of operation simply to accommodate an off-the-shelf payroll system, it will likely want to examine the issues involved in developing a customized software system that meets its needs.

Chapter 6 Hotel Departmental Statements Review Questions 1. Specify whether the following items are presented on the hotel income statement as Operated Departments, Undistributed Expenses, or Fixed Charges. a. Real Estate Rent Expense—Fixed Charges b. Administrative and General Department—Undistributed Expenses c. Depreciation—Fixed Charges d. Rentals and Other Income—Operated Departments e. Food and Beverage Department—Operated Departments f. Mortgage Interest Expense—Fixed Charges g. Telecommunications Department—Operated Departments 2. How is net revenue computed on a departmental income statement? Net Revenue = Sales – Allowances 3. How is gross profit computed on a departmental income statement? Gross Profit = Net Revenue – Cost of Sales 4. What items are included as Total Payroll and Related Expenses on a departmental statement? Total Payroll and Related Expenses includes the following: • Salaries and Wages • Payroll Taxes • Employee Meals • Workers’ Compensation Insurance • Employee Group Benefit Plans • Other employee benefits 5. Which statement reports the revenue for vending machine sales of cigarettes in a public lobby? Rentals and Other Income

Chapter 6

6. What is the purpose of supporting schedules? Name some of these. The purpose of these schedules is to provide additional detail for line items or captions in the financial statements. Supplementary schedules may be prepared for the following: Food Cost of Sales Beverage Cost of Sales Salaries and Wages Payroll Taxes Employee Benefits House Laundry

Chapter 6

Problems Comprehensive Case Problem: Village Hotel, Inc. Problem 1 1.

Village Hotel, Inc. Rooms Department Income Statement For the year ended December 31, 20X9 REVENUE Room Sales Allowances Net Revenue

Schedule A1

$ 1,043,900 2,700 $1,041,200

EXPENSES Salaries and Wages Employee Benefits Total Payroll and Related Expenses Other Expenses: Commissions Contract Cleaning Guest Transportation Laundry and Dry Cleaning Linen Operating Supplies Reservation Expense Uniforms Other Operating Expenses Total Other Expenses Total Expenses

159,304 26,030 185,334 4,124 13,200 12,494 11,706 7,742 12,619 7,288 3,032 6,875 79,080 264,414

Departmental Income (Loss)

$ 776,786

Chapter 6

Village Hotel, Inc. Food and Beverage Department Income Statement For the year ended December 31, 20X9

Schedule A2

Food

Beverage

Total

Revenue Allowances Net Revenue

$442,471 600 441,871

183,929 63 183,866

626,400 663 625,737

Cost of Food and Beverage Sales: Cost of Food and Beverage Consumed Less Cost of Employees’ Meals Net Cost of F&B Sales

177,873 12,832 165,041

43,407

221,280 12,832 208,448

43,407

Other Income: Other Revenue Other Cost of Sales Net Other Income

1,070 642 428

GROSS PROFIT

417,717

EXPENSES Salaries and Wages Employee Benefits Total Payroll and Related Expenses Other Expenses: China, Glassware, and Silver Contract Cleaning Kitchen Fuel Laundry and Dry Cleaning Licenses Music and Entertainment Operating Supplies Uniforms Other Operating Expenses Total Other Expenses

182,214 36,318 218,532 8,766 4,000 2,505 6,199 3,130 31,308 12,523 3,757 7,271 79,459

Total Expenses

297,991

Departmental Income (Loss)

$ 119,726

Chapter 6

Village Hotel, Inc. Telecommunications Department Income Statement For the year ended December 31, 20X9 REVENUE Local Long Distance Service Charges Total Revenue Allowances Net Revenue

4,783 47,228 389 52,400 372 52,028

COST OF CALLS Local Long Distance Total Cost of Telephone Service

4,587 41,918 46,505

Gross Profit

5,523

EXPENSES Salaries and Wages Employee Benefits Total Payroll and Related Expenses

12,307 2,010 14,317

Other Operating Expenses

6,816

Total Expenses

21,133

Departmental Income (Loss)

Schedule A3

$ (15,610)

Village Hotel, Inc. Rentals and Other Income For the year ended December 31, 20X9 Vending Machines Commissions Cash Discounts Earned Interest Income Total Rentals and Other Income

Schedule A4 $

1,500 2,700 800

5,000

Chapter 6

Village Hotel, Inc. Administrative and General Department Statement For the year ended December 31, 20X9 Salaries and Wages Employee Benefits Total Payroll and Related Expenses Other Expenses: Credit Card Commissions Data Processing Expense Dues and Subscriptions Human Resources Expense Operating Supplies Postage and Telegrams Professional Fees Uncollectible Accounts Traveling and Entertainment Other Operating Expenses Total Other Expenses

96,997 13,478 110,475 11,330 6,400 1,200 7,817 7,805 3,203 4,000 1,432 2,000 3,022 48,209

Total Administrative and General Expenses

Schedule A5

$ 158,684

Village Hotel, Inc. Marketing Department Statement For the year ended December 31, 20X9 Salaries and Wages Employee Benefits

Schedule A6 $

22,420 4,580

Total Payroll and Related Expenses

27,000

Advertising: Outdoor Print Radio and Television Other Total Advertising

500 3,500 1,800 288

Fees and Commissions: Agency Fees Commissions Total Fees and Commissions

1,200 10,500

6,088

11,700

Other Operating Expenses

3,421

Total Marketing Expense

48,209

Chapter 6

Village Hotel, Inc. Property Operation and Maintenance For the year ended December 31, 20X9 Salaries and Wages Employee Benefits Total Payroll and Related Expenses

Schedule A7 $

27,790 3,862 31,652

Property Operation and Maintenance Expenses: Building Electrical and Mechanical Equipment Engineering Supplies Furniture, Fixtures, Equipment, and Decor Grounds and Landscaping Operating Supplies Removal of Waste Matter Swimming Pool Uniforms Other Operating Expenses Total Other Expenses

9,251 16,243 2,311 14,177 4,414 2,749 2,499 2,500 500 2,000 56,644

Total Property Operation and Maintenance

Village Hotel, Inc. Utility Costs For the year ended December 31, 20X9

Schedule A8

Electric Fuel Water

29,012 44,638 7,770

Total Utility Costs

81,420

88,296

Chapter 6

Village Hotel, Inc. Schedule of Fixed Charges For the year ended December 31, 20X9 Rent: Real Estate Furnishings, Fixtures, and Equipment Total Rent Expense

Schedule A9 $ 100,225 17,000 117,225

Property Taxes and Other Municipal Charges: Real Estate Taxes Personal Property Taxes Utility taxes Business and Occupation Taxes Total Property Taxes and Other Municipal Charges

44,950 8,650 850 1,200 55,650

Insurance

27,986

Interest Expense

52,148

Depreciation: Furnishings, Fixtures, and Equipment

85,272

Amortization: Leasehold Improvements

30,588

Total Fixed Charges

$ 368,869

Chapter 6

Problem 2 Village Hotel Inc. Statement of Income For the year ended December 31, 20X9

Schedule OPERATED DEPARTMENTS: Rooms Food and Beverage Telecommunications Rentals and Other Income Total Operated Departments

A1 A2 A3 A4

UNDISTRIBUTED EXPENSES: Administrative and General Marketing Property Operation and Maintenance Utility Costs Total Undistributed Expenses

A5 A6 A7 A8

INCOME BEFORE FIXED CHARGES FIXED CHARGES: Rent Property Taxes Insurance Interest Depreciation and Amortization Total Fixed Charges

Schedule A

Net Revenue

Cost of Sales

Payroll and Related Expenses

Other Expenses

Income (Loss)

$1,041,200 626,807 52,028 5,000 1,725,035

209,090 46,505 _______ 255,595

185,334 218,532 14,317 _______ 418,183

79,080 79,459 6,816 _______ 165,355

776,786 119,726 (15,610) 5,000 885,902

110,475 27,000 31,652 _______ 169,127

48,209 21,209 56,644 81,420 207,482

158,684 48,209 88,296 81,420 376,609

587,310

372,837

509,293

1,725,035 A9 A9 A9 A9 A9

255,595

135,225 55,650 9,986 52,148 115,860 368,869

INCOME BEFORE INCOME TAXES

140,424

Chapter 6

Problem 3 Village Hotel, Inc. Schedule of Employee Meals Expense For the year ended December 31, 20X9 Department: Rooms F&B Telecommunications A&G Marketing POM Total

3,450 6,890 130 1,259 769 334 12,832

Problem 4 Village Hotel, Inc. Schedule of Cost of Food Sold For the year ended December 31, 20X9 Food Inventory, 1/1 Food Purchases Food Purchase Returns Freight-In: Food Cost of Food Available Food Inventory, 12/31 Cost of Food Used (consumed) Employee Meals Credit Cost of Food Sold (Net Food Cost)

5,570 178,109 (825) 1,844 $ 184,698 (6,825) $ 177,873 (12,832) $ 165,041

Chapter 6

Case Study 1. Describe the major weaknesses of the practice of placing all revenue centers into one reporting segment. Some major weaknesses are: •

Hospitality accounting is based on responsibility accounting; a manager is held accountable for the operations of his or her department. Under the Domain Hotel's present system, profits for each revenue center are not reportable.

•

Not all revenue centers have the same cost of sales percentage.

•

Theft of food and beverage cannot be ascertained without cost of sales percentages.

•

The efficiency of staffing costs in any revenue center cannot be evaluated.

2. Describe the major weaknesses of the grouping of all support centers into one reporting segment. Some major weaknesses are: •

The concept of responsibility also applies to managers of support centers. Separate support center reports are essential to holding managers and executives accountable.

•

The efficiency of staffing costs in any revenue center cannot be evaluated.

•

Fixed expenses are generally significant in the hospitality industry and should be reported separately. Fixed expenses are an executive responsibility.

•

Charging all telephone service to the Administrative Department is a convenience. However, guest telephone usage and profitability cannot be measured. Alternatives are to allocate telephone usage to user departments or to record the complete telephone services to an individual support center called Telecommunications or a similar name.

•

Maintenance and Utility expenses are distinct. They should be separate support centers. Today’s electric and fuel costs are significant and require vigilant supervision provided through departmental reporting.

3. Comment on the handling of income from vending machines. Income from vending machines is not earned by the Administrative Department and should not be used to reduce its expense total. This income, as well as interest, dividends, cash discounts, and other revenue not attributable to any one revenue center should be reported on a Schedule of Rentals and Other Income. 4. Explain how the departments should be structured for reporting in accordance with the Uniform System of Accounts for the Lodging Industry. The revenue centers should be separated into individual reporting units, namely Rooms, Restaurant, Gift Shop, and Telephone. The support centers should be separated into individual reporting units, namely Administrative, Marketing, Maintenance, Utility Costs, and Fixed Charges.

Chapter 6

5. Summarize your explanation in #4 with a diagram of the reporting structure. Students may come up with any number of arrangements. This diagram is just one possibility.

Hotel

Support Centers

Utility Costs

Fixed Charges

Rooms

Administrative

Electric Heat Water

Restaurant

Marketing

Rent Property Taxes Insurance Interest Depreciation Amortization

Revenue Centers

Telecommunications

Other Income

6. Explain whether the accountant should be retained. This public accountant should not be retained, despite being a friend of the family. A public accountant with satisfactory experience in the hospitality industry is a business necessity for these reasons: •

Improved cost control and profit planning

•

Responsibility accounting benefits

•

A reporting system with results that can be compared to industry statistics

Chapter 6

7. Comment on any other areas that might not be in compliance with the Uniform System of Accounts for the Lodging Industry. Due to the accountant's lack of experience in hospitality accounting, the recording of expenses should be investigated to ensure that expenses have been recorded in accordance with the Uniform System of Accounts for the Lodging Industry. The following are only a few examples: •

Credit card company charges recorded in Administrative Department

•

Guest supplies allocable to Rooms and Restaurant

•

Cash overages or shortages recorded in Administrative Department

•

Bad debts recorded in Administrative Department

•

General insurance recorded in Administrative Department

•

Fuel used for cooking should be recorded in Restaurant

•

Accounting for employee meals

Chapter 7 Hotel Income Statements Review Questions 1. What is the purpose of the income statement? The purpose of the income statement is to report on the results of operations of a hospitality business for a specific period of time. This period can be as short as one month or one quarter, but not longer than one year. 2. What are some other names used for the income statement? The income statement has also been called the: Statement of operations Profit and loss statement Earnings statement 3. What are the components of revenue for a hotel? Revenue represents the sale of goods and services of the hotel’s departments. It also includes interest income, dividend income, and other items reported on the schedule of rentals and other income. 4. What are the financial components of a hotel income statement? The hotel income statement combines all the financial data pertaining to its revenue centers, support centers, energy costs, fixed costs, income taxes, and gains and losses from the sale of assets. 5. Why is net income not the same as cash flow? Net income and cash flow are not the same because: 1. Not all expenses require cash payment in the period in which they were incurred. 2. Not all revenue may be collected in the period in which it was earned. 3. Payments on the principal portions of loans are not expenses. 4. Depreciation and amortization expenses never affect cash. 6. What is a common-size income statement? This statement contains common-size percentages that show the relationship of all line items to net sales.

Chapter 7

7. What is a comparative income statement? This statement presents financial data for two or more periods and shows the changes between the periods, usually in dollars and percentages. 8. What is the purpose of the statement of retained earnings? The purpose of this statement is to provide updated information about the lifetime earnings retained by a corporation. 9. What is a statement of income and retained earnings? This statement combines the income statement and the statement of retained earnings on one statement.

Chapter 7

Problems Problem 1 Hotel Sivad, Inc. STATEMENT OF INCOME For the year ended September 30, 20XX Income OPERATED DEPARTMENTS: Rooms Food and Beverage Telecommunications Rentals and Other Income Total Departmental Income

$776,786 119,726 (15,610) 5,000 885,902

UNDISTRIBUTED EXPENSES: Administrative and General Marketing Property Operation and Maintenance Utility Costs Total Undistributed Expenses

158,684 48,209 88,296 81,420 376,609

INCOME BEFORE FIXED CHARGES

509,293

FIXED CHARGES: Rent Property Taxes Insurance Interest Depreciation and Amortization Total Fixed Charges

135,225 55,650 9,986 52,148 115,860 368,869

INCOME BEFORE INCOME TAXES

140,424

Income Taxes

48,707

NET INCOME

$ 91,717

Problem 2 Hotel Carbob, Inc. Statement of Retained Earnings For the year ended June 30, 20X9 Retained earnings, July 1, 20X8 Net income for the year ended June 30, 20X9 Total Dividends declared during the year Retained earnings, June 30, 20X9

$122,930 91,717 $214,647 60,000 $154,647

Chapter 7

Problem 3 Garden Bistro, Inc. Income Statement For the Year Ended December 31, 20X8 REVENUE Food Sales Allowances Net Revenue Cost of Food Sold Gross Profit

$171,000 1,000 170,000 53,000 117,000

% 100.6% .6 100.0 31.2 68.8

OPERATING EXPENSES Payroll Payroll Taxes and Employee Benefits China, Glassware, and Silverware Kitchen Fuel Laundry and Dry Cleaning Credit Card Fees Operating Supplies Advertising Utilities Repairs and Maintenance Total Operating Expenses

55,000 7,900 300 900 2,100 1,500 5,000 2,000 3,800 1,900 80,400

32.5 (a) 4.6 .2 .5 1.2 .9 2.9 1.2 2.2 1.1 47.3

Income before fixed charges and income taxes

36,600

21.5

FIXED CHARGES Rent Property Taxes Insurance Interest Depreciation Total Fixed Charges Income before income taxes Income taxes

6,000 1,500 3,600 3,000 5,500 19,600 17,000 2,000

3.5 .9 2.1 1.8 3.2 11.5 10.0 1.2

$ 15,000

8.8%

Net Income Note (a):

The actual computation is 32.4%, but using this amount brings the total of the items to 47.2%. However, the computed percentage for Total Operating Expenses is 47.3%. Since 32.4% is the largest number in the series, it was necessary to force it up to 32.5%.

Chapter 7

Problem 4 The Garden Bistro, Inc. Income Statement For the Years Ended December 31, 20X8 and 20X7 20X8

20X7

$ Change

% Change

$171,000 1,000 170,000 53,000 117,000

$160,800 800 160,000 51,000 109,000

$ 10,200 200 10,000 2,000 8,000

6.3% 25.0 6.3 3.9 7.3

55,000 7,900 300 900 2,100 1,500 5,000 2,000 3,800 1,900 80,400

56,000 7,500 300 600 1,800 0 5,200 1,400 3,000 1,000 76,800

(1,000) 400 0 300 300 1,500 (200) 600 800 900 3,600

(1.8) 5.3 0 50.0 16.7 n/m (3.8) 42.9 26.7 90.0 4.7

Income Before Fixed Charges and Income Taxes

36,600

32,200

4,400

13.7

FIXED CHARGES Rent Property Taxes Insurance Interest Depreciation Total Fixed Charges

6,000 1,500 3,600 3,000 5,500 19,600

6,000 1,200 3,600 2,800 4,700 18,300

0 300 0 200 800 1,300

0 25.0 0 7.1 17.0 7.1

Income Before Income Taxes Income Taxes

17,000 2,000

13,900 1,600

3,100 400

22.3 25.0

$ 15,000

$ 12,300

2,700

22.0

REVENUE Food Sales Allowances Net Revenue Cost of Food Sold Gross Profit

Net Income

Chapter 7

Problem 5 Effect on:

Cash sales Sales on account Expenses purchased on account Payment of last month’s accounts payable Depreciation Amortization New bank loan Payment of mortgage principal Total effect

Income Statement

Cash Balance

+200,000 +500,000 –300,000

+200,000 –200,000

– 80,000 – 15,000

+305,000

+ 25,000 – 60,000 – 35,000

Problem 6 Sales Cost of sales Gross profit Selling expenses A&G expenses Income before income taxes

791,000 489,629 301,371 180,348 53,788 67,235

(791,000 × 61.9%) (791,000 × 22.8%) (791,000 × 6.8%)

Problem 7 20X9 36,500 3,450 1,900 3,000 4,000 48,000 55,000

20X8 20,269 2,717 2,100 3,000 0 46,193 50,000

$ Change 16,231 733 (200) 0 4,000 1,807 5,000

% Change 80.1 27.0 (9.5) 0 n/m 3.9 (Solve $ change first) 10.0 (10% × 50,000 = $5,000 change) (5,000) + 50,000 = 55,000)

Problem 8 Fixed Costs ($0.13) Income Taxes ($0.01)

Profit ($0.04) Other Operating Costs ($0.13)

Food Costs ($0.32)

Labor ($0.37)

Chapter 7

Case Study 1. Prepare a pro forma income statement for the proposed restaurant venture for its first full year of operation. Computation of net food sales Breakfast (200 × 365 × $8) Lunch: Take-out lunches (70 × 365 × $9) Sit-down guests (80 × 365 × $12) Total food sales Cost of sales ($1,164,350 × 28%) Gross profit Expenses Payroll & related ($1,164,350 × 34%) Depreciation All other expenses ($1,164,350 × 20%) Total expenses

$ 584,000 229,950 350,400 1,164,350 326,018 838,332 395,879 20,000 232,870 648,749

Total restaurant income

$ 189,583

16.3%

2. Comment on the omission of income taxes. The omission of income taxes for this restaurant operation is not a critical factor at this time. The income of the restaurant and the rooms operation will be reported on one tax return; the corporation will pay all income taxes. The bank uses a measurement based on income before income taxes. 3. Assume the bank will not lend funds unless the operation will realize a 10% return on sales before any provision for income taxes. Based only on this standard, appraise the bank’s likelihood of approving the motel's bank loan application. Based on the resulting income before income taxes, the return on sales is 16.3%, computed by dividing the income of $189,583 by the sales of $1,164,350. This return is far in excess of the bank’s 10% yardstick and will be a favorable factor in the loan application.

Chapter 8 Ratio Analysis of the Income Statement Review Questions 1. What is a ratio? A ratio is the relationship of one item to another expressed as a number. 2. What are the advantages and limitations of ratio analysis? Advantages of ratio analysis: • Ratios are easy to compute and use. • Ratios provide a basis of comparison against benchmarks established by management and industry studies. • Ratios can point to problem areas. • Ratios provide a basis for establishing trends. Limitations of ratio analysis: • • • • •

A ratio standing alone cannot be properly evaluated. Ratios do not solve problems. Ratios must be properly interpreted. Income statements contain estimates that may influence results. A change in accounting procedures may influence ratios.

3. How can a ratio be used to determine if a condition is favorable or unfavorable? It must be compared to a “benchmark” such as ratios for prior periods, industry and trade association ratios, or budgeted ratios. 4. Which specific ratios can be used by a rooms department manager to evaluate profitability, operations efficiency, and asset management? The popular ratios used in analyzing any rooms department are: Profit margin ratio Labor cost percentage Average room rate Occupancy percentage 5. Which specific ratios can be used by a food service manager to evaluate profitability, operations efficiency, and asset management? The popular ratios used in analyzing any food and beverage department are: Profit margin ratio Labor cost percentage

Chapter 8

Food cost percentage Prime cost percentage Beverage cost percentage Average food check Average beverage check Average total check Inventory turnover ratio Days’ inventory on hand ratio 6. Which two ratios are most frequently used to measure a stock’s value? The two popular measurements of a stock’s value are: Earnings per share ratio Price earnings ratio 7. How is a rooms department profit margin ratio of 72 percent interpreted? The average dollar of sales is generating a profit of 72 percent, or it could be stated that the rooms department income is 72¢ on the sales dollar. 8. How is a food cost percentage of 30 percent interpreted? The average cost of food used to serve guests is 30 percent of the sales dollar, or it could be stated that 30¢ of the sales dollar is used to pay for food prepared for guest consumption. 9. What do the acronyms “ARR” and “ADR” represent? ARR = Average room rate ADR = Average daily rate 10. What factors may reduce a food cost percentage? • Substituting a lower-quality product • Reducing portion size • Increasing the menu prices 11. What are prime costs? Prime costs are the total of labor and materials used in the production or selling process. 12. What are covers? The term “covers” refers to the number of guests served in a food service operation during a specific period.

Chapter 8

13. What is the monthly inventory turnover for a food service operation that has had an annual inventory turnover ratio of 60 times? The monthly inventory turnover is 5 times (60 divided by 12). 14. What is the formula for each of the following ratios as applicable to a rooms department analysis? Average room rate

Net Room Sales Paid Rooms Occupied

Labor cost percentage

Total Payroll and Related Expenses Net Sales

Occupancy percentage

Paid Rooms Occupied Rooms Available

Profit margin ratio

Departmental Income Net Sales

15. What is the formula for each of the following ratios as applicable to a food service department analysis? Average food check Inventory turnover ratio Days’ inventory on hand ratio

Net Food Sales Covers Cost of Food Used Average Food Inventory 365 Days (or operating period) Annual Inventory Turnover Ratio

Food cost percentage

Cost of Food Sold Net Food Sales

Labor cost percentage

Total Payroll and Related Expenses Net Sales

Prime cost percentage

Cost of Sales + Payroll and Related Expenses Net Sales

Profit margin ratio

Departmental Income Net Sales

16. What is the formula for each of the following ratios as applicable to a corporate income statement analysis? Earnings per share ratio Price earnings ratio

Net Income Average Common Stock Outstanding Market Price per Share Earnings per Share

Chapter 8

Profit margin ratio

Net Income Net Sales

Return on equity ratio

Net Income Average Equity

17. Which of the following ratios is expressed as a percentage? The following ratios are expressed as percentages: Food cost percentage Labor cost percentage Occupancy percentage Profit margin ratio Return on equity ratio

Chapter 8

Problems Problem 1 Cost of Food Sold = 95,000 = 27.78% Net Sales 342,000 Problem 2 Cost of Beverages Sold = 30,000 = 20.13% Net Beverage Sales 149,000 Problem 3 Cost of Food Used = 106,200 = Average Food Inventory (2,800 + 1,600) ÷ 2

106,200 = 48.27 Times 2,200

Problem 4 $320,000 (40% × $800,000) Problem 5 72% Computed as follows: Sales Food Cost Gross Profit

100% 28% 72%

Problem 6 $160,000 (8% × $2,000,000) Problem 7 Average food check: Net Food Sales Covers

= 170,000 = $8.00 21,250

Food cost percentage: Cost of Food Sold = 53,000 = 31.2% Net Food Sales 170,000 Labor cost percentage: Total Payroll and Related Expenses Net Sales

55,000 + 7,900 = 37.0% 170,000

Chapter 8

Prime cost percentage: Cost of Sales + Payroll and Related Expenses = 53,000 + 55,000 + 7,900 = 68.2% Net Sales 170,000 Profit margin ratio: Net Income = 15,000 = 8.8% Net Sales 170,000 Return on equity ratio: Net Income Average Equity

15,000 = (83,000 + 98,000) ÷ 2

15,000 = 16.6% 90,500

Inventory turnover ratio: Cost of Food Used = 54,000 = 54,000 = 24.0 Times Average Food Inventory (2,100 + 2,400) ÷ 2 2,250 Days’ inventory on hand ratio: 365 Days Annual Inventory Turnover

= 365 = 15.2 Days 24

Earnings per share ratio: Net Income = Average Common Stock Outstanding

15,000 = $.60 25,000

Price earnings ratio: Market Price per Share Earnings per Share

= $12.00 = 20.0 .60

Problem 8 Occupancy percentage: Paid Rooms Occupied Rooms Available

25,864 = 25,864 = 59% 120 × 365 43,800

Average room rate: Net Room Sales Paid Rooms Occupied

= 1,463,902 = $56.60 25,864

Chapter 8

Problem 9 Occupancy percentage: Rooms Sold = 289 = 72% Rooms Available 400 Average Room Rate: Net Room Sales Paid Rooms Occupied

= 18,077 = $62.55 289

Problem 10 Occupancy percentage: Paid Rooms Occupied Rooms Available

8,730 = 8,730 = 52% 540 31 16,740

Problem 11 Average room rate Occupancy percentage Average food check Food cost percentage Labor cost percentage Inventory turnover ratio Profit margin ratio Return on equity ratio

Actual

Budget

Evaluation

$120.00 68 % $ 12.00 31 % 34 % 48 12 % 18 %

$118.00 72 % $ 11.15 32 % 34 % 41 10 % 22 %

Favorable Unfavorable Favorable Favorable Favorable Favorable Favorable Unfavorable

Problem 12

First quarter Second quarter Third quarter Fourth quarter Annual

Rooms 300 300 300 300 300

Days 90 91 92 92 365

Days Days Out of Reserved Rooms Order Corporate Available 5 0 26,995 0 5 27,295 3 2 27,595 6 4 27,590 14 11 109,475

Comments: Rooms Available = Rooms × days – out of order – corporate RevPAR = _____Sales_$____ Rooms available

Sales RevPAR 2,976,199 110.25 3,141,655 115.10 3,155,764 114.36 3,099,185 112.33 12,372,803 113.02

Chapter 8

Case Study 1. Comment on the boast that the rooms department income is up $10,000 from the previous year. The boast is without foundation. Room rates were increased 10 percent over last year. Therefore, the prior year’s income of $890,000 after a 10% price increase should have generated income of $979,000. Instead, the income for 20X9 was $900,000, resulting in an unexplained $79,000 income drop. The expenses of the rooms department affect the income result of $900,000; further information should be provided about the components of these expenses and compared to the prior year. The Occupancy Ratio, Average Room Rate, and RevPAR should be computed to further analyze the income drop. 2. Comment on the F&B director’s claim of maintaining profitability. The F&B department also had price increases. In that light, the $1,000 income increase is not a positive result. The food and beverage department results should be separately reported. Then, a comparative analysis of the expenses should be performed. Statistics such as average menu price seat turnover, food cost percentage, labor cost percentage, prime cost percentage, average food check, and average beverage check should be performed. 3. Comment on the GM’s true conclusion that the loss on the sale of property distorts the “bottom line”; comment also on the GM's assertion that the income before the loss was $295,000. It is true that a quick look at only the bottom line is not indicative of operations. However, even when ignoring the loss on sale of property, the income before that loss is down $40,000 from last year. When taking into account price increases in rooms, food, and beverage departments, the income results are unsatisfactory. 4. Comment on the income from other departments being down 11.5 percent. These other departments are not described, but, based on the small level of sales, the income probably comes from commissions, interest, sales of souvenirs, and other small sources. A drop of 11.5 percent is not significant when compared to a $650 drop in income. The large percentage drop is due to the small mathematical size of the numbers. In any case, the components of these other income items should be listed and compared with the prior year. 5. Comment on each of the support centers. Administrative Department The 23.1 percent increase in administrative expenses is alarming. The facts provided indicate that there was relatively little change in staffing. Was there a significant salary increase to executives and/or staff in this department? An employee listing showing the wages for the current and prior year should be prepared and analyzed. The individual expenses of this department should be listed and compared with the prior year. This department can incur heavier-than-usual charges in bad debts, credit card expense, traveling, and professional fees such as legal and accounting. Special attention should be given to the human resources expenses because there may have been relocation expenses and employment agency fees in the employment of an e executive replacing a terminated or retired executive. Maintenance Department Maintenance expenses are up $30,000, or 23.1 percent from last year. This is a critical increase. The individual expenses of this department should be listed and compared with the prior year's.

Chapter 8

Additionally, maintenance swings of this magnitude usually indicate that the assets have met their useful life. A fixed asset analysis should be prepared showing the date of purchase for assets such as Rooms furniture, kitchen equipment, air conditioning system, heating system, vehicles, and other major fixed assets. Utility Costs and Other Support Centers Nothing appears to be out of order with these departments. However, this conclusion is based only on the total expenses. The individual expenses of this department should be listed and compared with the prior year's to determine if corrective action is required in any particular area. 6. Comment on the fixed charges. The $40,000 increase may be easily explained due to the nature of fixed charges, specifically that such expenses are incurred regardless of operating days or operating volume. Fixed charges include rent, property taxes, property insurance, interest expense, depreciation, and amortization. The information previously given was that the hotel does not rent any other property or equipment. It is unlikely that depreciation is a factor because of the apparent age of the equipment due to high maintenance charges. New loans can generate significant interest expense. The individual fixed expenses should be listed and compared with the prior year's expenses to determine the reason for the significant increase. 7. Comment on the exclusion of an income tax line to arrive at a true "bottom line." The name of the hotel indicates that it is incorporated. Therefore, applicable income taxes should be shown on the financial statements. One may argue that income taxes are not required in the presentation of an internal income statement. That argument is true from a general accounting view but not from a managerial accounting view. Managerial accounting dictates that management be given sufficient information to make intelligent and timely management decisions. It is possible that a company might owe more income taxes in a down year or even a loss year. The reasons are technical but related to additional taxes due to a governmental audit, recapture of previous tax credits, and increase in tax rates.

Chapter 9 Hotel Balance Sheets Review Questions 1. What is the purpose of a balance sheet? The purpose of a balance sheet is to explain a hotel’s resources and commitments by showing its assets, liabilities, and owners’ equity as of a given date. It presents the “financial health” of a company. 2. What is the time period covered by a balance sheet? The balance sheet does not cover a period of time. The amounts shown on it represent balances as of the close of a specified day. 3. How can the accounting equation be restated to a financial equation? Assets

Claims of Creditors

Claims of Owners

↑

Liabilities

Equity

4. What are the three major sections of a balance sheet? The three major sections are: Assets Liabilities Owners’ equity 5. How are the different assets of a hospitality business classified on a balance sheet? The assets are classified as follows: Current assets Noncurrent receivables Investments Property and equipment Other assets

Chapter 9

6. What is the definition of a current asset? List the five major current assets in their descending order of liquidity. A current asset includes cash and other assets that can be converted to cash within 12 months from the balance sheet reporting date. Current assets listed in their descending order of liquidity are: Cash Short-term investments Accounts receivable Inventories Prepaid expenses 7. What is the difference between short-term investments and investments on a balance sheet? Short-term investments are securities for which a ready market exists. With short-term investments, management’s intention is to invest in other companies for potential gain and not for control or affiliation. Short-term investments are shown under current assets. In accounting, the term “investments” refers to a noncurrent asset and applies to investments in other companies that are made with an objective of control or affiliation. 8. What is the difference between a prepaid expense and a deferred charge on a balance sheet? A prepaid expense benefits a hospitality company for up to 12 months from the balance sheet date. A deferred expense has a benefit in excess of 12 months from the balance sheet date. 9. What is unearned revenue on a balance sheet? Unearned revenue results when a hotel collects room deposits and banquet deposits from guests before any services have been rendered. This item appears on the balance sheet under various names such as advance deposits, deposits and credit balances, customer deposits, unearned revenue, and other similar names. 10. What does the line item Deferred Income Tax represent on a balance sheet? Deferred income tax represents the amount of a hotel’s potential income tax obligation when its accounting policies are not the same as its policies under tax regulations, causing a difference between book income and taxable income. If the difference is temporary, the income tax expense on the financial statements will be different from that on the tax return. 11. What is a common-size balance sheet? A common-size balance sheet measures the relationship of each item on the balance sheet to total assets. The relationship of the components of the balance sheet to total assets is expressed as a percentage. 12. What is a comparative balance sheet? A comparative balance sheet presents financial data for two or more periods and shows the changes in the data in dollars or percentages.

Chapter 9

Problems Problem 1 Equity Section: Common stock issued Additional paid-in capital

$40,000 50,000

Problem 2 $100,000 Issued and outstanding stock is not changed when treasury stock is purchased. Treasury stock is shown as a separate item in the equity section as a deduction.

Problem 3 $38,000 Any amount owed over the next 12 months is always a current liability; in this case $1,000 a month is due over the next 12 months. $50,000 total debt less $12,000 = $38,000 long-term portion.

Chapter 9

Problem 4 Village Hotel, Inc. Balance Sheet December 31, 20X9

ASSETS Current Assets: Cash—House Banks Cash—Demand Deposits Short-Term Investments Accounts Receivable Less: Allowance for Doubtful Accounts Inventories Prepaid Expenses Total Current Assets Property and Equipment: Furniture and Equipment Less Accumulated Depreciation Leasehold Improvements (net) China, Glassware, and Silver (net) Total Property and Equipment

$ 10,000 37,648 61,837 1,523

47,648 10,000 60,314 19,165 15,819 152,946

925,000 275,000

650,000 475,000 42,119 1,167,119

Other Noncurrent Assets: Security Deposits TOTAL ASSETS

2,500 $1,322,565

LIABILITIES Current Liabilities: Accounts Payable Current Portion of Long-Term Debt Federal and State Income Taxes Payable Accrued Payroll Other Accrued Items Deposits and Credit Balances Total Current Liabilities Long-Term Debt: Notes Payable Less Current Portion Total Liabilities

36,972 25,000 15,212 21,316 34,918 4,500 137,918 425,000 25,000

400,000 537,918

SHAREHOLDERS’ EQUITY Common Stock, par value $1, Authorized 50,000 Shares, Issued 30,000 Shares Additional Paid-In Capital Retained Earnings Total Shareholders’ Equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

30,000 600,000 154,647 784,647 $1,322,565

Chapter 9

Problem 5 Garden Bistro, Inc. Balance Sheet December 20, 20X8

ASSETS CURRENT ASSETS Cash Accounts Receivable Food Inventory Supplies Inventory Prepaid Expenses Total Current Assets

$ 34,000 4,000 2,400 2,600 2,000 45,000

% 21.4% 2.5 1.5 1.6 1.3 28.3

PROPERTY AND EQUIPMENT Land Building Furniture and Equipment China, Glassware, Silver Total Less Accumulated Depreciation Net Property and Equipment

$ 30,000 60,000 52,000 8,000 150,000 40,000 110,000

18.9 37.7 32.7 5.0 94.3 25.1 (a) 69.2

OTHER ASSETS Security Deposits Preopening Costs Total Other Assets TOTAL ASSETS

1,500 2,500 4,000 $159,000

.9 1.6 2.5 100.0%

$ 11,000 1,000 9,000 6,000 27,000

6.9 .6 5.7 3.8 17.0

34,000

21.4

25,000 15,000 40,000 58,000 $159,000

15.7 9.4 25.1 (b) 36.5 100.0%

LIABILITIES CURRENT LIABILITIES Accounts Payable Sales Tax Payable Accrued Expenses Current Portion of Long-Term Debt Total Current Liabilities LONG-TERM LIABILITIES Mortgage Payable, net of current portion

SHAREHOLDERS’ EQUITY Paid-In Capital: Common Stock, Par Value $1, Authorized 50,000 Shares, Issued 25,000 Shares Additional Paid-In Capital Total Paid-In Capital Retained Earnings, December 31, 20X8 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

Chapter 9

Note (a):

Actual computation was 25.2%; however, it was forced down because the computation of Net Property and Equipment is 69.2% (94.3 – 25.1 = 69.2%).

Note (b):

The actual computation was 25.2%; however, if this was used, the liabilities and equity add to 100.1%. Since the items totaled 25.1%, the computed total was forced down to agree with the sum of the individual items.

Chapter 9

Problem 6 The Garden Bistro, Inc. Balance Sheet December 31, 20X8 and December 31, 20X7

ASSETS CURRENT ASSETS Cash Accounts Receivable Food Inventory Supplies Inventory Prepaid Expenses Total Current Assets PROPERTY AND EQUIPMENT Land Building Furniture and Equipment China, Glassware, Silver Total Less Accumulated Depreciation Net Property and Equipment OTHER ASSETS Security Deposits Preopening Costs Total Other Assets TOTAL ASSETS

20X8 $ 34,000 4,000 2,400 2,600 2,000 45,000

20X7 $ 36,500 3,450 2,100 1,900 2,600 46,550

$ Change $ (2,500) 550 300 700 (600) (1,550)

% Change (6.8) 15.9 14.3 36.8 (23.1) (3.3)

$ 30,000 60,000 52,000 8,000 150,000 40,000 110,000

30,000 60,000 48,000 8,300 146,300 35,000 111,300

0 0 4,000 (300) 3,700 5,000 (1,300)

0 0 8.3 (3.6) 2.5 14.3 (1.2)

1,500 2,500 4,000 $159,000

1,500 3,000 4,500 $162,350

0 (500) (500) (3,350)

0 (16.7) (11.1) (2.1)

$ 11,000 1,000 9,000 6,000 27,000

25,400 950 7,000 6,000 39,350

(14,400) 50 2,000 0 (12,350)

(56.7) 5.3 28.6 0 (31.4)

34,000

40,000

(6,000)

(15.0)

25,000 15,000 40,000 58,000

25,000 15,000 40,000 43,000

0 0 0 15,000

0 0 0 34.9

$159,000

$162,350

(3,350)

(2.1)

Chapter 9

Case Study 1. Comment on the general manager’s claim that the company’s financial strength has improved due to the significant increase in cash this year. Cash is not the measurement of financial strength. The impact of liabilities may dim the impact of cash, receivables, inventories, and other current assets. The financial condition is determined by the relationship of assets, liabilities, and equity, referred to as the balance sheet. 2. Furnish possible reasons for the increase in cash. The increase in cash is due to a combination of the decrease in receivables, the increase in accounts payable, and the increase in loans payable. Further analysis might show that this cash increase is merely window dressing and not in the best interests of the company. A statement of cash flows is necessary to provide any further explanation. 3. Provide possible reasons for any significant changes in any other assets. Receivables The significant decrease in receivables is a concern. A decrease of this magnitude might relate to a decrease in sales for the period. This conclusion can be verified by reference to the income statement. Inventories The decrease in inventories might cause degradation in customer service. A decrease in sales volume would require a smaller inventory, but a 44.4% decrease may contribute to unavailability of menu items leading to dissatisfied customers, ultimately adding to any sales problems. Property and equipment The decline is due to the normal depreciation of fixed assets for the period. There were no sales of property or equipment. 4. Suggest possible reasons for any significant changes in liabilities. The increase in accounts payable is difficult to justify when inventory decreased and cash increased. There may be cause for concern that the company has purposely delayed paying its vendors to make its cash balance look good. These payment tactics could lead to credit problems and inattention to service by the vendors. There seems to be no justification for a $20,000 increase in loans payable because no property or equipment was purchased. Was the money used to pay executive bonuses or dividends, or to finance operations? Further analysis is required. 5. Suggest possible reasons the change in stockholder’s equity. The decrease in stockholders’ equity could be the result of dividends declared and/or a net loss for the period. The income statement and the statement of retained earnings would provide the answer.

Chapter 10 Ratio Analysis of the Balance Sheet Review Questions 1. What is the difference between the terms “analysis” and “interpretation”? Analysis involves the calculating of percentages and ratios. Interpretation is determining the meaning and significance of the analysis. 2. What do the terms “liquidity,” “asset management,” and “debt management” mean? Liquidity: Ability to pay current obligations. Asset management: Controlling the level of assets as related to company policies and sales volume. Debt management: Ability to pay all debt. 3. Which ratios are used to measure liquidity? The two most popular ratios for evaluating liquidity are: Current ratio Quick ratio 4. Which ratios are used to evaluate asset management? The most popular ratios for evaluating asset management are: Accounts receivable turnover ratio Average collection period (of accounts receivable) ratio Inventory turnover ratio Fixed asset turnover ratio 5. Which ratios are used to evaluate debt management? The most popular ratios for evaluating debt management are: Debt-to-equity ratio Assets-to-liabilities ratio 6. How would a current ratio result of 3.12 be interpreted? It indicates that there are $3.12 of current assets for every $1 of current liabilities. Another way of stating the result is: The current assets are 3.12 times larger than the current liabilities.

Chapter 10

7. How would a quick ratio result of 1.55 be interpreted? It indicates that there is $1.55 of highly liquid (quick) assets for every $1 of current liabilities. Another way of stating the result is: The quick assets are 1.55 times larger than the current liabilities. 8. What is financial leverage? Financial leverage is using debt financing more than equity financing to operate or expand a business. 9. What are the formulas for the following ratios? a. Current ratio

Current Assets Current Liabilities

b. Quick ratio

Cash + Short-Term Investments + Receivables (Net) Current Liabilities

c. Accounts receivable turnover ratio

Net Revenue Average Accounts Receivable (Net)

d. Average collection period ratio

365 Accounts Receivable Turnover

e. Food inventory turnover ratio

Cost of Food Used Average Food Inventory

f. Fixed asset turnover ratio

Net Revenue Average Fixed Assets

g. Debt-to-equity ratio

Total Liabilities Total Equity

h. Assets-to-liabilities ratio

Total Assets Total Liabilities

10. How is working capital computed? –

Current Assets Current Liabilities Working Capital

11. What is the importance of adequate working capital? Adequate working capital provides the following benefits to a hospitality company: • • •

Makes it possible to take advantage of cash discounts. Permits the company to pay all interest and debt when due. Maintains the company’s good credit rating.

Chapter 10

• • • •

Permits the carrying of inventories at quantities that will provide the highest level of customer service. Enables the company to extend credit on open account to expand sales growth. Allows the company to operate more efficiently because there are no delays in receiving goods or services, and items are not delivered C.O.D. (collect on delivery). Provides a margin of safety for the company during economic recessions.

12. What are some causes of inadequate working capital? Some reasons for inadequate working capital are: • • • •

Large or numerous operating losses because of lower sales volume and/or increased costs. Losses due to theft or casualty losses that were uninsured or underinsured. Failure of management to obtain the necessary funds. Excessive investment in fixed assets.

13. What are some causes of excess working capital? Excess working capital results if: • • •

Fixed assets were purchased with excessive borrowings or issuance of capital stock. Fixed assets were sold and not replaced. Shareholders are deprived of their fair share of earnings in the form of dividends.

14. What are some factors affecting working capital requirements? Following are some determinants of working capital requirements: • • • •

Time from purchase of goods to sale (inventory turnover) Profit margins (return on assets, return on equity) Credit policies (receivables turnover) Debt load (debt to equity, assets to liabilities)

Chapter 10

Problems Problem 1 a. Assets 1.75

= =

Claims of Creditors .75

+ +

Claims of Owners 1.00

b. Assets 100%

= =

Claims of Creditors 43%

+ +

Claims of Owners 57%

c. The owners (shareholders) are financing most of the assets. Problem 2 a. Assets 2.33

= =

Claims of Creditors 1.00

+ +

Claims of Owners 1.33

b. Assets 100%

= =

Claims of Creditors 43%

+ +

Claims of Owners 57%

c. The owners (shareholders) are financing most of the assets. Problem 3 Cash Short-term investments Accounts receivable Inventories Prepaid expenses Total current assets

$150,000 40,000 12,000 20,000 5,000 $227,000

66.1% 17.6 5.3 8.8 2.2 100.0%

Problem 4

Current ratio Quick ratio Accounts receivable turnover ratio Fixed asset turnover ratio Debt-to-equity ratio Assets-to-liabilities ratio

Actual

Budget

3.5 1.6 25.3 3.0 2.5 1.4

3.9 1.2 30.0 2.5 2.2 1.5

Problem 5 a. Current ratio: Current Assets = Current Liabilities

45,000 27,000

1.67

Unfavorable Favorable Unfavorable Favorable Unfavorable Unfavorable

Chapter 10

b. Quick ratio: Cash + Short-Term Investments + Receivables (Net) = 34,000 + 0 + 4,000 = 1.41 Current Liabilities 27,000 c. Accounts receivable turnover ratio: Net Revenue Average Accounts Receivable (Net)

170,000 (3,450 + 4,000 ÷ 2

d. Average collection period ratio: 365 Accounts Receivable Turnover

365 = 8.00 Days 45.64

e. Fixed asset turnover ratio: Net Revenue Average Fixed Assets

170,000 (111,300 + 110,000 ÷ 2

f. Debt-to-equity ratio: Total Liabilities = 61,000 = .62 Total Equity 98,000 g. Assets-to-liabilities ratio: Total Assets Total Liabilities

= 159,000 61,000

2.61

h. Working capital: –

Current Assets Current Liabilities Working Capital

$45,000 27,000 $18,000

= 1.54

= 45.64 Times

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Case Study 1. Provide a more specific, informative definition of working capital management than “the management of a company’s current assets and current liabilities.” The management of working capital involves managing cash, accounts receivable, inventories, and short-term payables. 2. Provide examples of what Mr. Keynes might have meant by the purposes of speculation, precaution, and making transactions when he explained why businesses hold cash. Speculation One example: purchasing extra inventory at a discount that is greater than the carrying costs or risk of excessive inventory. Precaution One example: holding cash in an emergency fund. If cash inflows are not received as expected, this precautionary cash could be used to meet short-term obligations. Transactions A business exists to create products or provide services. A hospitality business holds cash to ensure its ability to provide quality customer service and products. 3. Provide some examples of what a company can do with its excess working capital. The flexibility of excess working capital exists only where cash is ample enough for withdrawal from the operating cycle. The various options for use of excess cash are: • • • • •

Expanding operations by internal growth Expanding operations through acquisition Investing in stocks or bonds with a long-term intention Paying dividends to stockholders Buying back common stock to increase earnings per share

Comment: Placing excess cash in money market funds or other short-term investments does not change working capital, since the transaction simply trades current assets; the cash balance is reduced, and a marketable securities account (current asset) is increased.

Chapter 11 Statement of Cash Flows Review Questions 1. What is the purpose of the statement of cash flows (SCF)? The major purpose of the statement of cash flows is to provide relevant information about the cash receipts and cash payments of a hospitality business for a stated period of time. 2. What kinds of questions are answered by the SCF? The SCF provides answers to such questions as: • • • • • • • •

How much cash was generated from operations? How much cash was received from borrowings? How much cash was received from the issuance of common stock or sale of treasury stock? How much cash was received from the sale of property, equipment, investments, and shortterm investments? What amount of cash was used to pay back current loans and long-term debt? What amount of dividends were paid? What amount of cash was used to acquire property and equipment? What amount of cash was used to make investments?

3. How does the management of a hotel use the SCF? Management uses the statement of cash flows to judge the company’s ability to meet its debt obligations, estimate future borrowings, invest excess funds, plan for growth of facilities or locations, and determine dividend policy. 4. What are some examples and brief descriptions of cash equivalents? Cash equivalents are highly liquid investments such as United States treasury bills, commercial paper, and money market funds. U.S. treasury bills are borrowings by the United States government from investors. In the investment community, they are called U.S. T-bills or simply T-bills. Commercial paper is unsecured short-term obligations of major corporations issued through brokers or directly by corporations. A money market fund is a mutual fund that invests primarily in commercial paper, U.S. Tbills, and other financial instruments offering attractive interest rates. 5. Why aren’t marketable securities considered cash equivalents in the SCF? Marketable securities are not classified as cash equivalents because such securities do not have a maturity date and may be subject to significant fluctuations in market value.

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6. What are the three sections of the SCF? The cash flows are classified into three major sections: Operating activities Investing activities Financing activities 7. What does the term “operating activities” mean? Operating activities refer to a hospitality company’s primary revenue-generating activities. For a hotel, revenue from all its operating centers, less expenses of operating centers, support centers, energy costs, and fixed charges, is classified as income from operating activities. Interest income and dividends income are also included in income from operating activities. 8. Why aren’t gains and losses from the sale of property, equipment, and investments considered a part of operating activities? Cash flows from the sale of property, equipment, and long-term investments are not considered as coming from operating activities because these transactions are not part of a hotel’s primary business purpose or day-to-day operations. 9. Why can’t the net income from the income statement be used as cash flow from operating activities? The statement of cash flows is based on cash transactions and not on accrual accounting for income and expenses. Not all sales on the income statement were cash sales and not all expenses were paid in the period reported. 10. What are the two major noncash expenses? Depreciation expense and amortization expense are noncash expenses that never affect cash flows. They never require a cash outlay because this type of expense is derived from adjusting entries that merely allocate the historical cost of a long-lived asset over an estimated useful life. 11. What are nonoperating gains and losses? Nonoperating gains and losses result from the disposal or sale of assets such as property, equipment, investments, and marketable securities. 12. What kinds of transactions would be entered in the investing activities section of the SCF? Investing activities involve cash transactions that pertain to the buying and selling of shortterm investments and noncurrent assets such as investments, property, plants, and equipment.

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13. What kinds of transactions would be entered in the financing activities section of the SCF? The financing activities section deals with equity and debt transactions. It explains how cash was obtained from investors (equity financing) and from creditors (debt financing). For example, cash can be obtained by issuing capital stock or borrowings. These financing activities ultimately require paying the debt principal, paying dividends, and possibly reacquiring stock (treasury stock). 14. What are three types of transactions that can appear in the footnotes and disclosures section of the SCF? Footnotes and disclosures are required for the following transactions: •

Income taxes and interest paid in the period

•

Accounting policy regarding cash

•

Noncash investing and financing transactions

15. How would the acquisition of land at a cost of $100,000, purchased with a $30,000 down payment and the balance financed with a mortgage, be shown in the SCF? Only the cash down payment of $30,000 would appear in the investing activities section of the statement of cash flows. This transaction would require disclosure in the footnotes, which might take the following form: Acquisition cost of land Cash down payment Balance financed by mortgage

$100,000 30,000 $ 70,000

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Problems Problem 1 Operating Activities Amortization Proceeds from sale of short-term investments Payment of principal on debt Cash used to acquire investments Depreciation Gain on sale of assets Increase or decrease in accrued liabilities Cash borrowings Proceeds from sale of property and equipment Increase or decrease in prepaid expenses Issue of capital stock Cash used to acquire short-term investments Loss on sale of assets Increase or decrease in receivables Net income Payment of dividends Proceeds from sale of investments Increase or decrease in inventory Purchase of treasury stock Proceeds from sale of treasury stock Cash used to acquire property and equipment Increase or decrease in accounts payable

Investing Activities

Financing Activities

x x x x x x x x x x x x x x x x x x x x x x

Problem 2 Operating Activities Amortization Proceeds from sale of short-term investments Payment of principal on debt Cash used to acquire investments Depreciation Gain on sale of assets Increase in accrued liabilities Decrease in accrued liabilities Cash borrowings Proceeds from sale of property and equipment Increase in prepaid expenses Decrease in prepaid expenses Issue capital stock Cash used to acquire short-term investments Loss on sale of assets

Investing Activities

Financing Activities

+ + – – + – + – + + – + + – +

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– + +

Increase in accounts receivable Decrease in accounts receivable Net income Payment of dividends Proceeds from sale of investments Increase in inventory Decrease in inventory Purchase of treasury stock Proceeds from sale of treasury stock Cash used to acquire property and equipment Increase in accounts payable Decrease in accounts payable

– + – + – + – + –

Problem 3 Davdeg Motel Cash Flows from Operating Activities: Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Loss on sale of equipment Gain on sale of investments Decrease in accounts receivable Increase in inventories Increase in prepaid expenses Increase in accounts payable Decrease in taxes payable Net cash provided by operating activities

$ 53,000

40,000 12,000 (5,000) 10,000 (3,000) (1,000) 7,000 (1,000)

59,000 $112,000

Problem 4 Lizdale Bistro Cash Flows from Operating Activities: Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Gain on sale of equipment Gain on sale of short-term investments Increase in accounts receivable Decrease in inventories Decrease in prepaid expenses Decrease in accounts payable Increase in accrued payables Net cash provided by operating activities

$ 25,000

10,000 (2,000) (3,000) (15,000) 2,000 1,000 (8,000) 3,000

(12,000) $ 13,000

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Problem 5 Bessdoon Restaurant Cash Flows from Operating Activities: Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Loss on sale of equipment Loss on sale of short-term investments Increase in accounts receivable Increase in inventories Decrease in prepaid expenses Decrease in accounts payable Increase in accrued payables Net cash used by operating activities

8,000 1,000 2,000 (18,000) (5,000) 2,000 (6,000) 1,000

5,000

(15,000) $(10,000)

Problem 6 Walkam Ristorante Note: The first step required was to compute the changes in the current asset and current liability accounts. Cash Flows from Operating Activities: Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Amortization expense Gain on sale of investments Increase in accounts receivable Decrease in inventories Decrease in prepaid expenses Increase in accounts payable Decrease in wages payable Net cash provided by operating activities

$ 54,000

80,000 10,000 (4,000) (30,000) 5,000 2,000 20,000 (7,000)

76,000 $130,000

Problem 7 Each student’s analysis may produce different results based on his/her interpretation and assumptions. The essential element in the evaluation of any answer is the measure of critical thinking demonstrated by the student. Some of the general issues are as follows: 1. The Sivad Motel did not generate significant cash flow for the year. 2. The investing activities used cash of $15,000; cash generated by operations was $10,000. The question is: What amounts went for property and equipment or investments? If the cash went for investments or short-term investments, the usage of cash is merely a transfer from operating activities to investing activities; it can be transferred back at will. However, if the cash was used to

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buy property and equipment, was such a purchase justified when weighing the amount of cash flow from operations? 3. The usage of cash flow for financing activities requires investigation. In light of the small cash flow from operations, are dividends being paid with fiscal irresponsibility? Are there cash payments for new or old cash borrowings? 4. The company started with a $15,000 cash balance and ended with a $5,000 cash balance. If this is the start of a trend, the company’s future might be in jeopardy. Management needs to analyze all sources and uses of funds and begin a long-range plan to improve the business’s cash position. Problem 8 Each student’s analysis may produce different results based on his/her interpretation and assumptions. The essential element in the evaluation of any answer is the measure of critical thinking demonstrated by the student. Some of the general issues are as follows: 1. The Nanood Motel presents a highly favorable cash flow result that is deceiving. The cash flow is not being generated from operations. Financing activities generated a $100,000 inflow; operations generated a $5,000 inflow. 2. Is the Nanood Motel “window dressing” its cash by cash borrowings or issuing stock? Cash borrowings require payment of principal and interest, which will reduce future cash flows. The interest will also reduce future operating income. 3. Were some of the cash borrowings used to purchase assets as indicated by the $50,000 cash outflow in the investing activities section? Were these purchases necessary for the future growth and operations of the motel? 4. The growth in the cash balance from $15,000 to $70,000 may not be in the best interests of the company since it did not come from internal growth. Management needs to discuss the financing activities with the corporate treasurer/controller. Problem 9 Each student’s analysis may produce different results based on his/her interpretation and assumptions. The essential element in the evaluation of any answer is the measure of critical thinking demonstrated by the student. Some of the general issues are as follows: 1. The Nanged Motel appears to be a fiscally sound company. Its operations generated a cash inflow of $505,000. 2. Cash flow provided by investing activities and cash used by financing activities appear reasonable when compared with the operating activities. 3. The cash balance increase from $500,000 to $1,105,000 is quite an impressive increase. 4. If internal growth or operations do not require this large cash balance, management should consider investing excess cash or expanding externally by purchasing profitable business ventures.

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Problem 10 Each student’s analysis may produce different results based on his/her interpretation and assumptions. The essential element in the evaluation of any answer is the measure of critical thinking demonstrated by the student. Some of the general issues are as follows: 1. The cash flow of $67,000 generated by operations is not impressive when its sources are analyzed. In fact, there appears to be significant cause for concern. a. Operations cash flow was increased by the $25,000 decrease in accounts receivable. Is this due to a change in credit policy or due to a significant decrease in sales? b. Operations cash flow benefited by the $3,000 decrease in inventory. Was this decrease due to lack of cash or a decrease in sales? Unnecessary reductions in inventories could result in stockouts affecting customer service. c. Operations cash flow benefited by the $1,000 decrease in prepaid expenses. Is the company’s cash position so limited that it cannot purchase items like property insurance at longer terms, which might also affect insurance rates? d. Operations cash flow benefited by the $18,000 increase in accounts payable. It is probable that the company is not timely in paying its obligations. 2. The $37,000 cash flow from investing activities was totally generated by the sale of long-lived assets. Why were they not replaced? Are sales significantly decreasing? Will replacements be needed next year? 3. The major part of the cash flow generated by financing activities was from cash borrowings. In view of the other activities, this fact becomes a critical concern. 4. The increase in cash from $3,000 to $122,000 is greatly deceiving. It appears that this company is in the process of liquidating its operations. a. Assets are being disposed of and not being replaced. b. Current and long-lived assets are being depleted. c. Liabilities are increasing.

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Case Study 1. Describe the three major sections of the SCF to the executives. The three major sections of a cash flow statement are: • • •

Operating activities section Investing activities section Financing activities section

The operating activities section shows the income from operations only. This income is converted from the accrual method to the cash method. The investing activities section shows cash transactions from sales or purchases of marketable securities, investments, property, equipment, and other noncurrent assets. Gains or losses on these transactions are ignored. Only the cash received and cash paid are entered in this section. The financing activities section shows only cash transactions from equity and debt financing. For example, cash received from issuance of capital stock, bonds sale of treasury stock, and cash borrowings are sources of cash. The cash outflows are payment of dividends, purchase of treasury stock, and payment of the principal portion of debt such as mortgages, loans, and bonds. 2. Present an SCF for the year ended December 31, 20X2, using the indirect method for preparing the operating activities. See the solution on the following page.

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Empire Steakhouse Statement of Cash Flows For the year ended 12/31/X2 Cash Flows from Operating Activities: Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Gain on sale of investments Increase in accounts receivable Decrease in inventories Increase in prepaid expenses Decrease in accounts payable Increase in wages payable Net cash provided by operating activities

$ 40,000

50,000 (30,000) (50,000) 5,000 (1,000) (10,000) 2,000

Cash Flows from Investing Activities: Proceeds from sale of short-term investments Purchase of short-term investments Proceeds from sale of equipment Purchase of equipment Net cash provided by investing activities

45,000 (20,000) 13,000 (32,000)

Cash Flows from Financing Activities: Cash proceeds from borrowings Payments on long-term debt Dividends declared and paid this year Purchase of treasury stock Proceeds from issuance of no par common stock Net cash used by financing activities

15,000 (35,000) (25,000) (3,000) 18,000

(34,000) 6,000

6,000

(30,000)

Increase (decrease) in cash for the year

(18,000)

Cash at the beginning of the year

50,000

Cash at the end of the year

$ 32,000

Chapter 12 Interim and Annual Reports Review Questions 1. What is an interim financial statement? An interim financial statement is one that is issued during the year. (Statements issued for the year ended are called annual statements.) 2. What does the term independent certified public accountant mean? An independent certified public accountant is a CPA who is in public practice and is without bias with respect to the client; therefore, the CPA’s services can be performed with impartiality. 3. What professional standards does the CPA use to perform an audit service? Audits are performed in accordance with generally accepted auditing standards. 4. What is the purpose of an audit? The purpose of an audit is to issue financial statements that present fairly and are in conformity with generally accepted accounting principles (GAAP). 5. What is the scope of an audit? Before an audit begins, the independent CPA must have or obtain a working knowledge of the client company and its industry. During the audit, the CPA will investigate and examine account balances and certain transactions. Not all accounts or transactions are examined; instead, samples are randomly selected and tested. The following is a partial list of the functions a CPA must perform during an audit: • • • • • •

Observe the physical inventory-taking by the client company and test the reliability of the counts, condition, and cost valuation of the inventory. Confirm the receivables with the company’s customers. Confirm the payables with the company’s creditors. Verify the existence of the marketable securities and their valuation at market. Review the minutes of the corporate meetings. Communicate with management, the board of directors, and outside legal counsel of the client.

6. What is an auditor’s report? Describe each paragraph of the auditor’s report. The auditor’s report is a letter that contains the conclusion of the auditor as to the fairness of the financial statements and the consistent application of generally accepted accounting principles by the client company. The standard auditor’s report consists of three paragraphs:

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First (introductory) paragraph: introduces the financial statements that were audited. Second (scope) paragraph: describes what an audit is. Third (opinion) paragraph: contains the auditor’s opinion regarding the fairness of the financial statements and consistent application of GAAP. 7. What professional standards does the CPA use to perform a review service? Reviews are performed in accordance with standards for accounting and review services, which are technical standards for unaudited financial statements. 8. What is the purpose of a review? The purpose of a review is to express limited assurance that no material changes to the financial statement are necessary for them to be in conformity with generally accepted accounting principles. 9. What is the scope of a review? A review requires the accountant to perform analytical procedures and make inquiries that provide the CPA with a reasonable basis for expressing limited assurance. Some examples of the CPA’s inquiries and analytical procedures are as follows: • • • • •

Inquiries concerning the client company’s accounting principles, practices, and methods Inquiries regarding the procedures for classifying and recording business transactions Analytical procedures for business transactions, account balances, or other items that appear to be unusual Inquiries concerning actions taken at meetings of shareholders, the board of directors, or other committees that may affect the financial statements Reading financial statements

10. What professional standards does the CPA use to perform a compilation service? Compilations are performed in accordance with standards for accounting and review services, which are technical standards for unaudited financial statements. These standards are established by the AICPA. 11. What is the purpose of a compilation? The purpose of a compilation is to present in the form of financial statements information that is the representation of the client company’s management without the CPA expressing an opinion or any level of assurance on the statements. 12. What is the scope of a compilation? In a compilation, the CPA becomes familiar with a company’s bookkeeping procedures and then compiles the financial data into a professional format.

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13. Under what conditions are consolidated financial statements required? These are required when a parent company owns more than 50% of the voting stock of a subsidiary. 14. What are some of the disclosures that might appear in the notes to the financial statements? The notes to the financial statements might disclose the following: • • • •

The composition of certain line amounts on the financial statements. The meaning or calculation of certain line items on the financial statements. Critical facts about a company that cannot be conveniently shown in the body of statements due to limitations of financial statement formats. Critical events that have affected or might affect the company.

15. What is a contingent liability? Give examples. A contingent liability is an existing condition, situation, or circumstance involving uncertainty as to possible loss that cannot be determined until a future event occurs or fails to occur. Some examples are pending lawsuits, possible tax assessments, future commitments, and loan guarantees. 16. What two types of annual reports does the SEC require? The two types of annual reports required by the SEC are: • •

10-K report (filed with the SEC) Annual report sent to shareholders

17. What kind of agency is the SEC? What is its primary mission? The Securities & Exchange Commission is a federal governmental agency. Its prime mission is to protect investors and maintain the integrity of the securities markets. 18. What is the significance of October 1929? October 1929 is an infamous date because of the stock market crash causing many investors to lose fortunes. There was also a “run” on banks because of mass public panic to withdraw money in deposit accounts. 19. Why was the SEC created? The SEC was created to restore investor confidence, regulate the securities market, and regulate shareholder-reporting requirements. The SEC was created in reaction to the stock market crash of 1929.

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20. What is the importance of the Sarbanes-Oxley Act of 2002? Of what significance are sections 302, 401, 404, 409, and 802 of the act? The importance of the Sarbanes-Oxley Act is that it improves the accuracy and reliability of corporate disclosures under securities laws. There are criminal provisions applicable to a company’s management and its public auditing firm. Under Section 302, executives must certify that: • • • • •

The annual report does not contain any misleading material or untrue statements or material omissions The financial statements and related information fairly present the financial condition and the results of operations The signing officers are responsible for internal controls and have evaluated these internal controls within the previous ninety days The officers have provided a list of all deficiencies in the internal controls and information on any employee fraud Significant changes in internal controls or related factors having a negative impact on the internal controls are disclosed

Section 401 states that financial statements are required to be accurate and must not contain incorrect statement. Under Section 404, the company is required to publish information in its annual reports concerning: • • •

The scope and adequacy of the internal control structure The procedures for financial reporting A statement assessing the effectiveness of the internal controls and procedures.

Section 404 also applies to a public accounting firm requiring that the firm assess and report on the effectiveness of the internal control system and procedures for financial reporting in its auditor’s report. Under Section 409, issuers of financial statements are required to disclose information on material changes in financial condition or operations. These disclosures should be supported by graphic presentations as appropriate. Section 802 applies both to management and its public accounting firm. •

21.

Penalties and/or imprisonment up to 10 years are imposed on any accountant who knowingly and willfully violates the requirements of maintenance of all audit or review papers for a period of 5 years.

What is a 10-K Report? The 10-K report is the official annual financial report filed by public companies with the SEC. Companies with at least 500 shareholders of one class of stock and at least $5 million in assets are required to file with the SEC. This document contains comprehensive financial information about the company, including information not usually found in the annual report to shareholders.

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22.

What types of opinions can a certified public accounting firm give in its auditor’s reports? A certified public accounting firm can give the following types of opinions in its auditor’s report: • • • •

23.

Unqualified opinion Qualified opinion Adverse opinion No opinion

What is the standard content of an annual report to shareholders? The content of the annual report will vary from one company to another. Regardless of the differences in quantity and style of reporting, they should all contain the following: • • • • • •

Letter to the shareholders Financial statements Notes to the financial statements Management Assessment of Internal Controls Report of independent public accountants Certification of annual report by company executives

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Problems Problem 1 Parent Cash Accounts receivable (net) Inventories Receivable from subsidiary Prepaid expenses Investment in subsidiary Land Building (net of depreciation) Equipment (net of depreciation) Accounts payable Payable to parent Accrued items Current portion of long-term debt Long-term debt (net of CP) Stock issued Retained earnings 1/1 Sales Cost of sales Labor cost Other operating expenses Fixed expenses Income taxes expense Total

70,000 50,000 30,000 10,000 3,000 90,000 70,000 150,000 30,000 (10,000) (10,000) (8,000) (20,000) (60,000) (200,000) (95,000) (400,000) 100,000 120,000 40,000 28,000 2,000 0

Subsidiary $

Elimination

10,000 20,000 15,000 (2) (10,000) 1,000 (1) (90,000) 30,000 92,000 20,000 (23,000) (2) 10,000 (6,000) (12,000) (30,000) (50,000) (40,000) (100,000) 28,000 32,000 10,000 12,000 1,000 0

(1) 50,000 (1) 40,000

Consolidated 80,000 70,000 45,000 — 4,000 — 100,000 242,000 50,000 (33,000) — (14,000) (32,000) (90,000) (200,000) (95,000) (500,000) 128,000 152,000 50,000 40,000 3,000 0

Elimination entries: (1) To allocate the investment in subsidiary against the subsidiary’s common stock and retained earnings. No allocation to other items is necessary because the subsidiary was purchased at book value at the beginning of this year. (2) To eliminate an intercompany transaction regarding a loan from the parent to the subsidiary.

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Problem 2

Don-Bess, Inc. Consolidated Income Statement For the year ended December 31, 20X9 Sales Cost of sales Gross profit Labor Other operating expenses Total operating expenses Income before fixed expenses Fixed expenses Income before income taxes Income taxes Net income

$500,000 128,000 372,000 152,000 50,000 202,000 170,000 40,000 130,000 3,000 $127,000

Don-Bess, Inc. Consolidated Statement of Shareholders’ Equity For the year ended December 31, 20X9 Retained earnings, January 1, 20X9 Net income for the year ended December 31, 20X9 Total Dividends declared during the year Retained earnings, December 31, 20X9

$ 95,000 127,000 222,000 0 $222,000

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Don-Bess, Inc. Consolidated Balance Sheet For the year ended December 31, 20X9

ASSETS Cash Accounts receivable (net) Inventories Prepaid expenses Total current assets

$ 80,000 70,000 45,000 4,000 199,000

Land Building (net of depreciation) Equipment (net of depreciation) Total property and equipment Total assets

100,000 242,000 50,000 392,000 $591,000

LIABILITIES Accounts payable Accrued items Current portion of long-term debt Total current liabilities Long term liabilities (net of current portion) Total liabilities

$ 33,000 14,000 32,000 79,000 90,000 169,000

SHAREHOLDERS’ EQUITY Common stock Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity

200,000 222,000 422,000 $591,000

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Case Study 1. Analyze and comment on the three decisions made by the CEO and CFO. • • •

Neither the SEC nor the Sarbanes-Oxley Act requires glossy photos in a company’s annual report to its shareholders. Neither the SEC nor the Sarbanes-Oxley Act prohibits the insertion of the 10-K Report in a company’s annual report to its shareholders. The decision not to include graphs is risky. Under Section 409 of the Sarbanes-Oxley Act, issuers of financial statements are required to disclose information on material changes in their financial condition or operations supported by graphic presentations as appropriate.

2. Decide what the auditor’s opinion will be of the annual report regarding the company’s financial statements and system of internal controls. Explain why the other types of opinions might not be proper in this instance. Based on the information provided, it appears that the financial statements will probably be given an unqualified opinion in the auditor’s report. Commentary on other types of opinion: • • •

Nothing indicates that a specific issue will arise causing an “except for” clause resulting in a qualified opinion. An adverse opinion is given only when a company's financial statements are not fairly presented. Nothing indicates that the company or staff will impede the scope of the audit, which would result in no opinion.

Commentary on system of internal control: Unfortunately, the system of internal controls will receive an adverse opinion because it is deficienct: the system is insufficient to determine if any irregularities occur. The confidence of the CEO and CFO regarding absence of fraud or irregularities is not factual. Under Section 404 of the Sarbanes-Oxley Act, the company is required to publish information in its annual report about the scope and adequacy of the internal control system. 3. Decide whether the CFO should choose to include the financial data of YAR, Inc., in the annual report of ETOC Hotels, Inc. Explain why or why not. The fact that ETOC holds 90% of YAR, Inc., common stock is a clear indication of ETOC’s control over YAR. The fact that YAR was not held for a full fiscal year is irrelevant. Based on its control, ETOC will have to combine its financial data and YAR’s in the financial statements. The statements will be labeled as consolidated statements because they will report the financial results as if ETOC and YAR were a single business entity. Combined assets and liabilities will be reported on one balance sheet; combined revenues and expenses reported on one income statement; and combined cash flows reported on one statement of cash flows.

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4. Analyze and comment on any other item that requires further consideration. Note: Students would need to research the SEC Website to determine management’s deficiency as follows. • • •

The filing of Form 10-K with the SEC is overdue. The company’s fiscal year ended December 31. The date given in the case study is sometime in April, which indicates a period in excess of 90 days after the fiscal year just ended. The deadline for filing the 10-K Report is 60 days after the end of a fiscal year. Website reference: sec.gov/answers/form10k.htm For Fiscal Years Ending on or After December 15, 2004 December 15, 2005 December 15, 2006

Form 10-K Deadline 75 days after fiscal year end 60 days after fiscal year end 60 days after fiscal year end

Chapter 13 Budgeting Expenses Review Questions 1. What is the concept of responsibility accounting? Under this concept, only those costs that a manager can control are charged to the manager’s department. That manager has the responsibility for and corresponding authority and control over the department’s expenses. 2. What are the three possible action traits of expenses? Can any individual expense possess all three action traits? What is the action trait of a variable expense? a fixed expense? a semivariable expense? An expense can be categorized according to its reaction to volume as being either variable, semi-variable, or fixed. An expense can be only variable, semi-variable, or fixed. Variable expenses are the only expenses that have a direct relationship with volume. If volume goes up by one unit, the variable expense also goes up by one unit. Stated another way, a variable cost is the additional or marginal cost a business incurs when it produces one more unit of whatever it sells. This association is called a linear relationship. Fixed expenses are those expenses that are not affected by volume. When volume goes up one or more units, the fixed expense is not affected. Semi-variable expenses consist of mixed elements: one portion is variable and another is fixed. Unlike variable and fixed expenses, semi-variable expenses do not have a predictable reaction to volume. If volume goes up one or more units, the semi-variable expense does not have any direct relationship to it that can be stated in dollars or a percentage. 3. What equation can be used to determine the components of total cost? Total Cost = TC

Variable Cost + Usually shown as: = VC + FC

Fixed Cost

4. What major expense in a restaurant is a variable expense? Food cost (cost of food sold). 5. What are the six fixed expenses in the hospitality industry? Depreciation Amortization Rent

Interest Property Taxes Insurance

Chapter 13

6. What major expense in a restaurant is a semi-variable expense? Labor cost. 7. What two methods can be used to determine the fixed component of a semi-variable expense? High-low method (maximum-minimum) Regression analysis (least squares) 8. What is the definition of breakeven point? Breakeven point is the level of sales at which there will be no profit or no loss (breakeven). The zero profit or loss is not the breakeven point. 9. What is the definition of contribution margin? Contribution margin is the amount of sales revenue that is contributed toward fixed costs and/or profit. It is calculated by subtracting variable costs from sales. 10. What is IBIT? Income Before Income Taxes.

Chapter 13

Problems Problem 1 65,000 200,000

32.5%

Problem 2 200,000 × 34% = 68,000 Problem 3 Rent expense = $1,000 at any sales volume Problem 4 Answer = $55,000 Computed as follows: $25,000 Historical VC = 25 VC% $100,000 Historical Sales $200,000 forecasted sales × 25% = $50,000 Fixed cost at any Sales volume = 5,000 Labor Budget = $55,000 Problem 5

High-volume month Low-volume month Variance Expense variance = Volume variance TC = VC + FC 120 = (200 × .5333) + ? 120 = 107 + ? 120 = 107 + 13

Expense 120 80 40 40 75

.5333 unit variable rate

Monthly fixed cost = $13 Annual fixed cost = $156

Volume 200 125 75

Chapter 13

Problem 6 Monthly fixed cost = $12 (12.29815) Annual fixed cost = $144 Variable Rate = .5238 (.523791) For instructors assigning the manual formula method to compute fixed cost, the solution is as follows: x 175 125 128 200 150 778

1 2 3 4 5

Fixed Cost

y 100 80 79 120 90 469

x2 30625 15625 16384 40000 22500 125134

xy 17500 10000 10112 24000 13500 75112

(Σy)(Σx2) – (Σx)(Σxy) n(Σx2) – (Σx)2 (469)(125,134) – (778)(75,112)

5(125,134) – (778)2

250,710 20,386

12.29814579

12 (rounded)

Problem 7 TC

= VC + FC = (30,000 × $4) + $58,000 = $178,000

Problem 8 FORECASTED SALES: $150,000 Budgeted Expense Type TC Cost of food sold V 45,000 Payroll & related SV 42,000 Guest supplies V 2,200 Operating supplies V 5,100 Utilities SV 7,000 Other Variable Costs V 6,200 Other fixed costs F 9,000 Other SV costs SV 7,000 Total Expenses 123,500 IBIT $ 26,500

VC 45,000 35,000 2,200 5,100 2,000 6,200 5,000 100,500

comments

7,000

F = $7,000

5,000

F = $5,000

9,000 2,000 23,000

F = $2,000

Chapter 13

Variable Cost % =

VC = Sales

100,500 150,000

67%

Problem 9 FC 100% – VC%

BEP =

Sales VC ($350,000 × 60%) CM FC IBIT

140,000 = 100% – 60% = $350,000 = 210,000 = 140,000 = 140,000 = 0

140,000 40%

←Breakeven point ←Breakeven

Problem 10 Sales $

FC + Profit Objective 100% – VC%

140,000 + 200,000 100% – 60%

Sales VC ($850,000 × 60%) CM FC IBIT

340,000 = $850,000 40%

= $850,000 = 510,000 = 340,000 = 140,000 = 200,000

←sales point ←profit target

Problem 11 $ 3.60 Food Cost = 30% $12.00 Menu Price Covers 1 10 50

Sales $12 $120 $600

Food Cost $3.60 } $36.00 } $180.00 }

(30% × sales $)

$350,000

Chapter 13

Problem 12 Increasing the menu price results in a decrease to food cost percentage, but the unit food cost does not change. $ 3.60 Food Cost $12.75 Menu Price Covers 1 10 50

= 28.235%

Sales $12.75 $127.50 $637.50

Food Cost $3.60 } $36.00 } $180.00 }

(28.235% × sales $)

ALTERNATIVE SOLUTION: The food cost is $3.60 per plate. Changing the menu price does not have any effect on the unit food cost. Units Volume 1 10 50

Food Cost $3.60 } $36.00 } $180.00 }

Sales $12.75 $120.75 $600.75

($3.60 × units sold)

Problem 13 The first step is to separate payroll into its variable and fixed elements. Use the high-low method to compute variable and fixed elements of payroll. Expense $6,000 3,000 3,000

Highest volume month Lowest volume month Variance TC = 6,000 = 6,000 =

VC 7,000 4,200

+ × +

Volume 7,000 2,000 ÷ 5,000 = .60 unit variable rate

FC .6 + ? 1,800 per month 1,800 × 12 = $21,600 for the year

FORECASTED SALES: $200,000 Budgeted Expense Type TC Cost of food sold V 44,000 Payroll & related SV 48,000 Guest supplies V 3,600 Operating supplies V 5,000 Utilities SV 9,000 Other Variable Costs V 5,000 Other fixed costs F 6,000 Other SV costs SV 7,000 Total Expenses 127,600 IBIT 72,400

VC 44,000 26,400 3,600 5,000 3,000 5,000 3,000 90,000

100

comments

21,600

Use high-low method

6,000

F = $6,000

6,000 4,000 37,600

F = $4,000

Chapter 13

VC % =

VC 90,000 = = 45% Sales 200,000

BEP

FC = 100% – 45%

Proof: Sales VC (68,364 × 45%) CM FC IBIT

37,600 = 68,364 55% = = = = =

$68,364 30,764 37,600 37,600 0

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Case Study Students are not restricted as to the content of the report to management. Some reports will contain extensive material if the student has researched budgets, breakeven analysis, and possibly CVP. Items in the student’s report to management could include the following: a. Scope of Engagement 1. Management-provided historical data; the computations are influenced by the data’s accuracy and applicability to current operations. 2. An explanation of the action traits of variable, semi-variable, and fixed costs to sales volume. 3. A description of the methods used to determine the relationship of expenses to sales volume. 4. Strategies in the budgeting of variable, semi-variable, and fixed costs. b. Limitations of Budgeting and Breakeven Analysis Budgeting is not an exact science. c. Advantages of Budgeting and Breakeven Analysis 1. Budgets are useful as an estimate of what might happen. 2. Budgets are useful tools in measuring against the plan. 3. Forecasting sales and budgeting of expenses are important in planning the future prosperity of a company. d. Suggestions to Management 1. A hospitality business does not set a goal of breaking even. Instead, a more useful management question is one that answers: What sales volume is required to achieve a specific profit? Profit planning is a primary goal for any successful hospitality business. Planning for profits can be accomplished by using a modification of the breakeven analysis. 2. A critical analysis would stress that most of the company’s expenses are variable, since VC% is 75%. This high VC% means that any increase in sales does not produce a dramatic increase in profits. (See following pages.)

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Dotco, Inc.

Pro forma Income Statement Annual Forecasted Sales

$400,000

$500,000

Expenses

Description

Cost of sales

35% VC

140,000

175,000

Payroll & related

20% VC, $12,000 Fixed

92,000

112,000

Operating supplies

8% VC

32,000

40,000

Utilities

2% VC, $5,000 Fixed

13,000

15,000

Rent

$18,000 Fixed

18,000

Property insurance

$3,000 Fixed

3,000

Depreciation

$12,000 Fixed

12,000

Other

10% VC, $5,000 Fixed

45,000

55,000

Total expenses

355,000

430,000

IBIT

45,000

70,000

% of IBIT to Sales (IBIT ÷ Sales)

11.25%

14%

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Dotco, Inc. Breakeven Analysis Comment: The determination of VC% and fixed cost dollars will be the same at the $400,000 and $500,000 levels because VC% and fixed cost dollars do not change, regardless of any sales level within the relevant range. For this study, the $400,000 level was selected.

Forecasted Sales

$400,000

Expenses

Description

Variable

Cost of sales

35% VC

$140,000

Payroll & related

20% VC, $12,000 Fixed

80,000

Operating supplies

8% VC

32,000

Utilities

2% VC, $5,000 Fixed

8,000

Rent

Fixed

Total $140,000

$12,000

92,000 32,000

5,000

13,000

$18,000 Fixed

18,000

Property insurance

$3,000 Fixed

3,000

Depreciation

$12,000 Fixed

12,000

Other

10% VC, $5,000 Fixed

40,000

5,000

45,000

$300,000

$55,000

$355,000

Total expenses VC% =

Total Variable Cost Sales

$300,000 $400,000

= 75%

Breakeven computation: Breakeven Point =

FC 100% – VC%

55,000 100% – 75%

Proof: Sales

$220,000

VC ($220,000 × 75%)

165,000

$ 55,000

55,000

IBIT

104

55,000 25%

= $220,000

Chapter 14 Forecasting Sales Review Questions 1. What does elastic demand mean? Elastic demand is a small change in price followed by large changes in demand. Elastic demand is of more concern to fast-service food operations and budget motels. 2. What are the two elements of revenue? Price and volume. 3. Ignoring elasticity of demand, does a 5-percent price increase have a better effect on profits than a 5-percent volume increase? Why or why not? A 5-percent price increase has a better effect on profits than a 5-percent volume increase. A volume increase raises variable costs because of the incremental costs of the additional units sold. However, a price increase does not affect variable costs because there is no change in quantities sold. 4. What is the formula for the moving average sales forecasting method? Volume in Base Period ÷ Weeks in Base Period 5. What is the formula for the statistical model for forecasting rooms revenue? food revenue? Why might a statistical method similar to forecasting food revenue not be suitable for forecasting beverage revenue? Rooms: Rooms × Occupancy Percentage × Average Room Rate × Days Open Food: Seats × Turnover × Average Food Check × Days Open The forecasting of beverage sales using a variation of the food statistical model may not yield accurate results. A guest occupying one seat in the dining room has only one meal, yet may have several drinks or none at all. Some guests may prefer to stand and drink at the bar or in the lounge. An experienced hospitality manager might develop a model using statistical data based on the history of the particular operation. 6. What is the formula for calculating average room rate if the sales dollars are available? Rooms Sales Dollars ÷ Paid Rooms Occupied

Chapter 14

7. What is the procedure for calculating the average room rate using the weighted average method? a. Multiply the rooms quantity by the room rate for each type of room to arrive at hypothetical daily sales. b. Total the rooms quantity and hypothetical sales. c. Divide the hypothetical sales by the rooms quantity to arrive at average daily rate. 8. Starting with a given pretax income, what basic procedure can be used to calculate the average room rate using the Hubbart Formula? 1. Enter the desired pretax income (IBIT) necessary to achieve a desired return on investment. 2. Add the fixed charges, utility costs, and support centers. 3. Take a total. This total represents the desired IBIT plus expenses of non-revenue centers before any income from revenue centers. 4. Enter the departmental income from the revenue centers excluding the rooms department. 5. Subtract the total income of the revenue centers (Step 4) from the total in Step 3. This new total represents the IBIT plus all departmental results with the exception of the rooms department. 6. Add in only the expenses for the rooms department. 7. Take a total. This new total represents the sales required by the rooms department to achieve the desired profit determined in Step 1. 8. Divide the required rooms sales dollars (Step 7) by the forecasted rooms sales. The result is the average room rate. 9. How is a desired rate of return calculated? The investment multiplied by the desired rate (percentage) of return. 10. What formula can be used to compute pretax profit if only the net income and tax rate are known? Comment: Pretax profit is the same as IBIT. IBIT = Net income 100% – tax rate 11. What is contribution margin percentage? How is it computed? The contribution margin percentage is computed by dividing the contribution margin dollars by sales dollars.

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12. What are joint costs? Costs shared by departments. For example, the food and beverage departments may share the same personnel. 13. What is sales mix? How is it computed? Sales mix is the proportion of each revenue center’s sales to total sales. It is computed by dividing the departmental sales dollars by the total sales dollars for the business. 14. What are the built-in assumptions of the CVP method? 1. Variable costs and sales maintain their linear relationship. 2. Fixed costs remain stable during the forecasting period. 3. Semi-variable costs have been properly separated into their variable and fixed elements. 15. What is the CVP formula for forecasting sales dollars? rooms unit sales? food covers? =

FC + Objectives 100% – VC%

Rooms =

FC + Objectives ARR – VC

Covers =

FC + Objectives Average Check – VC

Sales

FC + Objectives CM or

FC + Objectives CM

16. What is the CVP denominator for forecasting sales dollars for a multiple-products company selling food and beverage when only each department’s sales mix and contribution margin percentage are available? (Food Sales Mix % × Food CM%) + (Beverage Sales Mix % × Beverage CM%)

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Chapter 14

Problems Problem 1

Room Sales Food Sales Beverage Sales

Sales $ 850,000 120,000 30,000 $1,000,000

Sales Mix 85% 12% 3% 100%

(850,000 ÷ 1,000,000) (120,000 ÷ 1,000,000) (30,000 ÷ 1,000,000)

Problem 2

Rooms Restaurant Bar & Lounge

Sale $850,000 120,000 30,000

VC $127,500 54,000 $10,500

CM 722,500 66,000 19,500

CM% 85% (722,500 ÷ 850,000) 55% (66,000 ÷ 120,000) 65% (19,500 ÷ 30,000)

Problem 3 IBIT

Net Income 100% – Tax Rate

$140,000 100% – 30%

$200,000

Problem 4 Sales = 20,000 units × $10 price VC = 60% × $200,000 sales Contribution Margin

= =

$200,000 120,000 $ 80,000

= =

$220,000 132,000 $ 88,000

(10% volume increase)

= =

$220,000 120,000 $100,000

(10% price increase)

Problem 5 Sales = 200,000 units × 110% VC = 60% × $220,000 sales Contribution Margin Problem 6 Sales = 200,000 units × 110% VC (not affected by price increase) Contribution Margin Problem 7 Weeks 3 to 7 = 1060 + 1100 + 1160 + 1170 + 1160 = 5650 = 1130 5 5 5

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Problem 8 Sales Planned Expected Last Price Volume Forecasted Year Increase Increase Sales $150,000 $ 150,000 200,000 200,000 200,000 5% 210,000 (200,000 × 105%) 220,000 5% 10% 254,100 (220,000 × 105% × 110%) 240,000 5% 10% 277,200 (240,000 × 105% × 110%) 250,000 5% 10% 288,750 (250,000 × 105% × 110%) $1,380,050

January February March April May June Problem 9 Rooms 300

× ×

Occupancy % 75%

× ×

Average Room Rate $70

× ×

Average Check $5 $8 25

× × × ×

Days Open 31 = $488,250

Problem 10

Seats 50 100 100

Breakfast Lunch Dinner Total

× × × ×

Turnover 2.0 1.5 1.0

× × × ×

Days Open* 20 = $10,000 20 = 24,000 25 = 62,500 $96,500

Days Open Computed As Follows: Days in Month Closed Sunday Serving Dinner Saturdays – No breakfast/lunch Serving Breakfast & Lunch

30 5 25 5 20

Problem 11 FORECASTED BEVERAGE SALES FOR Wednesday: $11,000 Computed as follows: Step 1: Use the food/liquor percentage relationship to forecast the beverage sales in the restaurant. Forecasted Historical Forecasted Food Sales Beverage % Beverage Sales $30,000 30% $9,000 Step 2: Forecast beverage sales in the Lounge. Typical Wednesday beverage sales: $2,000 Step 3: Combine the forecasted beverage sales in the restaurant and lounge. Beverage sales in restaurant $ 9,000 Beverage sales in lounge 2,000 Total forecasted beverage sales $11,000

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Problem 12 Rooms Sales Dollars Paid Rooms Occupied

$400,000 6,154

$65 ARR

Problem 13

Single Double Suite

Hypothetical Rooms Rate Daily Sales 33 $ 60 $1,980 75 79 5,925 18 105 1,890 126 $9,795 ÷ 126 = $77.74 ARR

Problem 14 $59.50 ARR computed as follows: 1. Desired Pretax profit 2. Add: Fixed charges Energy costs Support centers 3. Total 4. Less: Income from revenue centers, excluding rooms 5. Net expenses before rooms department 6. Rooms department expenses 7. Total sales required by rooms department 8. Average room rate ($1,041,200 ÷ 17,500)

110

140,424

368,869 81,420 295,189 885,902

109,116 $ 776,786 264,414 $ 1,041,200 $ 59.50 ARR

Chapter 14

Problem 15 Single Room Rate = $66 Double Room Rate = $86 Computed as follows: 1. 280 rooms × 75% occupancy = 210 rooms sold daily. 2. 210 daily rooms × $80 average room rate = $16,800 daily sales. 3. 210 rooms sold × 70% = 147 double rooms sold. 4. 210 total rooms – 147 double rooms = 63 single rooms sold. 5. Daily Rooms Sold × Rate + Double Rooms × Differential = Sales $ 210 (Rate) + 147($20) = $16,800 210 (Rate) + $2,940 = $16,800 210 × Rate = $16,800 – $2,940 $13,860 Rate = 210 Rate = $66 for Single Room 6. Single room rate $66 Differential 20 Double room rate $86 Problem 16 Sales = $1,200,000 Computed as follows: Sales $ =

FC + Objectives 100% – VC%

$300,000 + $420,000 100% – 40%

$720,000 60%

$1,200,000

Proof: Sales VC ($1,200,000 × 40%) CM FC IBIT

$1,200,000 480,000 720,000 300,000 $420,000

111

FC + Objectives CM%

Chapter 14

Problem 17 Rooms = 800 Computed as follows: Rooms

FC + Objectives ARR – VC%

$40,000 + 0 $80 – $30

$40,000 $50

800 Rooms

FC + Objectives CM%

FC + Objectives CM$

Proof: Sales (800 × $80 ARR) VC (800 × $30 VC per room) CM FC IBIT

$64,000 24,000 40,000 40,000 0

Problem 18 Covers = 2,000 Computed as follows: Covers =

FC + Objectives ARR – VC

$16,000 + 0 $15 – $7

$16,000 $8

2,000 Covers

Proof: Sales (2,000 × $15 Average check) VC (2,000 × $7 VC per cover) CM FC IBIT

$30,000 14,000 16,000 16,000 0

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Chapter 14

Problem 19 Rooms = 14,000 Computed as follows: Step 1: Convert Net Income to IBIT Net Income 100% – Tax Rate Step 2: Apply CVP Rooms Formula IBIT

Rooms =

$156,000 100% – 35%

FC + Objectives CM$

FC + Objectives ARR – VC

$180,000 + $240,000 $50 – $20

$420,000 $30

14,000 Rooms

Proof: Sales (14,000 × $50 ARR) VC (14,000 × $20 VC per room) CM FC IBIT

$700,000 280,000 420,000 180,000 $240,000

Problem 20 Sales Revenue = $600,000 Computed as follows: Sales =

FC + Objectives CM%w

$150,000 + $162,000 52%

$600,000

113

$312,000 52%

$240,000

Chapter 14

Problem 21 Sales Revenue = $600,000 Computed as follows: Sales =

FC + Objectives CM%w

FC + Objectives (Food Sales Mix % × Food CM%) + (Bev. Sales Mix % × Bev. CM%)

$150,000 + $162,000 (60% × 40%) + (40% × 70%)

$312,000 24% + 28%

$600,000

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Case Study 1. Prepare working papers showing the computational sequence of your forecast. Label your steps with proper headings and show your computations for each step. Step 1: Compute historical food/beverage sales relationship in the dining room. Restaurant activity for August last year: Food Beverage Sales Sales Historical Relativity Computation Lunch $10,000 $1,000 10% ($1,000 ÷ $10,000) Dinner 20,000 4,000 20% ($4,000 ÷ $20,000) Step 2: Forecast beverage sales in dining room for August this year using historical data: Forecasted restaurant activity for August this year: Food Historical Forecasted Beverage Sales Sales Beverage % in Dining Room Lunch $12,000 10% $1,200 ($12,000 × 10%) Dinner 24,000 20% 4,800 ($24,000 × 20%) Total forecasted beverage sales in dining room $6,000 Step 3: Forecast August beverage sales in the Lounge for this year. Lounge activity for August last year: Beverage Days August Sales × This Month = Beverage Sales Sunday (closed) 5 $ 0 Monday $100 5 500 Tuesday 400 5 2,000 Wednesday 200 4 800 Thursday 300 4 1,200 Friday 600 4 2,400 Saturday 400 4 1,600 Beverage sales in Lounge $8,500 Step 4: Combine the forecasted beverage sales in the dining room and lounge. Beverage sales in dining room $ 6,000 Beverage Sales in Lounge 8,500 Total forecasted beverage sales $14,500 2. Prepare a report explaining the advantages and limitations of the method you used. The student’s typed report should display critical thinking and might contain elements such as the following: Advantages of this Method 1. Historical relationships may be excellent predictors. This method uses: a. Historical data for food/beverage relationships b. Historical typical day’s sales in lounge

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2. Customers do have a pattern of performing consistent activities on a specific day. For example, Friday being the end of the workweek requires celebration by certain people. Saturdays are “datenight” or “going-out night.” Monday might usually be a slow business day because it is the customer’s first day back to work and funds might be low from weekend activities. 3. It is simple to use. 4. It recognizes the dissimilarity between liquor sales in the dining room and in the lounge. Limitations of this Method 1. Unless historical data has been proven to be an accurate predictor, it should be used with caution. 2. The given historical data does not indicate any special events that might affect its prospect of recurrence. 3. If food menu prices have changed, this will affect the food/beverage relationship. 4. If beverage prices have changed, this will affect the food/beverage relationship. 5. If beverage prices have changed, the typical day’s sales in the lounge must also be revised accordingly. 3. Prepare a report explaining conclusions that should be considered about the forecasting method. Conclusions 1. The use of this method can be justified by proving the validity of the historical data as a predictor. Quite often, simple methods produce accurate results. 2. To make historical data more serviceable as predictors, it should be augmented by information such as the following: a. One-time special events in the community. b. Effect of sporting events such as the World Series, NBA playoffs, football, and other championship series. c. Weather on a given day. d. Special promotions by the business. e. Average menu price for that period. f. National crisis. g. International crisis.

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Chapter 15 Budgetary Reporting and Analysis Review Questions 1. What financial methods are used to perform sales forecasting? CVP (Cost-Volume-Profit) Analysis Statistical Models Percentage Method 2. What financial methods are used to budget revenue center expenses? Study of historical relationships to volume Classification of expenses as variable, semi-variable, or fixed The use of the high-low or regression analysis methods Analysis of the effect of price and volume increases 3. What is zero-base budgeting? Zero-base budgeting is not a method; it is a philosophy. The ZBB approach requires that nonrevenue department managers prepare a budget from zero and cost-justify each expense item. 4. What is cost justifying an expense? Measuring to see whether the expense yields a benefit greater than its cost. 5. What are the six fixed costs of a hotel? Insurance Property taxes Rent Interest Depreciation Amortization 6. What is an operations budget? A budget used to budget sales and expenses to achieve a desired profit. It is a profit plan that incorporates all revenue and expenses of a business. When completed, it is identical to an income statement except that the numbers listed are pro forma.

Chapter 15

7. What does the term pro forma mean? The numbers are estimates and not actual in form. 8. What is the typical format for a monthly budgetary report? Budget

Actual

Difference (or variance)

9. What is a budget variance? It is the difference between a budgeted amount and the actual amount. 10. What is a favorable variance? A favorable variance is the result of the actual being better than the budget. 11. What is a favorable sales variance? A sales variance is favorable if actual sales are greater than budgeted sales. 12. What is an unfavorable expense variance? An expense variance is unfavorable if the actual expense is greater than the budgeted expense. 13. What is a master budget? A master budget represents a company’s primary financial planning tool. It is prepared for each department for the year and then divided into monthly amounts. 14. What is the main assumption in the design of a master budget? It pre-determines the sales volume the organization must reach to make a desired profit. 15. What is a flexible budget? A series of budgets designed for many different levels of sales volume. Management determines a series of probable sales volumes, and then establishes expense budgets for each of those levels. 16. What are the two causes of a sales variance? Price and Quantity.

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17. What are the two causes of an expense variance? Cost and Quantity. 18. What formula determines the total price cause of a sales variance? Price Difference × ACTUAL Quantity = Price Cause 19. What formula determines the total quantity cause of a sales variance? Quantity Difference × BUDGETED Price = Quantity Cause 20. What formula determines the total cost cause of an expense variance? Cost Cause = Cost Difference × ACTUAL Quantity 21. What formula determines the total quantity cause of an expense variance? Quantity Cause = Quantity Difference × BUDGETED Cost 22. What is a capital budget? A budget used to plan and control the purchase of major assets.

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Chapter 15

Problems Problem 1

10,000 Unfavorable

Problem 2

3,000 Unfavorable

Problem 3

200 Favorable

Problem 4

Food sales and Food cost

Problem 5 Unfavorable variance due to Price Favorable variance due to Quantity Net Favorable Variance Calculated as follows:

$(1,100) 1,800 $ 700 Price $9.00 Average check 8.50 $(.50) Unfavorable

Budget Actual Difference Variance due to PRICE: Price Difference × Actual Quantity $(.50) × 2,200 = $(1,100) Variance due to QUANTITY: Quantity Difference × Budgeted Price 200 × $9 = 1,800 Total of Causes $ 700

Quantity 2,000 Covers 2,200 200 Favorable CAUSE Unfavorable Price

Favorable Quantity Favorable (net)

Problem 6 Favorable variance due to Price Unfavorable variance due to Quantity Net Favorable Variance Calculated as follows:

$ 4,800 (1,400) $ 3,400

Price Budget $7.00 Average check Actual 8.00 Difference $1.00 Favorable Variance due to PRICE: Price Difference × Actual Quantity $1.00 × 4,800 = $4,800 Variance due to QUANTITY: Quantity Difference × Budgeted Price (200) × $7 = (1,400) Total of Causes $3,400

Quantity 5,000 Covers 4,800 (200) Unfavorable CAUSE

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Favorable Price

Unfavorable Quantity Favorable (net)

Chapter 15

Problem 7 Unfavorable variance due to Price Unfavorable variance due to Quantity Net Unfavorable Variance Calculated as follows:

$(7,600) (2,400) $(10,000) Price $12.00 Average check 10.00 $(2.00) Unfavorable

Budget Actual Difference Variance due to PRICE: Price Difference × Actual Quantity $(2.00) × 3,800 = $(7,600) Variance due to QUANTITY: Quantity Difference × Budgeted Price (200) × $12 = (2,400) Total of Causes $(10,000)

Quantity 4,000 Covers 3,800 (200) Unfavorable CAUSE Unfavorable Price

Unfavorable Quantity Unfavorable (net)

Problem 8 Favorable variance due to Cost Unfavorable variance due to Quantity Net Unfavorable Variance Calculated as follows:

$220 (700) $ (480) Price $3.50 Unit Cost 3.40 $.10 Favorable

Budget Actual Difference Variance due to COST: Cost Difference × Actual Quantity $.10 × 2,200 = $220 Variance due to QUANTITY: Quantity Difference × Budgeted Price (200) × $3.50 = (700) Total of Causes $(480)

121

Quantity 2,000 Covers 2,200 (200) Unfavorable CAUSE Favorable Cost

Unfavorable Quantity Unfavorable (net)

Chapter 15

Problem 9 Favorable variance due to Cost Unfavorable variance due to Quantity Net Unfavorable Variance Calculated as follows:

$(2,916) 560 $ (2,356) Price $4.00 Unit Cost 4.60 $(.60) Unfavorable

Budget Actual Difference Variance due to COST: Cost Difference × Actual Quantity $(.60) × 4,860 = $(2,916) Variance due to QUANTITY: Quantity Difference × Budgeted Cost 140 × $4.00 = 560 Total of Causes $(2,356)

Quantity 5,000 Covers 4,860 140 Favorable CAUSE Unfavorable Cost

Favorable Quantity Unfavorable (net)

Problem 10 Favorable variance due to Price Favorable variance due to Quantity Total Favorable Variance Calculated as follows:

$6,350 2,100 $ 8,450

Price Budget $6.00 (a) Actual 7.00 Difference $1.00 Favorable (a) $36,000 ÷ 6,000 = $6 average check (b) $44,450 ÷ $7 = 6,350 covers Variance due to PRICE: Price Difference × Actual Quantity $1.00 × 6,350 = $6,350 Variance due to QUANTITY: Quantity Difference × Budgeted Price 350 × $6 = 2,100 Total of Causes $8,450

Quantity 6,000 6,350 (b) 350 Favorable

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CAUSE Favorable Price

Favorable Quantity Favorable

Chapter 15

Problem 11 Favorable variance due to Cost Favorable variance due to Quantity Total Favorable Variance Calculated as follows:

$ 780 420 $1,200

Cost Budget $4.20 (a) Actual 4.00 Difference $.20 Favorable (a) $12 average check × 35% food cost = $4.20 unit cost Variance due to COST: Cost Difference × Actual Quantity $.20 × 3,900 = $780 Variance due to QUANTITY: Quantity Difference × Budgeted Cost 100 × $4.20 = 420 Total of Causes $1,200

Quantity 4,000 3,900 100 Favorable CAUSE Favorable Cost

Favorable Quantity Favorable

Problem 12

Sales Expenses: Food cost Payroll & related Supplies China, glassware, silver Contract cleaning Other expenses Total expenses Departmental Income

Budget Amount % $50,000 100.0%

Actual Amount % $55,000 100.0%

16,000 15,000 800 200 500 1,000 33,500

32.0% 30.0% 1.6% 4% 1.0% 2.0% 67.0%

18,150 15,950 935 200 500 1,280 37,015

33.0% 29.0% 1.7% .4% .9% 2.3% 67.3%

$16,500

33.0%

$17,985

32.7%

Problem 13 Sales Expenses: Food cost Payroll & related Supplies China, glassware, silver Contract cleaning Other expenses Total expenses

$100,000

Departmental Income

$10,000

38,000 29,000 8,000 400 600 14,000 90,000

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Problem 14 Sales Food cost Payroll & related Supplies China, glass, silver Contract cleaning Other expenses

100,000 38,000 29,000 8,000 400 600 14,000

110,000 41,800 31,500 8,800 400 600 15,200

120,000 45,600 34,000 9,600 400 600 16,400

130,000 49,400 36,500 10,400 400 600 17,600

140,000 53,200 39,000 11,200 400 600 18,800

Total Expenses

90,000

98,300

106,600

114,900

123,200

Departmental Income

10,000

11,700

13,400

15,100

16,800

% of income to sales

10.0%

10.6%

11.2%

11.6%

12.0%

Problem 15 See Problem 14 Solution. As a convenience, the formulas are shown below. Only the first two levels are shown since the progression of formulas is corresponding. Sales Expenses: Food cost Payroll & related Supplies China, glass, silver Contract cleaning Other expenses

100,000

110,000

= B1*38% = (B1*25%) + 4000 = B1*8% = 400 = 600 = (B1*12%) + 2000

= C1*38% = (C1*25%) + 4000 = C1*8% = 400 = 600 = (C1*12%) + 2000

Total Expenses

= SUM(B3:B9)

= SUM(C3:C9)

Departmental Income

= B1 – B10

= C1 – C10

% departmental income to sales

= B12/B1

= C12/C1

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Case Study The students’ reports to management will vary in content and sequence. Following is a list of possible major issues and topics that might be included. Major Emphasis Supporting Management’s Decision for a Budget Successful hospitality businesses have budgetary systems. Budgets are management planning tools providing advantages such as: 1. A budget is a financial plan for achieving a stated goal. 2. Managers are forced to “look forward” in the planning stage. 3. Resources (assets, labor) are better allocated. 4. Budgets are tools for measuring progress toward a goal. 5. Executives and managers are held accountable. Budgetary Systems: Human Relations Considerations 1. The preparation of budgets is an organizational effort. 2. Managers at all levels should be involved in the preparation and planning of budgets if the monetary plan is to be useful and attainable. 3. The expertise of department managers contributes to successful budget planning and preparation. 4. Budgets forced upon department managers without their participation may create hostility toward budgetary controls. 5. After the budget is installed, teamwork is essential for proper control and progress evaluation. Budgetary Systems: Organizational Considerations 1. A budget committee composed of top executives provides guidance and coordination. 2. A budget director, who is usually an upper-level accountant, supervises the mechanical processing of the budget. 3. The accounting department’s role is to provide historical and financial data and assistance to departmental managers and executives for the forecasting of revenue and expenses. Budgetary Systems: Planning & Preparation Considerations 1. Hold budget-planning meetings for effective planning, efficient use of time, and cooperative teamwork. 2. The agenda for these meetings might include the following: a. Review of historical operations. b. Review of current operations and finances. c. Analysis of local and national economic data. d. Projection of revenue quantities.

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Regarding Reaction of Revenue Departmental Managers The revenue managers should have played a major and active role in the budget process for their respective departments. The expertise of these professionals contributes to better budgeting standards. Regarding Reaction of Non-Revenue Departmental Managers Unlike the revenue departmental managers, the non-revenue departmental managers played an active and major role in the budget preparation. The Rogers Hotel has been a poor profit performer, and zero-base budgeting forces managers to justify all their expenses because of its “fresh-start” approach. Regarding Controller Budgeting Fixed Costs The controller is the best choice for determining these expenditures because of their source and nature. Insurance, property taxes, rent, interest, depreciation, and amortization are not within the control of any department manager. Advice to Management Regarding Current State of Human Relations The new executive management should hold a meeting of all departmental managers and others involved in the budgetary process. The value of budgets should be emphasized. The success of the budgetary process depends on the department managers. Each revenue department manager should be assigned the responsibility for developing a series of flexible budgets as well as the authority to do so. Subsequent periodic meetings should be part of the plan. Limitations in the Report 1. There was no mention of monthly budgetary reports being issued to departmental managers. 2. Progress meetings were not mentioned. 3. It appears that flexible budgets were not developed. Unexplored Issues 1. Why did the Rogers Hotel have low profits or losses for the last five years? a. b. c. d. e. f. g.

Insufficient sales volume due to quantity or pricing? Unreasonable expenses? A combination of insufficient sales volume and unreasonable expenses? Lack of a budgetary system? Poor management? Poor marketing? Location? national economy? other issues?

2. Can the Rogers Hotel realistically attain the forecasted sales and expenses?

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Chapter 16 Financial Decision-Making Review Questions 1. What is the difference between quantitative and qualitative factors in financial decisionmaking? Quantitative factors can be measured in monetary terms, such as revenue and expenses. Qualitative factors—such as goodwill and company policies—may be significant in the decisionmaking process but cannot be expressed in monetary terms because it is impossible to measure them with any degree of accuracy. 2. What is the abbreviated Contributory Income Statement format? Sales VC CM FC IBIT

Sales at retail Variable costs Contribution margin Fixed costs Income before income taxes

3. What are some qualitative factors to consider when making an off-season open or close decision? Community relationship: 1. Possible negative reaction in the community to a business that enjoys profits only in prosperous times, but does not service residential citizens all year. 2. Possible significant loss of goodwill to local competitors who stay open. 3. Local political considerations. Employee considerations: 1. The possible demoralizing effect on employees. 2. Uncertain availability of qualified personnel for hire when reopening. 3. A greater need for training and retraining costs. Other factors: 1. The owner/manager might look forward to an extended vacation. 2. The measurement of closedown and start-up costs. 3. The necessity of a security service during the closed period. 4. The profits may be minimal to justify staying open. 4. What is the most prominent quantitative factor in an off-season analysis? The off-season’s contribution margin, which is the amount necessary to cover fixed costs (and, after fixed costs are paid, operating profit).

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5. What are some qualitative considerations to ponder when searching to acquire a business? 1.

How will guests react to a new ownership?

Will key personnel remain with the new ownership?

What is the condition of the property and equipment?

How many times has the business been sold in the past?

Has there been a recent change in competition?

Is new formidable competition coming in the future?

If the property is leased, is the lease short term? Is the lease due for renewal? Does the lease have unreasonable escalation clauses?

If this is a franchise, is the franchise readily transferable?

Are the franchise terms expiring?

6. What is a covenant not to compete? An agreement by the seller not to operate a similar business in a certain geographical area for a specified amount of time. 7. What is the largest problem in using a seller’s financial statements for a small business? Ascertaining the authenticity of the financial data. 8. What critical questions should a buyer consider when forecasting the potential profits of a seller’s business? 1.

Is the buyer purchasing the common stock from the seller or, instead, is this an asset purchase?

Is the seller drawing a salary that reflects the personal needs of the buyer?

Is this a family-operated business?

What effect will financing have on profits and cash flow?

9. What accounting and legal considerations should a buyer of a corporation keep in mind when purchasing the corporation’s common stock? 1. The bookkeeping records remain with the corporation and continue unaffected by the change in ownership. 2. Depreciation of existing assets is not affected because the assets remain at their original cost with respective accumulated depreciation. (However, any purchased covenant not to compete will set up a new asset to be depreciated.) 3. Recorded liabilities remain with the business. 4. The business will be responsible for any unknown liabilities. (The buy/sell agreement should contain provisions for this contingency, holding the seller legally liable.)

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10. What is the depreciable basis of assets when a company is acquired by the asset method? The depreciable basis is the buyer’s cost. 11. What is the largest single concern a buyer should have when examining authentic records of a family-operated business? If the records are authentic, the largest single concern is to determine any unpaid or under-paid wages for services performed by family members. 12. What are the two components of a loan payment? Which one does not appear on the income statement? The two components are as follows: 1. Interest expense 2. Principal payment—This item is not on the income statement 13. What is the definition of the following terms: franchise, franchisor, and franchisee? A franchise is a marketing right granting the use of a name, trademark, and the marketing of branded services and products. The franchisor grants this right by contract to a franchisee. 14. What are the advantages and disadvantages of being a franchisee? Franchisee advantages: 1. A successful, established name that is easily recognized and acclaimed by consumers. 2. Technical services such as site selection and building, market research, business advice, training. 3. Financing advantage either directly (by the franchisor) or indirectly, because the franchishor’s reputation imparts credibility to outside financing institutions and creditors. 4. National and regional advertising, the cost of which is nominal or included in the royalty fee. 5. Access to national computerized reservation systems. Franchisee disadvantages: 1. The initial cost of the franchise and continuing royalties might become unacceptable cost factors in the long run. 2. The franchisor’s mandated standards of operation might present a loss of freedom not acceptable to the franchisee. 3. Products required for purchase by the franchise agreement might carry an unreasonable mark-up.

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15. What is the definition of the following terms: lease, lessor, and lessee? Leasing arrangements involve a written contract called a lease. The renter is a lessee, and the landlord (owner) is a lessor. 16. What is the indifference point the lessee should compute when considering whether to sign a fixed or variable lease? How is it calculated? The sales level at which rental expense is identical for a fixed or variable lease. The indifference point can be calculated with the following formula: Indifference Point Sales =

Cost of Fixed Lease Variable Lease Percentage

17. What is the definition of the following terms: capitalized cost, capitalized cost reductions, residual value? Capitalized cost: The negotiated price of the car, a significant number because it is comparable to a “selling price.” Capitalized cost reductions: Down payment, trade-in, dealer incentives, and manufacturer’s incentives. Residual value: Value of the car at the end of the lease. 18. What are the advantages and disadvantages of leasing an automobile? The advantages of leasing are as follows: 1. Lower up-front cash outlay. 2. Deferred sales tax. The sales tax is usually based on the monthly payment and payable over the life of the lease. 3. Lower monthly payments. 4. Fewer repair costs. The leased automobile is usually new or a recent model covered by a manufacturer’s warranty. 5. More car, more often. 6. No used-car selling hassles. The disadvantages of leasing are as follows: 1. 2. 3. 4.

No ownership equity. Excess miles can carry a significant charge. Excess wear and tear charges. Early termination penalty.

19. What is the major difference between an open-end and closed-end automobile lease? Under an open-end lease, the lessee takes the market value risk, not the leasing company. If the leased vehicle’s market value is lower than a stated contract residual value, the lessee is responsible for paying the difference. Under a closed-end lease, if the vehicle is worth less than its contract residual value, the leasing company is the loser, not the lessee. Yet, if the vehicle is worth more, the lessee can buy it at the stated purchase option price.

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20. What is capital budgeting? Planning for the acquisition of land, buildings, furniture, equipment, and other long-lived assets. The planning may involve procurement of additional assets or replacement assets. 21. What are the two most popular and simple evaluation methods used to financially evaluate a capital budgeting request? How are they calculated? Average Rate of Return (ARR) method: measures the net annual return (net after depreciation and income taxes) compared to the average of the investment. The formula is: ARR

Net Annual Return (Investment + Salvage) ÷ 2

Payback Method: measures the estimated number of years a project will take to return its original cost (or pay for itself). The formula is as follows: Payback Period

Purchase Cost Net Annual Return + Annual Depreciation

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Problems Problem 1

Sales VC CM FC IBIT

Last Year In-season (12 Months) (9 Months) $900,000 $800,000 585,000 (2) 520,000 (2) 315,000 280,000 180,000 (3) 135,000 (3) $135,000 $145,000

Off-season If closed (3 Months) For Off-Season $100,000 (1) $800,000 65,000 (2) 520,000 (4) 35,000 280,000 45,000 (3) 180,000 (5) $(10,000) $100,000

(1) $900,000 – $800,000 = $100,000 (2) $585,000 ÷ $900,000 = 65% $800,000 × 65% = $520,000 $100,000 × 65% = $65,000 (3) $180,000 ÷ 12 = $15,000 per month $15,000 × 9 = $135,000 $15,000 × 3 = $45,000 (4) VC remains at 65% (5) FC remains at $180,000 CONCLUSION: Closing for the off-season results in a $35,000 lower IBIT because of the off-season’s contribution margin. Even though the off-season incurs a loss of $10,000, its contribution margin is a significant contributor to covering fixed costs. Problem 2

Sales VC CM FC IBIT

Last Year’s Data A B $500,000 $500,000 200,000 300,000 300,000 200,000 200,000 100,000 $100,000 $100,000

If Sales Increase 20% A B $600,000 $600,000 240,000 360,000 360,000 240,000 200,000 100,000 $160,000 $140,000

If Sales Decrease 20% A B $400,000 $400,000 160,000 240,000 240,000 160,000 200,000 100,000 $ 40,000 $ 60,000

VC analysis: A = $200,000 ÷ $500,000 = 40% for all levels B = $300,000 ÷ $500,000 = 60% for all levels CONCLUSION: In times of increased sales, Business A offers greater earnings potential. In times of decreased sales, Business B has less risk. An important factor is the relativity of the fixed costs, $200,000 for A and $100,000 for B, which remain constant regardless of the sales volume. Conversely, A enjoys a variable cost percentage advantage: 40% for A and 60% for B.

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Problem 3 Accumulated Depreciation

Cost Land $200,000 Building 500,000 $400,000 F&E 150,000 100,000 No-compete 75,000 Total remaining depreciation Comment: Stock purchase continues the existing books.

Remaining Depreciation n/a (land not depreciable) $100,000 50,000 75,000 (new asset) $225,000

Problem 4 Allowable Cost Depreciation Land $300,000 n/a (land not depreciable) Building, F & E 900,000 $900,000 No-compete 75,000 75,000 (new asset) Total depreciation available $975,000 Comment: Cost is basis for depreciation under an asset purchase. Problem 5 Sales =

Fixed Lease Stated %

Sales =

$6,000 8%

Sales = $75,000 (Indifference Point) Conclusion: Take a fixed lease if monthly sales are expected to exceed $75,000. Problem 6 .004545 × 2400 = 10.908% Problem 7 Step Description A Cap Cost $30,000 B Cap Reductions 2,000 C Net Cap Cost $28,000 D Residual $13,000 E (C – D) = $15,000 ÷ 48 F (C + D) = $41,000 × .002917 G (E + F) $432.10 Total H 5% Sales tax I Monthly lease payment

Fee

= $312.50 Depreciation fee $119.60 Financing fee $ 21.61 = $453.71

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Problem 8 Step Description A Cap Cost $28,000 B Cap Reductions 2,000 C Net Cap Cost $26,000 D Residual $14,000 E (C – D) = $12,000 ÷ 48 F (C + D) = $40,000 × .002917 G (E + F) $366.68 Total H 5% Sales tax I Monthly lease payment

Fee

= $250.00 Depreciation fee $116.68 Financing fee $ 18.33 = $385.01

Problem 9 Sales Cost of Sales Gross Profit Payroll & related Depreciation All other expenses Income before taxes (a)

(b)

$1,200,000 360,000 840,000 480,000 (a) 22,000 (b) 150,000 $ 188,000

Wages of employees as given Increase: Your salary Taxes and benefits $50,000 × 20% Total payroll & related Building $180,000 ÷ 30 years Equipment $80,000 ÷ 10 years Trade name $100,000 ÷ 25 years No-compete $20,000 ÷ 5 years Total annual depreciation

$420,000

= = = =

50,000 10,000 $480,000 $ 6,000 8,000 6,667 1,333 $ 22,000

Problem 10 Annual Expenses Old New Point-of-Sale Point-of-Sale System System Wages & Related $45,000 $35,000 Power 7,500 5,700 Supplies 2,500 2,000 Repairs 2,000 300 Depreciation 0 8,000 Total $57,000 $51,000 Annual savings before income taxes $6,000 ($57,000 – $51,000) Income taxes @ 40% 2,400 ($6,000 × 40%) Net annual savings after income taxes $3,600

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ARR =

Net Annual Return (Investment + Salvage) ÷ 2

3,600 (56,000 + 0) ÷ 2

3,600 28,000

Problem 11 Payback Period =

Purchase Cost Net Annual Return + Annual Depreciation

$56,000 $3,600 + $8,000

4.8 years

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Case Study 1. Explain why you selected the corporate form of organization. Support your explanation by discussing the advantages and disadvantages of the corporate form of business organization. The student should present a listing of the advantages and disadvantages of the corporate form of business with emphasis on the following: Advantages: a. Limited personal liability for the owners of a corporation. The shareholders’ personal assets are free from any claims of the corporation’s creditors providing there were no personal guarantees. b. Shares of stock represent ownership. The shareholders or corporation, without hampering the business organization, may sell all or part of their shares. c. The corporation can sell additional stock from its authorized shares to increase it finances for purposes of expanding the business or providing a larger borrowing base. d. The corporate structure is flexible. A small corporation may expand into a large corporation without a major restructure of its legal organization. e. The working shareholders are entitled to a salary and other benefits enjoyed by all employees. Disadvantages: a. Forming a corporation incurs higher initial costs due to legal fees, professional fees, and state incorporation fees. b. A corporation’s accounting system is more expensive due to its sophistication compared to a simple accounting system for a proprietorship. c. A corporation has more documents to maintain such as articles of incorporation, by-laws, minutes of meetings, and annual state filing fees. d. The shareholders do not own the assets. The assets are legally the property of the corporation. The shareholders have only a right to vote. 2.

Describe the prerequisite qualitative considerations that you, the purchaser, must make when taking over a leased facility. The student should mention, at a minimum, the following qualitative considerations: • • • • • • •

Responsibility for maintenance and insurance Escalation clauses for lessor’s insurance and property taxes Transferability of the lease by the lessee Restriction on improvements Definition of improvements made by lessee (leasehold improvements) that become the property of the lessor Renewable options Termination clauses

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3. Prepare forecasted income statements for Year 1 and Year 2 under your ownership. • Ignore depreciation and amortization expenses. • Round all amounts entered on the income statement to the nearest $100. The forecasted income statements for Year 1 and Year 2 are as follows: Year 1 Sales Cost of sales Gross profit Payroll: Owner Staff Taxes, fringes Total payroll & related Rent Advertising Interest All other (excluding depreciation) Total expenses IBDIT

Year 2

$330,000 99,000 231,000

(a) (b)

$346,500 104,000 242,500

50,000 42,000 18,400 110,400 30,000 10,000 19,000 35,000 204,400 $26,600

52,500 44,100 19,300 115,900 30,000 5,000 18,000 35,700 204,600 37,900

(f) (g) (h) (i)

(a)

Sales Base = $300,000 Year 1 = 10% increase = 300,000 × 110%: $330,000 Year 2 = 5% increase = 330,000 × 105%: $346,500 (b) Food cost is planned at 30% due to portion increase Year 1 = 330,000 × 30%: $99,000 Year 2 = 346,500 × 30% = 103,950 = $104,000 rounded to nearest $100 (c ) Year 1 = $50,000 as given Year 2 = 50,000 + 5% increase = $52,500 (d) Year 1 = 40,000 + 5% increase = $42,000 Year 2 = 42,000 + 5% increase = $44,100 (e) Year 1 Year 2 Owner’s salary $50,000 $52,500 Staff wages 42,000 44,100 Total payroll $92,000 $96,600 20% fringes, taxes $18,400 $19,320 = $19,300 rounded to nearest $100 (f) There is no change in the lease for the next two years. (g) The planned advertising program is $10,000 in Year 1 and $5,000 in Year 2. (h) Only the interest portion of a loan payment appears on an income statement. Interest expense for Year 1 is $19,000 and for Year 2 is $18,000. (i) Year 1 = $30,000 + $5,000 = $35,000 Year /2 = $35,000 + 2% = $35,700

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4. Prepare a classified balance sheet as of the date of purchase, including the check written tot he attorney. The balance sheet after purchase of the business is as follows: Current Assets: Cash Property & Equipment: Furniture & equipment Other Assets: Trade name Covenant not to compete Goodwill Organization cost Total other assets

$ 23,000(a) 80,000 40,000 20,000 60,000 (b) 2,000 (c) 122,000

Total Assets

$225,000

Current Liabilities Current portion of note payable Long-term Liabilities: Note payable Less current portion Net long-term debt Equity: Capital stock Additional paid-in capital

5,000(d)

$160,000 (e) 5,000 155,000 10,000(f) 55,000(f)

Total Liabilities and Equity

$225,000

(a) Initial investment Check to attorney Down-payment to acquire assets Balance

$65,000 ( 2,000) (40,000) $23,000

(b) Purchase price of assets FMV Received: Furniture & equipment Trade name Covenant not to compete Total Excess paid is Goodwill

$200,000 $80,000 40,000 20,000 140,000 $ 60,000

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(c) The $2,000 paid to the attorney is for incorporation services and state incorporation fees. This is not an expense because the business is not yet formed or in operation. The fees must be capitalized to an asset called Organization Cost. (d) A current liability is any debt due in the next 12 months. Only the principal is considered debt. The next 12 monthly payments on the loan are as follows: Principal and interest ($2,000 × 12) $ 24,000 Less interest portion (given) 19,000 Principal due in next 12 months $ 5,000 (e) Purchase price of assets $200,000 Less down-payment 40,000 Balance financed by note to seller $160,000 (f) Corporation received cash $ 65,000 Issued stock (10,000 shares × $1 par) 10,000 Excess is additional paid-in capital $ 55,000

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Chapter 17 Cash Management and Planning Review Questions 1. Why are accounts receivable and inventory not equivalent to cash even though they are converted into cash during normal operations? Even though inventory and accounts receivable are converted into cash in the normal operations of a business, they also recur again and again in an ongoing business. Thus, they are a continuing demand on cash. 2. What is cash flow? Cash flow is the movement of money into and out of a business. 3. What are positive and negative cash flows? A positive cash flow results when the money coming in (cash inflow) exceeds the money going out (cash outflow). Negative cash flow occurs when cash outflows exceed cash inflows. 4. What is solvency? The ability of a business to pay its debt (current and long-term) and remain in business. 5. What is cash flow analysis? What is its major objective? Cash flow analysis is the study of the cycle of cash inflows and outflows. Its objective is to maintain adequate cash to meet the requirements of the business. 6. Why don’t the income statement, balance sheet, and statement of cash flows present a projected cash flow analysis? The income statement and balance sheet data have been recorded on the accrual principle, not the cash basis of accounting. All three statements are based on historical data. 7. What is cash management? What is its major objective? Cash management is the process of monitoring cash to meet the needs of the business. Its major objective is to plan ahead for a company’s cash flow so that cash is available when the company needs it.

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8. Why is there a difference between profit and increase to cash? Profit is the result of revenue exceeding expenses on the income statement. The major reasons a profit does not represent an increase to cash are as follows: • • • • •

The payment of the principal portion of loans does not appear on the income statement. The payment of prepaid items does not appear on the income statement. Sales on the income statement might combine cash sales and sales on accounts receivable. Expenses on the income statement are a combination of cash payments and purchases on accounts payable. Expenses such as depreciation and amortization are non-cash expenses.

9. What are the definitions of the following terms: liquidity, Treasury bill, venture capital, demand deposit, and money market? Liquidity refers to an asset’s characteristic of being easily and readily convertible to cash. A Treasury bill, also called a T-bill, is a negotiable debt obligation of the U.S. Government, usually maturing in one year or less. The interest it pays is exempt from state and local taxation. Venture capital refers to funds from private investors who usually demand a voting interest in the business. Demand deposits are accounts that can be drawn upon without notice, such as checking and most savings accounts. Money market refers to short-term debt securities issued by corporations and the U.S. government. They may be commercial paper, CDs, and T-bills of one year or less. 10. What are the benefits of cash management? Cash management allows a business to: • • • • • •

Pay bills when due. Take advantage of purchase discounts. Take advantage of special purchases. Properly plan for upgrades of equipment, replacement, expansion. Attain inventory demands for seasonal cycles or special events. Enjoy a good credit rating.

11. What are two common non-cash expenses? The two most common non-cash expenses are depreciation and amortization. 12. What is a popular format for a cash budget? Is it used for long-term or short-term projections? A popular format for a cash budget is the cash receipts and disbursements format, which is used for short-term projections.

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13. What is cash float? Cash float is the interval of time measured by analyzing cash available in the accounting records and the actual bank account. Cash float is caused by: • •

Checks written to a payee but not yet presented for payment to the bank. The deposit of checks into a bank account, but not yet available for use.

14. What are payment float, collection float, and net float? A payment float is the interval between when a check is issued and recorded in the accounting records and when the check is actually deducted by the bank due to the mailing process, the time the recipient takes to deposit the check, and the bank’s check clearing process. A collection float is the period between when a business deposits a check in its bank account and when the bank actually receives those funds and makes them available. these deposited checks are not available until they go through the bank’s clearing process. Net float is the difference between collection float and payment float. 15. What is a lockbox system? A lockbox system is a system in which customers mail their payments to a company’s bank, and the checks are immediately entered as deposits. Customers are unaware the address is the company’s bank. 16. What is a ZBA? What is its benefit? A zero balance account (ZBA) is a checking account in which a balance of zero is maintained through the bank’s automatic transfer of funds to and from a master investment account. ZBA arrangement can minimize idle balances in bank accounts that pay no interest. 17. What is a sweep account? A sweep account is an account from which the bank “sweeps” any funds in excess of a target amount into an interest-bearing account. 18. What is EBITDA? How is it computed? EBITDA is an acronym for Earnings Before Interest, (Income) Taxes, Depreciation, and Amortization. It is computed by taking the net income from the income statement and adding back the deductions for interest, taxes, depreciation, and amortization. 19. Why is cash flow not accurately represented by EBITDA? EBITDA fails to measure true cash flow because its computation ignores the balance sheet. Specifically, EBITDA neglects to consider debt payments and capital expenditures. 20. What is free cash flow? What is its limitation in measuring cash flow? Free cash flow is cash from operations minus capital expenditures. It is not accurate as a measure of cash flow because it neglects the cost of debt.

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Problems Problem 1 Cash inflows Cash outflows Negative cash flow

$140,000 160,000 $(20,000)

Comment: The beginning balance is not considered an inflow produced in a given month. It is used to compute an ending cash balance for a given month. Problem 2 Cash inflows: Cash sales $120,000 Collection on accounts receivable 50,000 New bank loan 80,000 Total cash inflow $250,000 Cash outflows: Wages and expenses Debt payments Down payment on new vehicle Total cash outflow

$120,000 70,000 20,000 $210,000

Problem 3 April Collection of April Sales: 60% × $200,000 35% × $200,000 5% × $200,000 × 5% Collection of May Sales: 60% × $250,000 35% × $250,000 Collection of June Sales: 60% × $220,000

May

$120,000 $ 70,000 $10,000 150,000 87,500 132,000 $229,500

Problem 4 Beginning cash balance Cash sales Cash purchases Cash expenses Ending cash balance

June

$ 8,000 9,000 (2,000) (12,000) $ 3,000

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Problem 5 Cash sales % = ______$200,000 Total Sales = 65% 200,000 − 70,000 Sales on Account Month 1 % = 200,000 = 25% 50,000 Month 2 % = 200,000 = 7% 14,000 Month 3 % = 200,000 = 3% 6,000 Proof: 65% + 25% + 7% + 3% = 100% Problem 6 Net income Interest Income taxes Depreciation Amortization EBITDA

$183,000 40,000 45,000 10,000 2,000 $280,000

Problem 7

Beginning balance Cash receipts: Sales Cash payments: Purchases August 80% × $26,000 September 20% × $30,000 80% × $30,000 October 20% × $32,000 80% × $32,000 Operating expenses Rent Total payments

September 12,000

October 14,200

90,000

100,000

Ending balance

November

20,800 6,000 24,000 6,400 25,600 Accounts Payable 57,000 4,000 87,800

64,000 4,000 98,400

14,200

15,800

Accounts payable end of October: $25,600 Problem 8 Payment float Collection float Net float

$25,000 20,000 $(5,000)

A negative net float has no usefulness because it does not represent potential excess funds to invest.

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Problem 9

Beginning cash balance Cash receipts from sales March: 60% × $40,000 10% × $40,000 April:30% × $60,000 60% × $60,000 10% × $60,000 May: 30% × $53,000 60% × $53,000 June: 30% × $74,000 Total receipts Cash payments Purchases: March: 30% × $15,000 April: 30% × $20,000 70% × $20,000 May:30% × $16,000 70% × $16,000 June: 30% × $22,000 Operating expenses Interest Rent Debt principal Total cash payments Ending cash balance

April 16,000

May 5,500

June 7,600

24,000 4,000 18,000 36,000 6,000 15,900 _____ 42,000

_____ 55,900

31,800 22,200 60,000

4,500 6,000 14,000 4,800

35,000 1,000 4,000 2,000 52,500

28,000 1,000 4,000 2,000 53,800

11,200 6,600 42,000 1,000 4,000 2,000 66,800

5,500

7,600

800

Problem 10 Average monthly sales = $780,000 = $65,000 12 Months The average accounts receivable of $13,000 is given information. Average total monthly sales Average monthly accounts receivable Balance represents average monthly cash sales Cash sales = $52,000 = 80% $65,000 Sales on account = $13,000 = 20% $65,000 Proof: 80% + 20% = 100%

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$65,000 13,000 52,000

Chapter 17

Case Study 1.

Prepare a budgeted income statement for each of the first two months. Month 1 40,000 14,000 26,000 12,000 3,000 2,000 600 1,000 3,000 500 4,800 26,900 (900)

Sales Cost of sales (35% × sales) Gross profit Payroll (30% × sales) Payroll related (25% × payroll) Supplies (5% × sales) Advertising Depreciation Rent Insurance expense ($6,000/12) All other expenses (12% × sales) Total operating expenses Income 2.

Month 2 60,000 21,000 39,000 18,000 4,500 3,000 600 1,000 3,000 500 7,200 37,800 1,200

Prepare a cash flow analysis for the two-month period.

Beginning cash balance Cash receipts from sales Month 1 (80% × 40,000) (20% × 40,000) Month 2 (80% × 60,000) (20% × 60,000) Total cash receipts Cash paid out: Insurance policy Purchases Month 1 (10% × 14,000) (90% × 14,000) Month 2 (10% × 21,000) (90% × 21,000) Payroll Payroll related Supplies Advertising Rent All other expenses Down payment on truck Total cash paid out Ending cash balance

Month 1 10,000

Month 2 9,200

Month 3

32,000 8,000 48,000 32,000

12,000

A/Rec

18,900

A/Pay

56,000

6,000 1,400 12,600 2,100 12,000 3,000 2,000 600 3,000 4,800 _ 32,800

18,000 4,500 3,000 600 3,000 7,200 4,000 55,000

9,200

10,200

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Compute what the accounts receivable and accounts payable balances will be at the end of the two-month period. Accounts receivable of $12,000 at the end of Month 2 represents the 20% of $60,000 to be collected in Month 3. Accounts payable of $18,900 at the end of Month 3 represents the 90% of $21,000 purchases to be paid in Month 3.

Explain the dependability of the cash flow, as well as any future considerations regarding cash management, to the owner. The dependability of any cash flow analysis depends on factors such as: • • • •

The accuracy of the statistical ratios such as food cost, and percentages of expenses to sales. The accuracy of the estimates for cash collection of sales and cash payments of purchases. The accuracy of the budgeted operating statement; the sales estimates are especially critical because almost every expense is based on that estimated volume. Full disclosure of management plans.

There are several areas of concern in this cash flow analysis: • • • • •

Why did the owner wait until one week before the business first opened its doors to prepare a cash management plan? Budgeted statements and cash flow analysis should have been initiated during the start-up process. Since this appears to be a last-minute job, did the owner spend the proper time for arriving at the sales estimates, expense ratios, collection streams, and payment streams? The owner has not disclosed the financial arrangement for the upcoming purchase in Month 2. Will cash flow support the interest and principal obligations? Was the owner too optimistic in estimating sales collections of 80% cash and 20% collected in full the month following the sale? This should be checked closely when actual results are in. What about a provision for bad debts? Was the owner too optimistic in estimating that suppliers will supply terms that would allow only 10% due upon delivery, and that 90% of the purchases would be on 30-day terms? This should be checked closely when actual results are in.

The following recommendations should be made to the owner: • •

• • •

The cash management plan is only for the first two months. A longer period is required. The business had no historical data. Therefore, the cash flow was prepared totally on estimates based on industry averages and the owner’s personal judgment. While industry averages are helpful guides, they do not relate to a specific operation; they are averages of many operations. The percentages used in this management plan should be reviewed periodically and adjusted to actual operations. A long-term management plan should be documented, identifying the customer base, competition, menu mix, pricing, equipment needs, and the many other operational and financial considerations. The business started operations with $10,000, and operations for the first two months have not materially improved this cash balance. Careful attention is necessary to monitor the cash balance so that employees, suppliers, and the bank will be timely paid. The fact that operating profits are nominal at this time is not unusual for a new business. However, cash planning for any business is a strategic management function.

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Chapter 18 Casino Accounting Review Questions

1. Which state gained gambling prominence in the 1900s? Nevada legalized gambling during this period and succeeded California as the center of gaming. 2. What is the American Gaming Association's fundamental goal? The fundamental goal of the AGA is “to create a better understanding of the gaming entertainment industry by bringing facts about the industry to the general public, elected officials, other decision makers and the media through education and advocacy.” 3. What is the National Indian Gaming Association's commitment? The commitment of the NIGA is “to advance the lives of Indian people economically, socially, and politically.” The NGA provides educational information about gaming to its people, the public, government, and the media. 4. What three classes of games did the Indian Regulatory Act establish? How are they defined? Class I gaming is considered social gaming for minimal prizes. Class II gaming includes bingo and similar games, and non-banked card games played exclusively against other players. Class III gaming includes all forms of gaming not classified as Class I or II. Class III gaming is often referred to as casino-style gaming. 5. What is a racino? A racino is a racetrack with gaming facilities. 6. Are baccarat, blackjack, craps, and roulette card games or table games? Baccarat and blackjack are card games. Craps and roulette are table games. 7. What are nonprogressive slot machines? Progressive slot machines? Nonprogressive slot machines have a predetermined jackpot amount. Progressive slot machines have a jackpot that continues to grow with gaming activity until there is a winner.

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8. What department supervises the cage cashiers? The accounting department supervises the cage cashiers. 9. What is a marker? A marker is a document giving a customer a form of credit to use for gaming. 10. What are foreign chips? Foreign chips are from other casinos brought in by players and used for gaming. 11. What is an imprest system? An imprest system is a fund set at a fixed, predetermined amount, which, at the end of a shift, is restored to that fixed amount. 12. What is a floating cage balance system? A floating cage balance system is similar to an imprest system except that the funds are allowed to change as necessary to accommodate gaming volume and demand. 13. What is a fill slip? What is a credit slip? A fill slip is prepared by the table game operator to get an additional amount of chips from the cage cashier. A credit slip is prepared when the table game has an excess of cash; a security runner delivers the cash and credit slip to the cage cashier 14. What are the functions of a coin-in meter and a coin-out meter? These mechanisms are part of a slot machine. A coin-in meter records the gaming activity. A coin-out meter records the payouts (winnings to players). 15. What is a table par method? The par method is a method of inventory control in which a game starts with a predetermined value of chips. 16. What is a table inventory procedure? It is a procedure applicable to end of a shift when supervisory personnel count the chips and complete an inventory form. 17. What is a chip run? It is the exchange of foreign chips with the casinos that issued the chips.

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18. What is the general definition of Win? Of Drop? In its general definition, Win is the total amount gambled less the amount paid to winners. Drop is the money in a slot machine drop bucket or table game drop box. 19. What is a table drop? It is a procedure in which the drop box is removed from the table and delivered to the vault. 20. What is a participating slot machine? It is a machine owned by a party other than the casino; the casino and the owner share the profits. 21. What are the basic premises of the following casino games: baccarat, blackjack, craps, keno, and slot machines? Baccarat is a card game. Betting can be made either on the player winning, the house winning, or a tie. The hand that scores closest to 9 wins. Each hand gets two initial cards. Tens and face cards count as zero. The ace counts as one, and cards 2 through 9 are worth face value. The first digit of a 2-digit total is dropped; if a 6 and a 7 are drawn, the total is 13, but the first digit is dropped, so the count is 3. If the first two cards achieve a count of 8 or 9, it is called a “natural,” and as such wins automatically (excluding the event of a tie of equal valued “naturals”). Blackjack is a card game, likely the world’s most popular casino game. It is often simply called 21 because the object of the game is to get a number of cards to total 21, or as close to 21 as possible without exceeding it. In casinos, the blackjack player plays against the dealer. Several players may play at the same time; however, each player plays his or her hand only against the dealer’s hand. The cards are valued as follows: An Ace counts as a value of either 1 or 11; cards 2 through 10 are valued at their face number; the Jack, Queen, and King each has a value of 10. The suits of the cards do not affect the value. The winner is an individual with a hand value that is closer to 21 than that of the dealer, without going over 21. The players value the Ace as 1 or 11 to make the best hand. Craps is a dice game played at a large table. It is played with two dice. Skill and experience are not important in playing this game. Craps requires no complex calculations or strategies, yet the rules can be difficult for beginners to understand. The first time a player picks up the dice and rolls them is called the come-out roll. Bets placed before the come-out roll are called pass line bets, which immediately win when a shooter's come-out roll is a 7 or an 11, and lose when the come-out roll is a 2 (snake eyes), 3 (cross eyes), or 12 (box cars). If the next roll results in a 4, 5, 6, 8, 9, or 10, that number becomes the point. The shooter then keeps rolling the dice until he or she rolls the point or a 7 to end the round. If the shooter rolls the point first, a pass line bet wins. If, however, the shooter rolls a 7 first (i.e., sevens out), a pass line bet loses. Keno is a casino game similar to lotto and bingo. Basically, the player buys a keno ticket that determines the bet and payoff. The ticket is printed with the numbers 1 to 80; a player chooses from 1 to 20 numbers (as determined by house rules) and marks them on the ticket with a keno crayon. Each selection is called a spot; if the player selects 8 numbers, the player is playing an 8spot game. The player presents the ticket with the wager to the casino and receives a duplicate ticket. The casino game has 80 balls, also numbered 1 to 80. For every game, the casino house

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draws 20 balls at random. The player wins based on (1) how many numbers match the ones he or she marked on the ticket, and (2) the wager he or she placed when purchasing the ticket. Slot machines are mechanical games of chance. After entering a coin or coins, the player pulls and releases the arm of the slot machine to play the game. When the right combination of symbols stops in the window, the player was a winner. Today's casinos feature electronic slot machines offering many versions of games. Video poker, a poker card game in a slot machine, is very popular because the player has an opportunity for a large win.

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Problems Problem 1 General Internal Control End-of-Shift Procedure for a Table Game a. Table inventory is performed by incoming and off-going supervisory personnel. • Chips are counted. • An inventory form is completed. b. The table inventory is restored at Par. c. The drop box is removed. d. A new, empty drop box is attached to the table. e. The removed drop box, under security, is delivered to the count room. Problem 2 General Operation of the Count Room • • • • • • •

The count room arrives at a specified time. Special keys to open the drop boxes are signed out. Count room personnel are screened to ensure that they have no loose-fitting clothing, tote bags or purses, lunch bags or boxes. Once the count begins, no one is permitted to leave until the count is completed. Money, fill slips, and credit slips are counted and reconciled. The money is recounted and sorted into various denomination bundles. After the count is completed, the money, fill and credit slips, and count sheets are then delivered, under security, to the vault.

Problem 3 General Operation of the Vault • • • • • • • •

The vault receives money and documents from the count room. The vault operates under intensive security similar to that of the count room. Money and documents received from the count room are verified. Cashier reimbursements are made for fill slips, checks cashed, and chips. The cashier’s cash and chips are restored to their imprest amount. The casino bankroll is restored. Foreign chips are stored or a chip run is performed. Deposits should be made daily.

Problem 4 a. Amount wagered is $20,000 (the term Handle = amount wagered). b. Amount of slot win is $3,000, computed as follows: Slot Win

= Slot Handle – Paid Outs – Refills = $20,000 – $16,000 – $1,000

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Problem 5 a. b. c. d.

Player loses. First roll (come out roll) of 12 is a box car. Player loses. First roll of 2 is snake eyes. Player wins. First roll of 4 sets 4 as the point. Player loses. “Sevens out.”

Problem 6 a. b. c. d.

Player wins with a total of 21 vs. dealer’s total of 18. Player wins with a total of 19 vs. dealer’s total of 18. Player wins with a total of 21 vs. dealer’s total of 20. Player loses, went over 2; called a busted hand.

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Chapter 18

Case Study 1.

Select financial accounting procedures for the slot machines. Explain why you selected the procedures you did, justifying your choices and reasoning. Financial accounting procedure for nonprogressive slots Nonprogressive slots have a set, predetermined jackpot payoff. The general financial accounting procedure is as follows: • •

Record the reported Win as revenue. The senior staff computes the Win as follows: Slot Handle minus Paid-outs minus Refills. Make no provision for potential jackpots at the close of any accounting period because the amounts are known and likely not significant.

Financial accounting procedure for Progressive slots Progressive slots are similar to nonprogressive slots except that the jackpot increases with play until a player wins it. A provision is necessary at the end of an accounting period for the potential jackpot liability. • •

Record the reported Win as revenue. The senior staff computes the Win as follows: Slot Handle minus Paid-outs minus Refills. Record an adjusting entry at the end of the accounting period that reduces revenue and increases a liability account, such as Progressive Slots Liability.

Illustrate and explain the presentation of gaming revenue and free goods and services on the income statement. The free goods and services to guests are complimentary items such as rooms, food, beverage, and other amenities given as an incentive to gamble. For example, the beverage department charges the retail value of liquor given free to gamblers in the casino department. The revenue section of the income statement will appear as follows: Revenue Less Complimentary Allowances Net Revenue The other expense section of the income statement will appear as: Complimentaries: Rooms Food Beverage And any other free goods that should be listed or summarized

Explain the recording of expenses chargeable to the casino department. Payroll, employee benefits, and most other expenses for the casino department are accounted for largely as they are in other operating departments. Of special interest are the following expenses: • • • •

Credit and collection Gaming taxes, licenses, and regulatory fees Postage Complimentaries

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The credit and collection costs associated with collecting casino charge accounts are charged to the casino, unlike other operating departments where such costs are generally charged to A&G. The specialized casino licensing fees are charged to the casino department, just as the beverage department is charged for its special beverage license fee. Postage is generally charged to the A&G department. However, the casino postage expense is directly charged to the casino. The complimentary items expense is similar to the amenities provided on a gratis basis in other major revenue centers. The free guest amenities given to casino customers appear as separate line items under Other Expenses on the statement for gaming operations.

155

Chapter 19 Inventory Accounting Review Questions 1. Which bookkeeping account is used to record the acquisition of food inventory under the following methods? a. The periodic inventory accounting method—Food Purchases b. The perpetual inventory accounting method—Food Inventory 2. How many monthly periods will be affected by an error in ending inventory? Why are cost of sales and gross profit affected by an error in ending inventory? An error in ending inventory will affect two monthly periods: the month the ending inventory is in error and the following month, because the ending inventory becomes the beginning inventory for the next month. 3. What are the cost flow assumptions of the following approaches? a. FIFO = The first costs in are the first costs out of inventory. b. LIFO = The last costs in are the first costs out of inventory. c. Weighted average = The costs out of inventory should represent an average weighted by the number of units acquired at each price. 4. Which approach to costing issues will result in the highest ending inventory valuation in times of rising prices? In times of rising prices, FIFO will result in a higher balance sheet (ending) inventory because the most recent costs remain in inventory. 5. Which approach to costing issues will result in the highest cost of sales in times of rising prices? In times of rising prices, LIFO will result in a higher cost of sales because the most recent costs are used to price the issues.

Chapter 19

6. What are the advantages and disadvantages of LIFO? The major advantages of using LIFO may be summarized as follows: •

Better income measurement: Because the most recent costs are used to cost issues, the cost of sales expense more closely reflects current costs.

•

Income tax benefits: A higher cost of sales expense reduces taxable income resulting in a cash savings. The improved cash flow enables a company to invest the excess cash to produce revenue or to reduce debt and interest expense.

The major disadvantages may be summarized as follows: • • • •

Lower income: Investors and stockholders generally base their investment decision on the net income of a company. Lower balance sheet inventory: The current assets, working capital, and current ratio are understated in periods of rising prices. This financial information is analyzed closely by investors, stockholders, and banks. Potential tax burden: The income tax benefits of LIFO are not guaranteed. At time of adoption, if prices decline or if quantity of inventory is reduced below the balance on hand at time of inception, it is possible that LIFO will become a tax disadvantage. Impractical: Food and liquor inventories in the hotel industry generally have a fast turnover, and ending inventories are not as significant as those in manufacturing industries. The costs of maintaining a LIFO system and its potential consequences require serious and close scrutiny before it is selected as a cost allocation method.

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Problems Problem 1

Sales Cost of Sales: Beginning Inventory Purchases Cost of Goods Available Ending Inventory Cost of Sales Gross Profit

Month of September $150,000

Month of October 130,000

Year-to-date October 1,200,000

18,000 46,000 64,000 14,000 $ 50,000 $100,000

14,000 42,000 56,000 13,000 43,000 87,000

15,000 400,000 415,000 13,000 402,000 798,000

↑

Down $3,000

Up $3,000

No change, counterbalancing errors.

Problem 2 Sales (net) Cost of Sales: Beginning Inventory + Purchases Cost of Goods Available – Ending Inventory Cost of Sales Gross Profit

$31,000

100%

4,000 12,000 16,000 4,840 (C) 11,160 (B) 19,840 (D)

36% (A) 64%

(A) 100% – 64% Gross Profit = 36% Cost of Sales (B) 36% Cost of Sales × $31,000 Sales = $11,160 Cost of Sales (C) $16,000 Goods Available – $11,160 Cost of Sales = $4,840 (D) PROOF: 1. $31,000 Sales – $11,160 Cost of Sales = $19,840 Gross Profit 2. 64% Gross Profit × $31,000 Sales = $19,840 Gross Profit

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Problem 3 a. Ending Inventory = 5 × $5.25 = $26.25 FIFO = Most recent costs remain in inventory. Fact situation was: 4/1 Purchased 15 units at $5.00 each 4/10 Purchased 10 units at $5.20 each 4/20 Purchased 8 units at $5.25 each ← Start here (5 units) b. Ending Inventory = 5 × $5.00 = $25.00 LIFO = Oldest costs remain in inventory. Fact situation was: 4/1 Purchased 15 units at $5.00 each ← Start here (5 units) 4/10 Purchased 10 units at $5.20 each 4/20 Purchased 8 units at $5.25 each c. Ending Inventory = 5 × $5.1212 = $25.61 Weighted Average: 4/1 15 × $5.00 = $75.00 4/10 10 × $5.20 = 52.00 4/20 8 × $5.25 = 42.00 Total 33 $169.00

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169.00 = $5.1212 weighted unit cost 33

Chapter 19

Case Study 1.

Explain how the cost of sales and profits for this particular restaurant could be in line with corporate standards, yet have a $5,000 shortage in inventory. Since each restaurant location has an elaborate POS system that has proven reliable and accurate, the $5,000 shortage in the food inventory is likely due to internal theft. Shortages in receiving could account for some of it, but such a large amount points to theft. Since the restaurant uses the perpetual inventory record-keeping system, the manager is a prime suspect of theft or incompetence.

Calculate the before-and-after effect on gross profit if the accounting records showed the following before the $5,000 inventory shortage: Sales: $100,000 Beginning inventory: $15,000 Purchases: $28,000 Ending inventory per books: $18,000 Effect of inventory shortage on gross profit:

Sales Beginning inventory Purchases Ending inventory Cost of sales Gross profit 3.

Before $100,000 15,000 28,000 (18,000) 25,000 75,000

After $100,000 15,000 28,000 (13,000) 30,000 70,000

Suggest how corporate headquarters could institute a simple, inexpensive audit procedure at each location that will quickly spot such shortages. A physical count of inventory is the only sure, exact way to determine inventory accuracy. Taking a full inventory would be too time-consuming and expensive. A practical audit procedure is to perform a physical count of only select items, including a rotating count of certain other inventory items. The unannounced physical counts would remain a standard procedure.

List some measures corporate management could take to effectively guard against internal theft. A sample list, not all inclusive, of defensive measures to guard against inventory theft would include the following: • • • •

No single individual should control receiving, inventory, disbursements, and adjustments. Be especially aware of the trusted employee who works long hours and doesn’t take vacation. The receiving personnel should properly count the food received with the purchase order/receiving document. The paperwork amount is the amount entered into the perpetual inventory documents. Pilferage may involve collusion between truck drivers and storeroom personnel who receive less than the full quantity, yet approve the receiving documents. The food is then shared among the thieves.

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• • • • •

After catching the guilty party, criminally prosecuting the thief will serve as a strong deterrent to others. Internal thieves have been known to wrap food items in plastic and place the container in a trash bin to be recovered later. Limit employee access to the storeroom and inventory records. In addition to conducting surprise audits, corporate management should also conduct periodic, unexpected inventory checks so employees know they run the risk of being caught. Video cameras could be installed in strategic areas.

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Chapter 20 Assorted Topics Review Questions

1. What is a feasibility study? A feasibility study is a preliminary study undertaken before a project is begun to determine the likelihood of the project's success. It contains financial information statistics, conclusions, and recommendations. 2. What are the sections that might appear in a feasibility study? Generally, any feasibility study should contain these sections: • • • • • • • •

Proposal Letter Opening Section of the Feasibility Report Description of Market Area Evaluation of Area and Project Site Analysis of Competition Demand Analysis Recommend Facilities and Services Estimated Income Statement

3. Why might hotel management want to allocate service center expenses to revenue centers? Revenue centers receive benefits from service centers and should be allocated a share of such a department’s expense, even though revenue department managers cannot directly control service center expenses. Allocating service center expenses to revenue departments is an extension of responsibility accounting. 4. What bases of allocation might be used to allocate service centers under the direct method? Under the direct method, each service center and fixed charge is allocated to a number of revenue centers based on some logical basis as: • • • •

Percentage of payroll Percentage of square footage Percentage of total revenue Percentage of any basis determined to equitably allocate an expense

5. What is the definition of fair value accounting? The accounting definition of fair value includes both assets and liabilities. The fair value of an asset is the amount at which the asset could be bought or sold in a current transaction between a

Chapter 20 willing buyer and seller, other than in liquidation of a business. The fair value of a liability is the amount at which the liability could be settled in a current transaction between willing parties, other than in liquidation of a business. 6. What prices are used in Level 1, Level 2, and Level 3 for purposes of measuring fair value? The prices used in each hierarchy are as follows: Level 1: Uses quoted prices in active markets for identical assets or liabilities. Level 2: If a quoted market price is not available in Level 1, either a directly or indirectly observable price is used for the asset or liability. Level 3: Failing to obtain Level 1 and Level 2 inputs, the use of unobservable inputs such as estimates or another method deemed applicable by management. 7. What is the definition of compound interest? Compound interest is interest that is calculated both on the initial principal and the accumulated interest of prior periods. 8. What is the objective of a compound value calculation? The objective of a compound value calculation is to answer the question, “If I presently have a known amount to invest, what will be its future value at the end of a specified period of time?” 9. What is the objective of a present value calculation? The objective of a present value calculation is to answer the question, “How much must be invested now to achieve a specific goal?” 10. What is the objective of an ordinary annuity calculation? The objective of an ordinary annuity calculation is to answer the question, “What will be the future value of an investment at the end of a specified period if I invest a stated series of amounts?” 11. What is the objective of an annuity due calculation? The objective of an annuity due calculation is identical to that of an ordinary annuity. The major difference is that investments are made at the end of the year in an ordinary annuity, and investments are made at the beginning of the year in an annuity due. 12. What is the objective of a present value of an ordinary annuity calculation? The objective of a present value of an ordinary annuity calculation is to answer the question, “How much must be invested now to receive a series of payments for a stated number of years?”

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Problems Problem 1

Rooms F&B Total

Sales $600,000 200,000 $800,000

Percentage 75.0% 25.0% 100.0%

Notes: $600,000 ÷ $800,000 = 75.0% $200,000 ÷ $800,000 = 25.0%

Allocation of Marketing Dept $18,000 6,000 $24,000 75% × $24,000 = $18,000 25% × $24,000 = $6,000

Problem 2 • • • •

The interest rate per period is 3% (6% divided by 2). n = 20 (2 interest periods × 10 years). Using the Compound Value Table intersection of 3% and 20 = 1.8061112. $5,000.00 × 1.8061112 = $9030.56.

Problem 3 • • • •

The interest rate per period is 1% (4% divided by 4). n = 24 (4 interest periods × 6 years). Using the Present Value Table and intersecting 1% and 24 = 0.7875661. $5,000.00 × 0.7875661 = $3937.83.

Problem 4 Note: This problem uses an ordinary annuity table because $5,000 is invested every year at the end of the year. • • • •

The interest rate per period is 5% (5% earned annually). n = 15 (1 interest period per year × 15 years). Using the Ordinary Annuity Table and intersecting 5% and 15 = 21.5786. $5,000.00 × 21.5786 = $107,893.00.

Problem 5 Note: $5,000 is invested every year at the beginning of each year. This problem uses an ordinary annuity table even though it is an annuity due calculation. A factor of 1 is added to the number of interest periods to convert from end-of-year to beginning-of-year factors. • • • •

The interest rate per period is 5% (5% earned annually). n = 16 (1 interest period per year × 15 years + 1 to convert to beginning of year investments). Using the Ordinary Annuity Table and intersecting 5% and 16 = 3.6575. $5,000.00 × 23.6575 = $118,287.50.

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Chapter 20 Problem 6 • • • •

The interest rate per period is 4% (4% earned annually). n = 10 (1 interest period per year × 10). Using the Present Value Annuity Table and intersecting 5% and 10 = 8.1109. $2,000.00 × 8.1109 = $16,221.80.

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For the Instructor AEGIS Automated Examination Generation and Information System The AEGIS system is designed to protect the credibility of your course examinations through continuous generation of unique tests and ongoing evaluation of the test items. In order to continue the success of the AEGIS system, please TAKE ACTION on the following:

Destroy ALL previously used final examinations on file. The exam you administer should have a date in the lower left corner that is no older than one year. Update your examination file with the current examination(s) enclosed, and continue to change and update with each new examination. Examinations are easily identifiable by the Exam Control Number at the top of the exam. Read and follow the instructions in this packet, paying particular attention to the instructions for the completion of the Final Examination Answer Sheet. Distribute this information to all instructors in your program who will be using EI courses.

If you have any questions regarding whether you have the most current exam please contact: Helen Purvis, Director, Academic Services at: Phone: (800) 344-4381 or (517) 372-8800 extension 2343 Fax: (517) 372-5141 E-mail address: hpurvis@ahla.com

Administering the Final Examination 1. The final examination is a proctored test and must be administered in a supervised setting. You should be administering a current exam. The exam creation date can be found on the lower left corner of the exam. Be sure the edition of the exam that is in the lower left corner matches the edition of the book you are using. If your exam is more than one year old contact Helen Purvis immediately and request a new replacement exam. 

Students may bring a dictionary and a non-programmable calculator to the final exam session. They may not bring any notes or reference materials or any programmable calculators, cell phones, palm pilots, pagers or other electronic devices.



The instructor is expected to protect the integrity of the exam.



The Institute reserves the right to withhold certificates in the event we suspect the integrity of the exam has been compromised.

2. You will receive an Exam Master that you may photocopy, one for each student. Following the examination, collect and destroy all copies of the examination. Do not use the same exam repeatedly! 3. Forward all completed Final Examination Answer Sheets to the Institute for grading. 

The Class Roster is to be included with the answer sheets and must also indicate the Final Exam Control Number that was used for the class. 

Send to: The Educational Institute Academic Services Department 2113 N. High Street Lansing, MI 48906

4. In the event a student is unable to take the examination with the class, please return the answer sheet to the student, NOT to the Educational Institute. The answer sheet is part of the materials purchased by the student and will be required should the individual wish to complete the final at some future date. 5. Once the exams are graded, a grade report will be returned to the individual indicated on the class roster as the instructor, along with all certificates for students successfully completing the course with a score of 70% or better. These certificates should be signed by the instructor and distributed to the students. 6. A complimentary exam answer sheet is returned for a student who has unsuccessfully completed the course. A retake exam request form is returned for use in requesting final exam answer sheets for students who have unsuccessfully completed a retake exam.

Completing the Final Examination Answer Sheet Every Educational Institute course package includes a Final Examination Answer Sheet. Certificates of course completion can only be issued for students submitting the answers to the final examination on the original answer sheet form. No photocopies or substitutes will be accepted or graded. The Educational Institute will not be responsible for replacing lost or stolen answer sheets. Replacement answer sheets may be purchased by calling Academic Programs at (800) 344-4381. If you collected the final examination answer sheets for safekeeping, distribute them to the respective students and announce the following:

1. A number two (#2) pencil must be used to mark all information on the answer sheet. DO NOT USE INK!! 2. The student name and number must be written in the boxes indicated. a. Student Name: skip boxes between names and initials only, not between letters in a name. b. Student Number: The student’s EI Student Number should be written in the box. A number shorter than 9 digits should be written to end in the last box on the right. If none of the above apply, leave the space blank and we will assign the student a number. Once the name and number are written in the boxes, have the students fill in the corresponding oval beneath the letter or number. Please refer to the sample answer sheet that has been included. 3. The course name and number as stated on the final examination must be provided, as well as the exam date. 4. The exam control number space MUST be filled in with the examination control number in order for the answer sheet to be properly scanned and graded. The examination control number can be found at the top of each page of the final examination. 5. The answer space for each question must be completely filled in as shown in the example and directions. 6. All changes must be completely erased. 7. Do not staple examination forms together. Do not damage the Black timing marks at the edge of the form as they must be intact for the form to be scanned and graded.

Thank you very much for your cooperation. For further assistance, please do not hesitate to contact our Director, Academic Services: Helen Purvis: (800) 344-4381 E-mail address: hpurvis@ahla.com

Fax #: (517) 372-5141

Class Roster Instructions for Academic Institutions To ensure that we maintain accurate records on your students, please complete the class roster according to these instructions, and return it with the students’ completed final examinations.

Top Section: General Information 1. Sponsor – The academic institution sponsoring the course. 2. Course Name – The name of the Educational Institute course being conducted. 3. Final Exam Control Number – The 6 digit number found at the top of each page of the final exam. Please submit a separate class roster for each exam control number. 4. Exam Date – The date the exam was administered. 5. Instructor’s Name – The full name of the course instructor. Please print clearly, as the instructor’s certificate will be prepared from this information. 6. Instructor’s Phone Number, E-mail address and Instructor Number – If the instructor has previously taught an E.I. course, please provide his or her Educational Institute instructor number if known. (This number is indicated on grade reports.) We will assign instructor numbers to new instructors. 7. Instructor’s Signature – Signature of the instructor who taught the class. 8. Mailing address for Course Certificates – The name, complete address, and telephone number of the individual to whom the students’ course certificates and grade report should be mailed once prepared.

Lower Section: Student Information The first line (#0) is a sample showing the information needed on each student enrolled in the class. (Additional space for this information is provided on the back of the page.) 1. Student Number – Please provide the Educational Institute student number for all students who have previously taken an Institute course. This information is required in order for us to update an individual’s academic record. 2. Former E.I. Student? – Mark a “Y” in this column for each student who has previously taken an Institute course, and an “N” for each student who has not. 3. Name – Print or type the name of each student enrolled in the course (across as it should appear on the certificate) in alphabetical order by last name. THANK YOU for your cooperation!! A grade report indicating final grades for each student will be returned with the course certificates. Please do not forget to include your course evaluation when returning your final examination.

Instructional Materials for Academic Institutions This packet of instructional materials includes the following: 1. Important information on the AEGIS system. 

Detailed instructions on administering the Final Examination, completing the Final Examination Answer Sheet, and completing the Class Roster.

2. A Class Roster 

To be completed and forwarded to the Educational Institute together with the student’s completed final examination answer sheets.



These forms may be photocopied for additional students or classes.

3. Course CD The CD includes an Instructor Guide and a bank of test questions which can be used by the instructor to develop quizzes or assignments of any length. These are to be graded by the instructor. 4. AEGIS Course Final Examination 

A 100-question comprehensive examination for each course.



This proctored test is to be administered in a supervised setting.



The Final Exam Control Number for each examination (found at the top of the exam) must be indicated on the class roster form and on each student’s final examination answer sheet submitted to the Educational Institute for grading.

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