© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Chapter 2 Financial Statements For Decision Making

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Objectives After studying this topic you should be able to:  Develop knowledge and understanding of a variety of accounting statements;  Critically evaluate the usefulness of such information to managers, and other statement users;  Develop knowledge of alternative accounting terminology used within financial reports; and  Develop a working knowledge of the concepts of profit and cash in the business context.

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers The difference between profit & cash Profit = the surplus of value between sales revenue and associated costs for the same period Sales Revenue – Costs = Profit

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Example: difference between cash and profit Cultural Events is a small local events company, its operating information for one month, April is:  Sales for the period are £40,000, which includes £10,000 invoiced and yet to be paid by the customer;  Cost of sales, £12,000, which includes £6,000 still to be paid to the supplier;  Expenses for the month are £20,000, but this includes £4,000 paid previously and £6,000 not to be paid until the next month;  At the start of the month the bank balance (cash) was £5,000  A cash payment of £15,000 is paid in April related to last month’s expenses.

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Solution Cultural EventsProfit Cash Opening cash£5,000 Sales Revenue£40,000 + cash from sales£30,000 - Cost of sales£12,000 £35,000 = Gross Profit£28,000 - Expenses for March£15,000 - Expenses£20,000 - Expenses for April£10,000 Profit£8,000Closing cash£10,000

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers External financial reporting Standardisation over time has led to International Financial Reporting Standards (IFRS) being developed which are being adopted in a number of countries.

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers The international convergence of accounting standards Australia, European Union countries (incl. France, Germany, Italy, United Kingdom - UK), South Africa, Turkey Use of IFRS since 2005, some countries for listed companies only Argentina, Mexico, Russia,2012 Brazil2008 or 2010, depending on type of company Canada2011, plus allowed for not-for-profit organisation ChinaBroad convergence with national standards India, IndonesiaPlanned convergence Japan Allowed for some international companies since 2010, further adoption under consideration Republic of Korea2011 Saudi Arabia Required in banking sector, under consideration more generally United States (USA)Allowed for foreign company users since 2007, aiming for substantial convergence (data from IFRS 2012)

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Statement of Comprehensive Income Statement of Income for the year ended 31st December XXX2 31st December XXX231st December XXX1 Revenue6,9007,400 Cost of sales(710)(680) Gross Profit6,1906,720 Other income Distribution costs(80)(72) Administrative expenses(3450)(3,708) Other expenses(690)(740) Finance costs(40)(60) Profit before tax2,6302,810 Income tax expense(790)(843) Profit for the year1,8401,967 (Note: data for format illustrative purposes only)

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Statement of Financial Position terms (1) Accounting TermAlternative TermDescription Statement of Financial Position Balance Sheet A statement that shows what a company owns and owes at a given point in time Assets Something the company owns, or has use of Non-current assets Fixed assets Assets that usually have a useful life for the company longer than 12 months e.g. Owned property, machinery, equipment Current assets Assets that are short term, usually have a useful life for the company shorter than 12 months e.g. Cash, Inventory, trade receivables Inventories Stock The value of the stock of goods for resale e.g. Stock of food, drink, merchandising, shop stock Trade receivables Debtors & Prepayments Money outstanding from sales, customers to pay in the future & things paid for but still to ‘use’ e.g. Customers with credit terms still to pay. A prepayment could be paying a year’s insurance at the start of the year

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Statement of Financial Position terms (2) Accounting TermAlternative TermDescription EquityShareholders’ funds The owners’ value in the business e.g. Value of shares, retained profits, reserves Liabilities An obligation to be met in the future Non-current liabilities Long-term liabilities Liabilities, usually over 1 year e.g. Bank loans Current liabilities Short-term liabilities, to be met within 12 months Trade payablesCreditors & AccrualsThe amount you owe to your suppliers e.g. Amounts you owe for stocks already purchased, but yet to pay. Electricity that you are invoiced for after consumption would be an accrual

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Statement of Financial Position (1) Statement of Financial Position as at 31st December XXX2 31st December XXX231st December XXX1 ASSETS Non-current assets Property, plant and equipment Intangible assets Current assets Inventories8580 Trade receivables Cash and cash equivalents Total assets

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Statement of Financial Position (2) Statement of Financial Position as at 31st December XXX2 31st December XXX231st December XXX1 EQUITIY AND LIABILITIES Equity attributable to owners Share capital Retained earnings Total equity Non-current liabilities Long-term borrowings Deferred tax1030 Total non-current liabilities Current liabilities Trade payables Short-term borrowings1012 Current tax payable2530 Total current liabilities Total liabilities Total equity and liabilities

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Statement of Cash flows Direct Method Cash receipts from customersxxx Cash paid to suppliersxxx Cash paid to employeesxxx Cash paid for other operating expenses xxx Interest paidxxx Income taxes paidxxx Net cash from operating activitiesxxx

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Statement of Cash flows Indirect Method Profit before interest and income taxesxxx Add back depreciationxxx Add back amortisation of goodwillxxx Increase in receivablesxxx Decrease in inventoriesxxx Increase in trade payablesxxx Interest expensexxx Less Interest accrued but not yet paidxxx Interest paidxxx Income taxes paidxxx Net cash from operating activitiesxxx

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Uniform System of Accounting for the Lodging Industry (USALI)  Hospitality specific reporting framework  Developed in the 1920’s  Responsibility accounting format  Provides a complete management accounting reporting system  Allows external benchmarking  Used in industry-wide studies  Useful in management contract operations

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Example: USALI Department Statement

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Example: USALI Summary Statement of Income * Income - in this American terminology ‘income’ relates to what in the UK would be termed ‘Profit’

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Example Room Statement

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Summary  Cash and profit refer to different elements of the accounts and should never be used interchangeably, they are different.  A number of different ‘GAAPs’ exist, international GAAP, using IFRS are used more widely than other ‘national’ county specific GAAPs.  External reporting statements can be utilised internally for management accounting analysis purposes, but are too general and far reaching for operational decision making.  USALI is well utilised as a reporting framework within hospitality and is one of the oldest sector specific internal reporting frameworks in the world.  USALI serves many purposes for internal reporting and external benchmarking for decision making.