1. Chapter 6
Financial Statements

2. The Income Statement The Purpose of the Income Statement
When you manage a hospitality facility, you will receive
Revenue, the term used to indicate the money you take in, and you will incur
Expenses, the cost of the items required to operate the business.
The dollars that remain after all expenses have been paid represent your profit.
Income Statement 2

3. The Purpose of the Income Statement
Many hospitality managers call each individual revenue generating segment within their business a profit center.
The revenue-expense = profit formula holds even in what is not typically considered a for-profit segment of the hospitality industry.
In many business dining situations, food is provided as a service to the company’s employees either as a no-cost (to the employee) benefit or at a greatly reduced price.
Thus, it is common in many situations to operate a cost center that generates costs but no revenue.
All stakeholders who are affected by a business’s profitability will care greatly about the effective operation of a hospitality business.
Owners
Investors
Lenders
Creditors
Managers
When an accurate income statement is used to provide information, the business’s owners, lenders, investors and managers can all make better decisions about how best to develop and operate it. 3

4. ROI is computed as follows:
Return on Investment
Investors are particularly interested in return on investment (ROI), which measures the quality or strength of an investment.
ROI is computed as follows: 4

5. Income Statement Preparation
In very small hospitality operations, the owner or managers of the business may be responsible for the preparation of the income statement.
In larger restaurant chain operations, the manager may submit financial data to a centralized accounting office, which would then prepare the unit’s income statement.
In very large restaurants and in many hotels, the income statement may be prepared by professionals who work on-site. 5

6. Format of the Income Statement
An income statement is designed to identify revenues, expenses, and profits and is a summary of financial information for a defined accounting period.
In its very simplest structure, the income statement appears as follows: 6

7. Format of the USALI
A hotel income statement, using the Uniform System of Accounts for the Lodging Industry (USALI), shows sales and cost of sales related to rooms and non-rooms departments and any other expenses related to the functioning of the hotel.
The next two slides show the hotel income statement using a vertical format.
The hotel income statement can also use a horizontal format. 7

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11. Format of the USALI
The USALI can be divided into three sections arranged on the income statement from most controllable to least controllable by the hotel manager.
The operated department income section consists of separate profit centers as department income. Each department reports revenues, expenses, and income.
The undistributed operating expenses section covers Undistributed Operating Expenses through Gross Operating Profit and includes expenses that cannot truly be assigned to one specific department.
The nonoperating expenses section is least controllable by the hotel manager and includes items such as depreciation, interest, and income taxes. 11

12. Revenue Data
The first portion of the income statement details the revenue data to be reported during the identified accounting period.
Hotel revenue categories include:
Rooms
Food
Beverage
Telecommunications
Garage and Parking
Golf Course
Golf Pro Shop
Guest Laundry
Health Center
Swimming Pool
Tennis
Tennis Pro Shop
Other Operated Departments
Rentals and Other Income 12

13. Expense Classification
Expense classification is the process of carefully considering how a business’s expenses will be detailed for reporting purposes.
In the hotel industry, when an expense is easily attributable to one department, it is classified as a departmental cost. This type of cost is sometimes referred to as a direct operating expense.
When the expense cannot truly be assigned to one specific area within an operation, it is classified as an undistributed operating expense. 13

14. Schedules
In addition to income statement summaries, managerial accountants may use one or more departmental schedules to provide statement readers with more in-depth information about important areas of revenues and expenses.
A hotel income statement may consist of a summary with reference to one or more departmental schedules that will provide additional detail.
In the food and beverage revenue area, schedules may be created based upon the sales and expenses achieved by restaurants and bars. 14

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16. Other Revenues and Gains Other Expenses and Losses
6-1 Multi-Step vs. Single-Step Income Statement – Summary of Income Statement
Multiple-step
Single-step
Sales Revenue
Net Sales a
Total Revenue
Cost of Goods Sold
Gross Profit b
Total Expenses
Operating Expenses
Income from operations c
Non-operating items
Net Income d
a Sales - Sales returns - Sales Discounts
b Net sales - Cost of goods sold
c Gross profit - Operating expenses
d Income from operations + Other revenue/gains - other expenses/losses
Other Revenues and Gains
Other Expenses and Losses
Interest revenue from notes receivable and marketable securities
Interest expense on notes and loans payable
Dividend revenue from investments in capital stock
Casualty losses from recurring causes such as vandalism and accidents
Rent revenue from subleasing a portion of the store
Losses from the sales of abandonment of property, plant, and equipment
Gain from sale of property, plant and equipment
Loss from strikes by employees and suppliers

17. The Balance Sheet How to read a Balance Sheet(2:34) 17

18. The Accounting formula is stated as
Balance Sheet Content
The Accounting formula is stated as
Assets = Liabilities + Owner’s Equity
The content of a balance sheet tells its readers as much as possible about each of these three accounting formula components. 18

19. The Purpose of the Balance Sheet
The type of information contained on a business’s balance sheet is of critical importance to several different groups including:
Owners
Investors
Lenders
Creditors
Managers 19

20. Limitations of the Balance Sheet
Knowledgeable readers of a balance sheet recognize that accountants utilize a variety of evaluation approaches, each of which may make the most sense for specific asset types based upon circumstances and available information.
It is also important to note that balance sheets have been criticized because of the company assets they do not value.
Consider the fact that, of all the assets listed on the balance sheet, none take into account the relative value, or worth, of a restaurant or hotel’s staff, including its managers. 20

21. Balance Sheet Formats
There are two basic methods accountants use to display the information on a balance sheet.
When using the account format, those preparing the balance sheet list the assets of a company on the left side of the report and the liabilities and owner’s equity accounts on the right side. 21

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23. Balance Sheet Formats
When using the report format those preparing the balance sheet list the assets of a company first and then the liabilities and owner’s equity accounts (vertically) 23

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25. Components of the Balance Sheet
The balance sheet is subdivided into components under the broad headings of
Assets,
Liabilities,
Owners’ Equity.
These subclassifications have been created by accountants to make information more easily accessible to readers of the balance sheet and to allow for more rapid identification of specific types of information for decision making. 25

26. Current Assets
Current Assets are those which may reasonably be expected to be sold or turned into cash within one year.
Liquidity is defined as the ease in which current assets can be converted to cash in a short period of time (less than 12 months).
Current assets, typically listed on the balance sheet in order of their liquidity, include:
Cash
Marketable securities
Accounts receivable (net receivables)
Inventories
Prepaid expenses 26

27. Non Current (Fixed) Assets
Non Current (Fixed) Assets consist of those assets which management intends to keep for a period longer than one year, and typically include investments, property and equipment (land, building, furnishings and equipment, less accumulated depreciation), and other assets.
Assets(5:09)
Accounting Basics 3- Assets - YouTube 27

28. Liabilities
Current liabilities are defined as those obligations of the business that will be repaid within a year.
The most important sub-classifications of current liabilities include notes payable, income taxes payable, and accounts payable.
In the hospitality industry, current liabilities typically consist of payables resulting from the purchase of food, beverages, products, services and labor.
Long-term liabilities are those obligations of the business that will not be completely paid within the current year.
Liabilities(4:28) 28

29. Owner’s Equity
For corporations, common stock is the balance sheet entry that represents the number of shares of stock issued (owned) multiplied by the par value (the value of the stock recorded in the company’s books).
Common stock is valued at its historical cost regardless of its current selling price.
Retained earnings are the final entry on the owners’ equity portion of the balance sheet.
If net losses have occurred, the entry amount in this section may be a negative number.
Owner’s Equity(4:38) 29

30. 6-2 Typical Receipts and Payments Classified by Activity –Statements of Cash Flows
Operating activities
Cash inflows:
From sale of goods or services.
From returns on loans (interest) and on equity securities (dividends).
Cash outflows:
To suppliers for inventory.
To employees for services.
To government for taxes.
To lenders for interest.
To others for expenses.
Investing activities
From sale of property, plant, and equipment.
From sale of debt or equity securities of other entities.
From collection of principal on loans to other entities.
To purchase property, plant, and equipment.
To purchase debt or equity securities of other entities.
To make loans to other entities.
Financing activities
From sale of equity securities (company’s own stock).
From issuance of debt (bonds and notes).
To stockholders as dividends.
To redeem long-term debt or reacquire capital stock.

31. Cash Flow Statement(6:52)

32. Format of the Statement of Cash Flows
COMPANY NAME
Statement of Cash Flows
Period Covered
Cash flows from operating activities
(List of individual items)
Net cash provided (used) by operating activities XX
XXX
Cash flows from investing activities
(List of individual inflows and outflows)
Net cash provided (used) by investing activities
Cash flows from financing activities
(Net cash provided (used) by financing activities
Net increase (decrease) in cash
Cash at beginning of period
Cash at end of period
Noncash investing and financing activities
(List of individual noncash transactions)

33. Company A, Inc.
Cash Flow Statement
For the Year Ended Dec 31, 2011
Cash Flows from Operating Activities:
Operating Income (EBIT)
$489,000
Depreciation Expense
112,400
Loss on Sale of Equipment
7,300
Gain on Sale of Land
−51,000
Increase in Accounts Receivable
−84,664
Decrease in Prepaid Expenses
8,000
Decrease in Accounts Payable
−97,370
Decrease in Accrued Expenses
−113,860
Net Cash Flow from Operating Activities
$269,806
Cash Flows from Investing Activities:
Sale of Equipment
$89,000
Sale of Land
247,000
Purchase of Equipment
−100,000
Net Cash Flow from Investing Activities
136,000
Cash Flows from Financing Activities:
Payment of Dividends
−$90,000
Payment of Bond Payable
−200,000
Net Cash Flow from Financing Activities
−290,000
Net Change in Cash
$115,806
Beginning Cash Balance
319,730
Ending Cash Balance
$435,536