1. Chapter 5 The Income Statement
HFT 2401
Chapter 5
The Income Statement

2. Major Financial Statements Used by Business
Income Statement
Statement of Operations
Profit & Loss Statement
Reports Revenues and Expenses
Covers a period of time
Balance Sheet
Statement of Financial Position
Covers a particular point in time
Static in nature

3. Users of the Financial Statements
Internal – Managers of the business
External
Potential Investors
Creditors
Owners not active in managing the business

4. Major Elements of the Income Statement
Revenues (Sales)
Cost of Goods Sold
Expenses
Gains and Losses
Income Taxes
Extraordinary Items
Earnings per share

5. Revenues Revenues for services are recorded when the event occurs
Legal title passes from the seller to the buyer
Selling price has been established
Seller’s obligation is complete
The service has been exchanged for another asset (cash or accounts receivable)

6. Cost of Goods Sold
Goods that are purchased for resale are initially recorded as inventory
When they are sold, they are transferred to the Cost of Goods Sold expense account

7. Cost of Goods Sold Calculation
Beginning Inventory
+ Purchases
= Goods Available for Sale
- Ending Inventory
= Cost of Goods Used
+ - Transfers in (out)
= Cost of Goods Sold

8. Expenses Day to Day Operational Expenses Payroll Expenses
Specific Departmental Expenses
Repair & Maintenance Expense
Sales Expenses
Administrative Expenses
Other Undistributed Expenses

9. Gains & Losses
Gains – Increases in assets, reductions in liabilities or a combination of both resulting from incidental transactions
ie: Sale of used equipment
Losses – Decreases in assets, increases in liabilities or a combination of both resulting from incidental transactions
ie: Storm Damage Deductibles

10. Income Taxes Based on the relevant revenues and expenses
Usually a variance in taxes booked and taxes paid – due to various accruals
Recorded as deferred income taxes (liability)

11. Extraordinary Items Must meet two criteria
Must be of a high degree of abnormality and be clearly unrelated to the ordinary and typical activities of the business
Infrequent occurrence – must not be reasonably expected to occur again

12. Earnings per Share
Total net earnings of the business for each common share outstanding
EPS = Net Income
Common Shares Outstanding
Only used for business organized as corporations or LLC

13. Income Statements for External Users
Usually contain only summary detail about operational results
Sales (total) by segment
Expenses (total) by segment
Operating profit by segment
Overhead expenses (total)
Interest Expense
Interest Income
Income before taxes
Provision for taxes
Net income
Earnings per share

14. Income Statements for Internal Users
In addition to summary information, internal users require detailed departmental statements listing each individual line item
Departmental statements are also known as schedules
Uses the Uniform System of Accounts for the Lodging Industry (USALI)
Allows better comparisons
Based on responsibility accounting

15. Income Statement per USALI
Three major sections
Operated Departments
Undistributed Operating Expenses
Other
Management fees
Fixed charges
Gains / losses
Income Taxes

16. Operated Departments
Reports net revenue by department for every major producing department
Revenues
- Allowances
- Cost of Goods Sold
- Payroll and Related Expenses
- Specific Departmental Expenses
= Departmental Net Income

17. Undistributed Operating Expenses
Administrative and General
Human Resources
Information Systems
Security
Sales and Marketing
Franchise Fees
Transportation
Property Operations and Maintenance
Utilities

18. Other Expenses Management fees Fixed Expenses – Capacity Costs Rent
Property Taxes (Real Estate & Personal Property)
Insurance
Interest Expense
Capital Leases
Depreciation and Amortization

19. Statement of Retained Earnings
Used for corporations
Similar to statement of owners equity
Beginning Retained Earnings
+ (-) Net Income (Loss)
(-) Dividends Declared (Not necessarily paid)
+ (-) Prior Period Adjustments
= Current Retained Earnings Balance

20. Income Statement Analysis
Common Size Statements
Vertical Analysis
Total Revenue Equal 100%
Each Expense Shown As a Percentage of Total Revenue
Compare to Industry, Like Businesses or Self

21. Vertical Analysis Example
Rooms Revenue 500, %
Food Revenue 100, %
Beverage Revenue , %
Other Revenue 200, %
Total Revenue ,000, %
Expenses
Room Expenses 100, %
Food Expenses , %
Beverage Expenses , %
Other Expenses 100, %
Total Expenses , %
Net Income , %

22. Homework Assignment Problem 1 Problem 2 Problem 5 Problem 9 Problem 10