Solution manual managerial accounting and finance for hospitality operations CHAPTER 02

To maximize earnings, an organization should have financial flexibility, which is the operation’s ability to change its cash flows to meet unexpected needs and take advantage of new prof

UNDERSTANDING FINANCIAL STATEMENTS OF

HOTELS AND RESTAURANTS

I Questions

1 Assets are things owned by the firm, liabilities are claims of outsiders to assets, and owners’ equity is claims of owners to assets The relationship involving the three is stated as follows: Assets = Liabilities + Owners’ Equity

2 Creditors are interested in the hospitality operation’s ability to pay its current and future obligations The ability to pay its current obligations is shown, in part, by a comparison of current assets and current liabilities The ability to pay its future obligations depends, in part, on the relative amounts of long-term financing by owners and creditors Everything else being the same, the greater the financing from investors, the higher the probability that long-term creditors will be paid and the lower the risk that these creditors take in “investing” in the enterprise

Investors or owners are most often interested in earnings that lead to dividends

To maximize earnings, an organization should have financial flexibility, which is the operation’s ability to change its cash flows to meet unexpected needs and take advantage of new profitable investments, thus increasing net income and, ultimately, cash dividends for investors

3 Some of the limitations of the balance sheet are:

– It often does not reflect current values of some assets, such as property and equipment For hospitality operations, whose assets are appreciating rather than depreciating, this difference may be significant

– They fail to reflect many elements of value to hospitality operations Most important to hotels, motels, restaurants, clubs, and other sectors of the hospitality industry are people Nowhere in the balance sheet is there a reflection of the human resource investment

– Other valuable elements not directly shown on the balance sheet include such things as goodwill, superior location, loyal customers, and so on Understandably, it may be difficult to assign an objective value to these elements

– They are less useful because they become outdated The user of the balance sheet must be aware that the financial position reflected at year-end may be quite different one month later

– The balance sheet, like much of accounting, is based on judgments; that is,

it is not exact Certainly, assets equal liabilities plus owners’ equity However, several balance sheet items are based on estimates, e.g., the amounts shown as accounts receivable (net) reflect the estimated amounts

to be collected

4 The term “current” as used in the balance sheet refers to (1) order of the convertibility of assets to cash, and (2) maturity of liabilities

Current assets consist of cash and any other assets or resources that are expected

to be realized in cash or to be sold or consumed during the normal operating cycle of the business (or one year, if the normal operating cycle is less than twelve months)

Current liabilities are debts that will become due within the normal operating cycle of the business, usually within one year; they normally will be paid, when due, from current assets

Assets and liabilities that are not current are classified as non-current

5 The major differences between the balance sheet and the income statement are:

a The income statement covers a period while the balance sheet is prepared as

of the last day of the accounting period

b The income statement reflects operations of the hospitality property for the period between balance sheet dates while the balance sheet reflects the financial position of the hospitality operation – its assets, liabilities, and owners’ equity – at a given date

6 Three examples of direct operating expenses are: cost of rooms sold, direct labor expense (of personnel working in the rooms department) and other direct expenses (supplies used in the rooms department)

7 Cost of food sold is determined by adding the beginning inventory and purchases, then subtracting from their sum the ending inventory

8 Creditors find that the income statement yields significant information for determining the ability to realize income from operations which in turn will indicate also their ability to pay interest on debts Funds generated from operations may be used to settle the company’s debts

9 Purposes of the Statement of Cash Flows

a To predict future cash flows

b To evaluate management decisions

c To determine the ability to pay dividends to stockholders and interest and principal to creditors

d To show the relationship of net income to changes in the business’ cash

10 The most important source of cash for many successful companies is from operating activities A large positive operating cash flow is a good sign because

it means funds have been internally generated with no fixed obligations or commitment to return such to anybody

11 It is possible for cash to decrease during a year when income is high because cash may be used not only for operating activities but also for investing and financing activities

12 Interest expense is included as an operating activity because it enters into the determination of net income However, SFAS No 20 (revised 2000) states that financing activities may include not only the principal amount borrowed or repaid but also the interest paid on the debt incurred

13 Transactions involving accounts payable are not considered to be financing activities because such transactions are used to obtain goods and services rather than to obtain cash Furthermore, purchases of goods and services relate to a company’s day-to-day operating activities

II Practical Problems

PROBLEM 1

EQ Common Stock Issued EQ Retained Earnings

A Repair Parts Inventory EQ Paid-In Capital

PROBLEM 2

PROBLEM 3

Assets

-Intangible Assets

Other Assets

-PROBLEM 4

The investment in Toyota Motor Company stocks maybe shown as

a) Marketable securities if the company intends to sell them when the need for cash arises

or b) Investment (long-term) if the company intends to hold on them for income purposes either in form of dividends or gain from appreciation of market value

and other business reasons

PROBLEM 5

The purchase will be recorded as investment because Elle Corporation fully owns Cosmo Company and therefore control of operations can be fully exercised

PROBLEM 6

PROBLEM 7

Minda’s Inn Current Assets Section of the Balance Sheet

December 31, 2003 Current Assets

Less: Allowance for doubtful accounts 16,316 111,863

Minda’s Inn Current Liabilities Section of the Balance Sheet

December 31, 2003 Current Liabilities

Current maturities on long-term debt 25,824

PROBLEM 8

1 ANSWER: P 51,000 (P21,000 + P22,000 + P8,000)

2 ANSWER: P 30,500 (P12,000 + P18,500)

3 ANSWER: P (20,500) (P30,500 – P51,000)

4 ANSWER: P 8,000 increase (P26,500 – P18,500)

5 ANSWER: P 110,000

6 ANSWER: P 261,000 (P325,000 – P64,000)

7 ANSWER: P 50,500 (P80,500 – P30,000)

PROBLEM 9

Rob Roy’s Restaurant Income Statement For the Year Ended December 31, 2003 Sales

Cost of Sales

Operating Expenses

Schedule A (Cost of Sales – Food Department)

P480,000

P458,000

Schedule B (Cost of Sales – Beverage Department)

Beginning inventory P 15,000

P145,000

PROBLEM 10

Requirement (1)

P 89,216

P 73,371 Less: Goods used internally

Employee meals – general manager P 85

Employee meals – food department 648

P 72,382 Add: Transfers from the Bar to Kitchen 46

Requirement (2)

1 Food Department

2 Administrative Department

3 Food Department

4 Marketing Department

PROBLEM 11

Happy Motel Rooms Department Schedule For the year ended December 31, 20xx Revenue

Expenses

Salaries P 10,000

Other Expenses

PROBLEM 12

Activity Transaction Operating Investing Financing Source Use

1 Short-term

investment

securities were

purchased

2 Equipment was

purchased

3 Accounts payable

increased

4 Deferred taxes

decreased

5 Long-term bonds

were issued

6 Common stock was

sold

7 Interest was paid to

long-term creditors

8 A long-term

mortgage was

entirely paid off

9 A cash dividend

was declared and

paid

Activity Transaction Operating Investing Financing Source Use

10 Inventories

11 Accounts receivable

12 Depreciation

charges totaled

P200 thousand for

* Adjustments to net income

PROBLEM 13

For 2003:

1 Gross profit P507,000 (P561,000 – P54,000)

2 Total fixed charges P68,000 (P17,000 + P21,000 + P30,000)

3 Average tax rate 25% (P21,938  P87,750)

5 Total overhead expenses P140,250

6 Payroll cost percentage 28.75% (P161,000  P560,000)

7 Food cost percentage 30% (P54,000  P180,000)

PROBLEM 14

3 (4) Noncash transaction 11 (1) Operating

5 (4) Noncash transaction 13 (1) Operating

7 (1) Operating 15 (2) Investing

8 (3) Financing

PROBLEM 15

5 (4) Noncash transaction 13 (3) Financing

8 (4) Noncash transaction

PROBLEM 16

1 Cash received from hotel guests during 2003:

Collection from customers

Less: Increase in AR 10,000 2,530,000

2 Beginning balance, Dividends payable P 10,000

Ending balance, Dividends payable (15,000)

4 Analysis of long-term debt:

Reductions during the year

Reclassification as current debt (50,000)

Beginning balance, Income tax payable 4,000

Ending balance, Income tax payable (5,000)

PROBLEM 17

Ilang-Ilang Inn Statement of Cash Flows For 2004 Cash Flows from Operations

Add (Deduct) Adjustments to reconcile net income to cash

flows from operations:

Cash Flows from Investing Activities

Cash Flow from Financing Activities

Payment of current portion of long-term debt (50,000)

(100,000)

PROBLEM 18

Food Department Income Statement For the year ended December 31, 20xx Revenue

Expenses

Employee Meals Expense 34,400

Other Expenses

Miscellaneous Expense 12,400

PROBLEM 19

P22,670

Promotional Meals Cost 556 974

PROBLEM 20

P127,102 Less: Food inventory, August 31 25,622

Cost of sales P101,480

Transfers kitchen to the bar 214 3,450

P 98,030 Add: Transfers bar to the kitchen 96

PROBLEM 21

Consolidated Income Statement

Total Dining Room Banquet Room Beverages Requirement (a)

Cost of sales 144,800 83,200 33,600 28,000

Direct costs

Wages & salaries 103,200 66,560 24,640 12,000 Other direct costs 27,200 16,640 8,960 1,600 Total 130,400 83,200 33,600 13,600 Contribution to indirect

Requirement (b)

Allocated costs

Administrative &

Property operation &

Insurance expense 2,000 800 1,000 200 Total 56,000 25,040 23,160 7,800 Net income (loss) before

(a) Allocation

(1) General & administrative (based on revenue)

Banquet Room P112,000 / P400,000 = 28%

(2) Marketing costs (based on revenue)

Dining Room = 52%

(3) All other indirect costs (based on square footage)

Requirement (c)

Based on the schedule in Requirements a & b, no division should be closed because they all showed positive contribution to indirect costs and net income after allocating all the indirect costs This proves the fact that they are all profitable

PROBLEM 22

Requirement (a)

Balance Sheet

Assets

Current Assets

Noncurrent Assets

Cost Accumulated Depreciation Net

Liabilities and Stockholders’ Equity

Liabilities

Current Liabilities

Income taxes payable 6,100

Noncurrent Liabilities

Stockholders’ Equity

Total liabilities and stockholders’ equity P777,900

Requirement (b)

Trial Balance Accounts

Debit Balance

Credit Balance

Accumulated Depreciation: Building

Accumulated Depreciation: Equipment

Accumulated Depreciation: Furnishings