ACCOUNTING AND FINANCIAL ANALYSIS

Solutions Manual For Accounting and Financial Analysis in the Hospitality Industry Jo nathan Hales 1st Edition 1 / 4

ACCOUNTING AND FINANCIAL ANALYSIS

IN THE HOSPITALITY INDUSTRY

INSTRUCTORS MANUAL

CHAPTER 1

INTRODUCTION TO NUMBERS, ACCOUNTING

AND FINANCIAL ANALYSIS

Chapter Outline Introduction Num bers – the lifeblood of business Definitions and Formulas Customers, Associates, and Profitability Career Success Model Technical Skills Management/Leadership Skills Financial Skills Marketing Skills High Performance Organizations Financial Statements The Profit & Loss Statement The Balance Sheet The Statement of Cash Flows The Statement of Stockholders Equity Revenues – The Beginning of Financial Performance Formulas Market Segments The Customer Profit – The Ultimate Measure of Financial Performance Department Profit House Profit Net House Profit Profit before and after taxes Summary Hospitality Manager Take-Aways Key Terms Formulas Review Questions Practice Exercises

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Answers to Review Questions

• Name and describe the three main financial statement of a business. Include the

characteristics of each financial statement.The Profit & Loss Statement, The Balance Sheet, and the Statement of Cash Flows.P&L Characteristics

• It covers a specific tim

e period, for example month, accounting period, year.

• It reports the actual financial results for a business for the specific time period.
• It compares the actual financial performance to other measures such as budget, the

previous year, the previous month or previous accounting period.

• It includes a Summary or Consolidated P&L statement and supporting Department

P&L statements

• A new P&L statement is started each month or accounting period and records

information for the current month/accounting period and year to date (YTD).

• Managers are expected to analyze or critique their monthly P&L Statements to

explain variations – both positive and negative - from the budget or from the previous year.Balance Sheet Characteristics

• It m

easures the value or net worth of a company at a specific point in time.

• The fundamental accounting equation describes the Balance Sheet

Assets = Liabilities + Owner Equity

• It is made up of accounts organized by assets, liabilities, and owner equity.
• These accounts are divided into current accounts under one year and long term

accounts over one year.

• Each account has a beginning balance, monthly activity, and an ending balance.

The ending balance for one month becomes the beginning balance for the next month.

• Operations managers are not expected to provide monthly Balance Sheet critiques.
• Accounting managers balance monthly the accounts on the Balance Sheet

Statement of Cash Flows Characteristics 1.It involves the cash account of the Balance Sheet 2.It has beginning and ending balances.

3.It shows how money is used in the daily operations of the business.

4.It measures liquidity.

5.It is a fundamental component of working capital.

6.It reflects the increases and decreases in Balance Sheet accounts.

7.There are three classifications of Cash Flow:

Operating activities Financial activities Investment activities.

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• Define REVPAR and explain why it is so important as a revenue measurement for

room revenues as well as total hotel financial performance.

REVPAR is an important measure of a hotel’s ability to generate room revenue by measuring average rate and occupancy percentage in maximizing total room revenue. It is calculated in two ways, Total Room Revenue divided by Total Rooms, or Average Room Rate times Room Occupancy Percentage. REVPAR shows how well the hotel management is managing both average room rates and total rooms sold. It is important because room departments in a hotel have the highest department profit margins, are generally the largest revenue departments, and maximizing total room revenue will often have the greatest impact on maximizing total hotel profits.

• Name and describe the four profit levels in a hotel.

Department Profit measures the profit generated by each individual revenue/profit department in the hotel.Total Department Profits measure the total profitability of all the revenue/profit departments in the hotel.House Profit/Gross Operating Profit measures the hotel profit remaining after the cost of expense centers have been deducted from Total Department Profits. It measures management’s ability to manage all the hotel resources to maximize House Profit.Net House Profit/Adjusted Gross Operating Profit measures the total hotels financial performance after fixed expenses are deducted from House Profit.*Profit After Taxes measures the remaining profit after all expenses and taxes have been paid. It is often distributed between the owners, management companies, franchise companies, or any other organizations that have a financial interest in the hotel.

• What is the difference between capitalization and working capital? What is each used

for in business operations?

Capitalization involves the start up, expansion or renovation of a business and generally involves the long term assets, long term liabilities and owner equity accounts.Working Capital involves the day-to-day operations of a company and generally involves the short term asset and short term liability accounts. It includes revenues and the managing of daily cash flows in the business.

• Why is understanding accounting concepts and methods of financial analysis

important to a hospitality manager?

Accounting Concepts form the foundation for worki ng with numbers in measuring financial performance. They are rules, policies and procedures that ensure that the numbers are prepared and presented accurately for anyone that reads or uses financial reports.Methods of Financial Analysis are ways to use the financial numbers produced by operations to evaluate the success or lack of success of the business. It involves analyzing and comparing numbers to guidelines such as the budget or last years actual 18

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