The income statement is generally considered the more important of the two major financial reports. If sales revenue is greater than expenses, the amount of the difference represents operating income. Prepaid cost / Life (years, months)Prepaid expense per period Depreciation is a method of systematically writing off the cost of long-lived assets (except land) over the life of the asset.
This chapter discusses the two major financial statements—the balance sheet and the income statement. The ending date of an operating period indicated in the income statement is normally the specific date of the balance sheet.
Undistributed Operating Expenses ᎏᎏ
The periodic method relies on a physical count and cost- ing of the inventory to determine the cost of sales. Commonly referred to as FIFO, the first-in, first-out inventory control procedureworks as the name implies—the first items received are assumed to be the first items sold. The value of ending inventory is the total cost shown in the final tier of the balance available column.
Commonly referred to as LIFO, the last-in, first-out inventory control procedureworks as the name implies—the newest or last items received are assumedto be the first items sold, leaving the oldest items in inventory. ᎏᎏCost of sales (CS) Sales flow is from the bottom to top of the inventory tiers with the LIFO method. The value of ending inventory is the total cost shown in the final tier of the balance avail- able column.
The opposite effect would be the bar adding the cost of the transfer to adjust the cost of sales—beverage. The balance sheet provides a picture of the financial condition of a busi- ness at a specific point in time. In general terms, the ownership equitysection of the balance sheet is the dif- ference between total assets and total liabilities.
True value.Because transactions are recorded in the value of the dollar at the time the transaction occurred, the true value of some assets on the balance sheet may not be apparent. For each of the following inventory valuation methods, calculate the value of ending inventory and the cost of sales as of June 30. However, the rest of the chapter concentrates on the basic analysis of financial statements, with the emphasis on balance sheet and the income statement.
Period 1 % Change / Period 1 Percentage Change
However, for the cost of sales, the cost of each product is divided by its respective sales revenue. A per-guest average can be determined using the following concept: sales revenue / guests, cost / guests, or operating income. Subsequent periods of sales rev- enue or cost figures are expressed as a percentage of the sales revenue or cost figures used in the first period.
With the index numbers identified, convert sales revenue and cost of sales food from historic to current dollars. P3.6 A motel had the following annual sales revenue and average room rate figures for the last five years. Use the index numbers identified to convert the reported yearly sales revenue to current dollars.
P3.14 A motel had the following annual sales revenue and average room rate figures for the last five years. Use the index numbers identified to convert the annual sales revenue to current dol- lars. Calculate the cost percentages for food cost, beverage cost, and the total cost of sales as a percentage of sales revenue.
Common-size analysis expresses each item as a per- centage of total sales revenue for the income statement and total assets for the balance sheet.
Liabilities & Stockholders’ Equity ᎏᎏ
Long-term solvency ratios.These ratios are also called net worth ratios, and they measure a company’s ability to meet its long-term debt repay- ment responsibilities. Included are ratios that describe total assets to to- tal liabilities, total liabilities to total assets, total liabilities to total ownership equity, cash flow from operating activities to total liabilities,.
Stockholders’ Equity ᎏᎏ
Total Liabilities & Stockholders’ Equity $ ᎏᎏ
Depending on the volume of credit card sales and the efficiency of credit card companies, the turnover rate. Credit card receivables ratios will be discussed as a percentage of total credit card revenue, total credit revenue, and total sales revenue. Credit card receivables ratios based on credit card revenue, total credit revenue, and total sales revenue.
This ratio will show the relationship of credit card receivables to credit card revenue, which is the most accurate method:. This method also allows the determi- nation of monthly average credit card receivables for a seasonal operation. The ultimate skewing of credit card receivables occurs when any reference to credit sales is omitted from the calculation.
The ratio to express credit card receivables as a percentage of total revenue, which excludes both forms of credit revenue, is. The percentage credit card receivables and accounts receivable based on total credit revenue or total revenue is less accurate and less meaningful. Use of average credit card receivables as a percentage of credit card revenue rather than total credit revenue or total sales revenue provides the most accurate and meaningful results.
The turnover ratio expresses the relationship of credit card revenue to av- erage credit card receivables as the inverse of the previous ratio.
ᎏᎏ times
This ratio uses the credit card turnover ratio to create an understandable cor- relation to the repetitive cycle of credit card sales and the collection of credit card receivables over an annual operating period in days. In essence, this col- lection ratio tells us the average number of days it is taking to collect on credit card receivables.
ᎏᎏ times
ᎏᎏ days
Although accounts receivable is decreasing due to increasing use of credit cards, they will continue to be used. Our discussion of accounts receivable ratios will follow the same approach used for credit card ratios. This ratio is best expressed as accounts receivable as a percentage of ac- counts receivable credit revenue.
If cash and credit card and accounts receivable credit sales are not maintained separately within the total. Thus, the ratios will produce the best and most accurate evaluation of average accounts receivable if accounts receivable credit revenue is used. The equation to find accounts receivable as a percent- age of accounts receivable credit revenue is.
The ratio tells us that over the year an average of 5.5 percent of accounts receivable credit revenue was in the form of accounts receivable during any given day of operations. Though far from being the best method, an annual ratio could be calculated using total credit revenue or total sales revenue rather than accounts receivable credit revenue. The equation to calculate the accounts receivable average collection period is Days in the period / Accounts receivable turnover ratio for the period.
Examples were shown where total credit revenue and total revenue replaced credit card and accounts receivable revenues.
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Inventory turnoverratios are discussed in some detail in the section on cash conservation and working capital management in Chapter 11. The working capital turnover ratio is a measure of the effectiveness of the use of working capital. In general, the rapidly increased use of credit cards relative to accounts receivable has had the effect of increasing working capital turnover ratios.
A hospitality operation should probably try to find its most appropriate level of working capital and then compare future performance with this optimum level. Too much working capital (that is, too low a turnover ratio) means ineffective use of funds. Too little working capital (indicated by too high a turnover ratio) may lead to cash difficulties if revenue begins to decline.
Note also that, all other factors being equal, the higher the working capital turnover ratio, the lower will be the current ratio. This means that if an estab- lishment has little or no credit sales and a very low level of inventory (e.g., a motel doing cash-only business), it will have both a low current ratio and a high working capital turnover. Thus, with reference to the earlier section on the cur- rent ratio, creditors prefer a low working capital turnover, owners prefer a high turnover, and management tries to maintain a reasonable balance between the two extremes to maximize profits by reducing the amount of money tied up in current assets, while maintaining sufficient liquidity to take care of unantici- pated emergencies requiring cash.
The fixed asset turnoverratio assesses the effectiveness of the use of fixed as- sets in generating revenue.
ᎏᎏ times
Revenue per seat is calculated by dividing revenue for the period by the number of seats the restaurant has. The calculation is similar to the percentage to revenue example shown for the previous ratio. This ratio may be calculated on a daily, monthly, or an annual basis by di- viding sales revenue by rooms occupied for the specific period.
Ratios should be selected for use, which are most appropriate for the operation being analyzed. Sales revenue ᎏᎏᎏAverage working capital Operating days in the period ᎏᎏᎏᎏᎏ Inventory turnover ratio for the period. Cost of sales for the period ᎏᎏᎏᎏAverage inventory for the period Market price per share.
E4.7 A restaurant and beverage operation reported the following for the op- erating month of March, which had 23 operating days. With the recovered records and infor- mation obtained from outside sources, you believe a balance sheet can be reconstructed for the period ending on the date of the fire. Balance sheets for the previous three years indicated that current as- sets on average represented 25 percent of total assets.
The owners are considering new furnishings for the bar at an estimated cost of $20,000 using their own funds.
