Professional Documents
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Chapter Outline
The Purpose of the Income Statement Income Statement Preparation Income Statement Analysis
Learning Outcomes
State the purpose of regularly preparing an income statement for a hospitality business. Explain the way managers and accountants actually prepare an income statement. Analyze an income statement to improve the operation of your own business.
When an accurate income statement is used to provide information, the businesss owners, lenders, investors and managers can all make better decisions about how best to develop and operate it.
2009 John Wiley & Sons Hoboken, NJ 07030
Return on Investment
Investors are particularly interested in return on investment (ROI), which measures the quality or strength of an investment. The income statement is the source of the information required to determine the numerator of the ROI calculation. ROI is computed as follows:
Money earned on funds invested Funds invested = ROI
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714,079 111,813 132,143 7,624 63,530 88,942 35,577 71,154 120,000 55,907 1,400,769 276,428 84,889 191,539 76,616 114,923
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(Figure 3.3 continued) Total Operated Department Income Undistributed Operating Expenses Administrative and General Information Systems Human Resources Security Franchise Fees Transportation Marketing Property Operations and Maintenance Utility Costs Total Undistributed Operating Expenses Gross Operating Profit Rent, Property Taxes, and Insurance Depreciation and Amortization Net Operating Income Interest Income Before Income Taxes Income Taxes Net Income 1,188,750
113,100 29,700 48,600 23,100 0 27,900 129,360 99,750 89,250 560,760 627,990 146,700 105,000 376,290 106,000 270,290 108,116 162,174
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Figure 3.4 Hotel Income Statement Horizontal Format Blue Lagoon Waterpark Resort Income Statement For the Period: January 1 through January 31, 2010 Payroll and Related Expenses 247,200 182,400 44,580 4,500 15,000 4,080 497,760
Net Revenue Operated Departments Rooms Food Beverage Telecommunications Other Operated Departments Rentals and Other Income Total Operated Departments Undistributed Operating Expenses Administrative and General Information Systems Human Resources Security Franchise Fees Transportation Marketing Property Operations and Maintenance Utility Costs Total Undistributed Operating Expenses Gross Operating Profit Rent, Property Taxes, and Insurance Depreciation and Amortization Net Operating Income Interest Income Before Income Taxes Income Taxes Net Income Prepared using USALI 2,100,150 1,200,000 600,000 240,000 6,000 45,000 9,150 2,100,150
76,800 12,000 43,800 16,620 0 4,200 64,320 24,300 0 242,040 237,840 739,800
36,300 17,700 4,800 6,480 0 23,700 65,040 75,450 89,250 318,720 494,520
113,100 29,700 48,600 23,100 0 27,900 129,360 99,750 89,250 560,760 627,990
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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.
2009 John Wiley & Sons Hoboken, NJ 07030
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Depreciation
It is important to note here that depreciation expense in all forms of the income statement serves a very specific purpose. Depreciation is a method of allocating the cost of a fixed asset over the useful life of the asset. Depreciation is subtracted from the income statement primarily to lower income, thus lower taxes. The portion of assets depreciated each year is considered tax deductible because it is subtracted on the income statement before taxes are calculated.
2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes
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Accounting Period
For many businesses, the accounting periods established coincide with the calendar months of the year. In some cases, businesses prefer to create income statements that are 28 days long. This helps the manager compare performance from one period to the next without having to compensate for extra days in any one period. Businesses may also elect to create income statements bi-monthly, quarterly, annually, weekly, daily, or even hourly.
2009 John Wiley & Sons Hoboken, NJ 07030
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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
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Expense Timing
Accrual accounting requires a businesss revenue to be reported when earned and its expenses to be recorded when incurred. This matching principle is designed to closely tie expenses of a business to the actual revenues those expenses helped the business generate. The consistency principle of accounting requires managers to be uniform in decision making. That is, if an expense is treated in a specific manner in one instance, it should be treated in an identical manner in all subsequent situations.
2009 John Wiley & Sons Hoboken, NJ 07030
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Expense Classification
Expense classification is the process of carefully considering how a businesss 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.
2009 John Wiley & Sons Hoboken, NJ 07030
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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.
2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes
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Figure 3.9 Principles of Income Statement Preparation A properly prepared income statement: 1. Clearly identifies the business whose revenues and expenses are being summarized 2. Plainly states the specific accounting period for which the statement has been prepared 3. Includes a summary, in the most informative (detailed) manner practical, of all the revenue generated by the business during the accounting period 4. Summarizes all accounting period expenses utilized by the business to generate the stated revenue 5. Utilizes a logical and consistent system to classify expenses 6. Provides additional clarity via the use of schedules where appropriate 7. Incorporates the use of a uniform system of accounts if applicable
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Revenue Analysis
When restaurant managers seek to increase revenue, they must do so by:
Increasing the number of guests served, and/or Increasing the average amount spent by each guest.
When hotel managers seek to increase rooms revenue, they must do so by:
Increasing the number of rooms sold, and/or Increasing the average daily rate (ADR) for the rooms it sells.
2009 John Wiley & Sons Hoboken, NJ 07030
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Revenue Analysis
Additional factors to be considered when making a complete evaluation of revenue increases include:
The number of days included in the accounting period Changes in the number of high or low volume days included in the accounting period Differences in date placement of significant holidays (i.e. month or day of week) Changes in selling prices Variations in operational hours
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Expense Analysis
Guests cause businesses to incur costs. If there are fewer guests, there are likely to be fewer costs, but fewer profits as well! The real question to be considered is not whether costs are high or low. The question is whether costs are too high or too low, given managements view of the value it hopes to deliver to the guest and the goals of the operations owners.
2009 John Wiley & Sons Hoboken, NJ 07030
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Vertical Analysis
Vertical analysis compares all items on the income statement to revenues using percentages. In this approach, an operations total revenue figure takes a value of 100%. When utilizing vertical analysis, individual sources of revenue and the operations expenses are expressed as a fraction of total revenues. Each percentage computed is a percent of a common number. As a result, vertical analysis is also sometimes referred to as common-size analysis. Figures 3.11 and 3.12 show vertical analysis of a hotel income statement and a restaurant income statement, respectively.
2009 John Wiley & Sons Hoboken, NJ 07030
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(Figure 3.11 continued) Total Operated Department Income Undistributed Operating Expenses Administrative and General Information Systems Human Resources Security Franchise Fees Transportation Marketing Property Operations and Maintenance Utility Costs Total Undistributed Operating Expenses Gross Operating Profit Rent, Property Taxes, and Insurance Depreciation and Amortization Net Operating Income Interest Income Before Income Taxes Income Taxes Net Income 1,188,750 56.6
113,100 29,700 48,600 23,100 0 27,900 129,360 99,750 89,250 560,760 627,990 146,700 105,000 376,290 106,000 270,290 108,116 162,174
5.4 1.4 2.3 1.1 0.0 1.3 6.2 4.7 4.2 26.7 29.9 7.0 5.0 17.9 5.0 12.9 5.1 7.7
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714,079 111,813 132,143 7,624 63,530 88,942 35,577 71,154 120,000 55,907 1,400,769 276,428 84,889 191,539 76,616 114,923
28.1 4.4 5.2 0.3 2.5 3.5 1.4 2.8 4.7 2.2 55.1 10.9 3.3 7.5 3.0 4.5
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Vertical Analysis
For example, when a hotels accountant reports the costs of the hotels food department, these are commonly expressed as a percentage of total hotel revenue.
go figure!
When analyzing the Blue Lagoon Water Park Resort income statement as presented in Figure 3.11, managerial accountants would compute the food cost (food cost of sales) as a percentage of total revenue. Thus: Food Costs (Food Cost of Sales) = Food Cost% Total Revenue or $ 178,200 $ 2,100,150 = 8.5%
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Vertical Analysis
In a restaurant income statement, all ratios are calculated as a percentage of total sales except the following:
Food costs are divided by food sales. Beverage costs are divided by beverage sales. Food gross profit is divided by food sales. Beverage gross profit is divided by beverage sales.
In restaurants, food and beverage items use their respective food and beverage sales as the denominator so that these items can be evaluated separately from total sales.
2009 John Wiley & Sons Hoboken, NJ 07030
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go figure!
When analyzing Joshuas income statement as presented in Figure 3.12, managerial accountants would compute his food cost percentage as a percentage of food sales, rather than total sales. Thus: Food Costs = Food Cost % Food Sales or $ 767,443 $ 2,058,376 = 37.3 %
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Vertical Analysis
Vertical analysis may be used to compare a units percentages with industry averages, budgeted performance, other units in a corporation, or percentages from prior periods. Profit margin is the most telling indicator of a manager's overall effectiveness at generating revenues and controlling costs in line with forecasted results.
2009 John Wiley & Sons Hoboken, NJ 07030
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go figure!
As can be seen in Figure 3.12, profits for Joshuas refer to the net income figure at the bottom of his income statement. Joshua's net income for this year was $114,923 and his total sales for this year were $2,541,206. His profit percentage using the profit margin formula is as follows:
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Vertical Analysis
In both the USAR and USALI, an important objective is that of responsibility accounting for each separate department. It is important for upper management to know how each department is performing, so individual department managers can be held responsible for their own efforts and results.
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Vertical Analysis
Expenses should increase when increased revenues require management to provide more products or labor to make the sale. If expenses are reduced too much, the effect on revenue can be both negative and significant. Managers analyzing the expense portion of an income statement should be most concerned about the relationship between revenue and expense (vertical analysis) and less concerned about the total dollar amount of expense.
2009 John Wiley & Sons Hoboken, NJ 07030
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Vertical Analysis
As a professional hospitality manager, you can do even more to analyze expenses in each line item. Figure 3.13 expresses each direct operating expense as a percentage of total direct operating expenses. This is a form of vertical analysis because the common denominator for all expense % calculations is total direct operating expenses.
2009 John Wiley & Sons Hoboken, NJ 07030
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Silverware Kitchen Utensils Kitchen Fuel Cleaning Supplies Paper Supplies Bar Expenses Menus and Wine Lists
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Vertical Analysis
For example, the $40,964 expended for laundry and linen comprises 31.0% of all direct operating expenses.
go figure!
The formula utilized to compute the percentage in this example is:
Specific Expense Total Expenses = Specific Expense % or Laundry and Linen Expense Total Direct Operating Expenses = Laundry and Linen Expense % or $40,964 $132,143
= 31.0%
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Horizontal Analysis
Managers can utilize horizontal analysis (also called comparative analysis) to evaluate the dollars or percentage change in revenues, expenses, or profits. A horizontal analysis of income statements requires at least two different sets of data. Managers may be concerned with comparisons such as:
Current period results vs. prior period results Current period results vs. budgeted (planned) results Current period results vs. the results of similar business units Current period results vs. industry averages
2009 John Wiley & Sons Hoboken, NJ 07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes
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Determining Variance
The variance shows changes from previously experienced levels, and will give you an indication of whether your numbers are improving, declining, or staying the same. All dollar variances and percentage variances of expenses on the income statement can be calculated in the same way. The comparative income statement helps managers analyze their expenses and take corrective action if it is needed.
2009 John Wiley & Sons Hoboken, NJ 07030
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go figure!
To calculate the variance, Joshua would use the following formula:
Sales This Year Sales Last Year =Variance or $2,541,206 - $ 2,306,110 = $235,096
Effective managers are also interested in computing the percentage variance, or percentage change, from one time period to the next. Thus, Joshuas sales percentage variance is determined as follows:
(Sales This Year Sales Last Year) Sales Last Year or ($2,541,206 - $2,306,110) $2,306,110
= Percentage Variance
= 10.2%
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(go
figure! continued)
Of course, an alternative and shorter formula for computing the percentage variance is as follows:
= Percentage Variance
Another way to compute the percentage variance is to use a math shortcut, as follows:
= Percentage Variance
= 10.2%
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For example, Figure 3.16 shows a comparative analysis for the Property Operations and Maintenance Schedule for the Blue Lagoon.
2009 John Wiley & Sons Hoboken, NJ 07030
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Figure 3.16 Comparative Analysis - Property Operations and Maintenance Schedule Blue Lagoon Water Park Resort Property Operations and Maintenance Schedule For the Period: January 1 through January 31, 2010 Difference $ % (89) 29 660 600 (1.9) 0.2 9.6 2.5
Budget Payroll and Related Expenses Chief Engineer Engineer Assistants Benefit Allocation Total Payroll and Related Expenses Other Expenses Computer Equipment Equipment Rental Electrical & Mech. Equipment Elevators Elevator Repairs Engineering Supplies Floor Covering Furniture Grounds HVAC (heating/ventilation and air conditioning.) Kitchen Equipment Laundry Equipment Light Bulbs Maintenance Contracts Operating Supplies Painting & Decorating Parking Lot Pest Control Plants & Interior Plumbing & Heating Refrigeration & A/C Signage Repair Snow Removal Travel & Entertainment Telecommunications Trash Removal Uniforms Total Other Expenses Total Property Operations and Maintenance $ 4,800 12,060 6,840 $23,700
$1,200 3,900 9,000 2,520 420 1,350 600 9,000 3,000 9,000 300 450 900 4,200 480 1,500 1,800 1,200 885 4,500 5,460 300 6,000 1,200 600 1,800 1,650 $73,215 $96,915
$1,695 4,200 8,490 2,520 840 1,050 0 11,460 3,360 8,550 534 336 900 3,948 477 852 2,568 1,290 888 5,340 5,880 0 5,910 570 528 1,680 1,584 $75,450 $99,750
495 300 (510) 0 420 (300) (600) 2,460 360 (450) 234 (114) 0 (252) (3) (648) 768 90 3 840 420 (300) (90) (630) (72) (120) (66) 2,235 2,835
41.3 7.7 (5.7) 0.0 100.0 (22.2) (100.0) 27.3 12.0 (5.0) 78.0 (25.3) 0.0 (6.0) (0.6) (43.2) 42.7 7.5 0.3 18.7 7.7 (100.0) (1.5) (52.5) (12.0) (6.7) (4.0) 3.1 2.9
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go figure!
Thus, for example, (from Figure 3.16) in the area of computer equipment, the variation (in dollars) from budget for the Blue Lagoons Property Operations and Maintenance department would be computed as:
Some managers prefer to express variations from budget in percentage terms. Thus, the percentage variance for computer equipment is determined as follows:
= Percentage Variance
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(go
figure! continued)
Of course, an alternative and shorter formula for computing the percentage variance is as follows:
Another way to compute the percentage variance is to use a math shortcut, as follows:
1 = Percentage Variance or
$1,695 $1,200
1 = 41.3%
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