Transcript 4464-chapter-03.ppt

HFT 4464
Chapter 3
Review of Financial
Statements & Selected Ratios
7/12/2016
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Chapter 3 Introduction

This chapter will provide a review of the
major financial statements and selected key
ratios used in the industry.

Financial statements reviewed:
 Income statements
 Balance sheet
 Statement of retained earnings
 Statement of cash flows
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Income Statement

Details revenues and expenses for a period of
time

Income statements can be as detailed as
necessary for use by managers and investors:
 Summary for outside users
 Detailed departmental statements for
insiders
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Uniform System of Accounts

Widely used format for income statements in
the hospitality industry

Focuses primarily on departmental
performance
 Revenues and expenses specifically
attributable to that department

Undistributed operating expenses include
items like marketing and maintenance
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Uniform System For Restaurants

Restaurants also follow a specific format.

First expense shown is cost of goods sold for
both food and beverage.

This is followed by other expenses

Not completed on a departmental basis like
hotels because the restaurant is really only
one department.
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Review of Balance Sheet


Shows financial position of an organization at
a particular point in time
Assets, liabilities, and owner’s equity

Current items listed first
 “Current” meaning convertible to cash or
paid in cash within a year

Retained earnings are not the same as cash
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Relationship Between Balance Sheet and
Income Statement

Assets used to generate revenue and cash flow:
 For a hospitality business this is land, building,
and equipment.

Liabilities are related to expenses.
 Accrued wages and accounts payable

Retained earnings will increase with net income,
less any dividends declared.
 This is the link to the income statement.
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Statement of Retained Earnings

Often consolidated into a consolidated statement
of owner’s equity

Basic calculation
 Balance at beginning of period
 Plus: net income
 Less: dividends declared
 Equals: ending balance

There is no cash in retained earnings.

It is simply accrued earnings less dividends
declared to the shareholders.
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Statement of Cash Flows

Its purpose is to show where cash flow came
from and where it went during a period of time.

Three major sections of the statement:
 Operating activities
 Investing activities
 Financing activities

Recent accounting scandals have placed a
premium on a company’s ability to earn cash
flows.
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Statement of Cash Flows

Why has this become so important?
 Balance sheet uses estimates.
 Enron “hid” debt from its balance sheet.
 Worldcom categorized expenses as
“investments” (assets).
 Income
statement is completed on accrual
basis (when do we recognize the revenue).
 Cash
flows represent the actual flows of cash
and are more difficult to “invent.”
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Validity of Financial Statements

Who is responsible?
 Management is responsible for the
accounting and financial reporting systems.

Auditors are there to assess if the statements
make a fair representation of firm position and
performance.

Investors learned a hard lesson in 2000–01
about financial statements and are aware of
the need for change. Some potential remedies
include:
 Rotating auditors regularly
 CEOs taking responsibility
for veracity of
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financial statements
Ratio Analysis

Ratio analysis is used to take existing financial
accounting information and generate new
information.

Ratios on their own are not very meaningful.

Various ratios of a hospitality organization can
be compared to industry averages. However:
 Which segment of the hospitality industry?
 Which companies are included in the
industry averages?
 Are there enough firms in the average to
make the ratios meaningful?
 Do all the firms use the same accounting
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methods?
Classes of Ratios


Liquidity—ability to meet current debts
Turnover—management’s effectiveness regarding
the management of assets

Solvency—ability to meet long-term debts or the
extent of long-term financing

Profitability—how profitable the operation is

Activity—involves key measures of operating
performance

Investor—those ratios of special significance to
outside investors
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Liquidity Ratios

Current ratio
 Current assets/current liabilities

Quick ratio
 Cash + marketable securities + accts. rec.
current liabilities

Working capital = current assets less current
liabilities

Does current ratio always have to be greater than 1?
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Turnover Ratios

Inventory turnover
 Cost of sales / average inventory
 Appropriate range for this number

Asset turnover
 Revenue
/ Average Total Assets
 Revenue per dollar of assets
 Can management manipulate this figure?
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Solvency Ratios

Debt to Asset ratio
 Total debt / total assets

Debt to equity ratio
 Total debt / total equity
 Hotel industry often has high debt

Times interest earned
 EBIT / interest expense
 Gives lender a measure of “cushion” (how much
earnings are available to pay interest)
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Profitability Ratios

Profit margin
 Net Income / Total Revenue

Return on assets
 Measure amount of profit for every $1 in assets
 Net Income / Average Total Assets

DuPont Ratio


( Net Income / Total Revenue ) x
Total Revenue / Average Total Assets )
Return on equity
 Net Income / Average Stockholder’s Equity
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(
Activity Ratios

Occupancy percentage


Average Daily Rate (ADR)


Rooms Occupied / Rooms Available
Rooms Revenue / Rooms Sold
REVPAR
Occupancy Percentage x ADR
 Rooms Revenue / Rooms Available


Food Cost Percentage


Cost of food sold / food revenue
Beverage Cost Percentage

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Cost of beverage sold / beverage
revenue
Investor Ratios

P/E Ratio—price to earnings (net income)


Dividend payout ratio


Market Price / Earnings Per Share
Dividend Per Common Share / Earning Per Share
Dividend yield

Annual Dividend / Market Price Per Share
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Limitations of Ratio Analysis

Be careful not to label ratios by themselves as
“good” or “bad.”

Different users of ratios have different
perspectives.
 Example: Lenders vs. owners regarding
the current ratio

Ratios may tell you there is a problem, but
they don’t tell you what the problem is.
 Example: high food cost
 Why?
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Homework:
Problems 1,2,3 & 5
7/12/2016
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