Professional Documents
Culture Documents
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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2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
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:
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2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
Widely used format for income statements in the hospitality industry Focuses primarily on departmental performance
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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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2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
Shows financial position of an organization at a particular point in time Assets, liabilities, and owners equity Current items listed first
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2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
For a hospitality business this is land, building, and equipment. Accrued wages and accounts payable
Retained earnings will increase with net income, less any dividends declared.
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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.
2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
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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:
Recent accounting scandals have placed a premium on a companys ability to earn cash flows.
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2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
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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2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
Who is responsible?
Auditors are there to assess if the statements make a fair representation of firm position and performance. Investors learned a hard lesson in 200001 about financial statements and are aware of the need for change. Some potential remedies include:
Rotating auditors regularly CEOs taking responsibility for veracity of financial statements
2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
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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 methods?
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2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
Classes of Ratios
Liquidityability to meet current debts Turnovermanagements effectiveness regarding the management of assets Solvencyability to meet long-term debts or the extent of long-term financing Profitabilityhow profitable the operation is Activityinvolves key measures of operating performance Investorthose ratios of special significance to outside investors
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2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
Liquidity Ratios
Current ratio
Quick ratio
Working capital = current assets less current liabilities Does current ratio always have to be greater than 1?
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2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
Turnover Ratios
Inventory turnover
Asset turnover
Revenue
/ total assets Revenue per dollar of assets Can management manipulate this figure?
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2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
Solvency Ratios
Debt ratio
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2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
Profitability Ratios
Profit margin
Return on assets
Return on equity
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2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
Activity Ratios
Occupancy percentage
Occupancy x ADR
Cost of food sold / food revenue Cost of beverage sold / beverage revenue
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2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
Investor Ratios
Dividend yield
Annual dividend / market price per share Not a holding rate of return for the stock
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2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458
Be careful not to label ratios by themselves as good or bad. Different users of ratios have different perspectives.
Ratios may tell you there is a problem, but they dont tell you what the problem is.
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