You are on page 1of 19

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

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-1

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:

Summary for outside users Detailed departmental statements for insiders

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-2

2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

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


2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-3

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.

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-4

2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

Review of Balance Sheet

Shows financial position of an organization at a particular point in time Assets, liabilities, and owners 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

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-5

2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

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. Accrued wages and accounts payable

Liabilities are related to expenses.

Retained earnings will increase with net income, less any dividends declared.

This is the link to the income statement.


2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-6

Statement of Retained Earnings

Often consolidated into a consolidated statement of owners 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.
2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-7

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 companys ability to earn cash flows.

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-8

2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

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.

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-9

2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

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 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

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-10

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?

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-11

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

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-12

2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

Liquidity Ratios

Current ratio

Current assets/current liabilities


Cash + marketable securities + accts. rec. current liabilities

Quick ratio

Working capital = current assets less current liabilities Does current ratio always have to be greater than 1?
3-13
2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

Turnover Ratios

Inventory turnover

Cost of sales / average inventory


Appropriate

range for this number

Asset turnover
Revenue

/ total assets Revenue per dollar of assets Can management manipulate this figure?

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-14

2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

Solvency Ratios

Debt ratio

Total debt / total assets


Total debt / total equity Hotel industry often has high debt EBIT / interest expense Gives lender a measure of cushion (how much earnings are available to pay interest)

Debt to equity ratio


Times interest earned


Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-15

2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

Profitability Ratios

Profit margin

Net income / total revenue


Measure amount of profit for every $1 in assets Net income / total assets Also a function of profit margin and asset turnover Net income / total revenue x total revenue / total assets Net income / stockholders equity

Return on assets

Return on equity

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-16

2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

Activity Ratios

Occupancy percentage

Occupied room nights key figure used in forecasting

Average Daily Rate (ADR) REVPAR

Occupancy x ADR
Cost of food sold / food revenue Cost of beverage sold / beverage revenue
3-17
2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

Food cost percentage

Beverage cost percentage

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

Investor Ratios

P/E Ratioprice to earnings (net income)

Used by many investors as a buy/sell indicator

Dividend payout ratio

% of earnings paid to shareholders

Dividend yield
Annual dividend / market price per share Not a holding rate of return for the stock

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-18

2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

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 dont tell you what the problem is.

Example: high food cost Why?


2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458

Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor

3-19

You might also like