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Presents strategies for application development, interface design, and enabling Web-based access.
* Includes numerous case studies and examples from the private and public sectors.
* Provides information on integrating legacy MIS systems and planning for future developments in database design.
This chapter discusses the two major financial statements-the balance sheet and the income statement. In hospitality operations, balance sheets are normally prepared for an overall operation, and income statements are prepared by each of the subordinate operating departments (or divisions). Two basic classifications of costs, direct and indirect, are incurred in a hospitality operation.
Departmental income statements report operating costs that are classified as direct costs, that are directly traceable to the department. Indirect costs are costs that are not easily traceable to a specific department, and are usually undistributed costs. Undistributed costs are normally incurred to support the overall facility and will normally appear on a summary income statement. All costs shown in a generic income statement will be shown as cost of sales, and named expenses.
Cost of sales was discussed in an example in Chapter 1. Calculating the cost of sales will be expanded in this chapter. Four methods of calculating the value of inventory will be discussed and how to adjust the cost of food and beverages used to arrive at net cost of sales will be explained. These adjustments may include interdepartmental transfers, as well as adjustmentsfor employee and promotion meals.
Responsibility accounting will be introduced and discussed for profit and cost centers. Allocation methods used to distribute indirect costs to departments will be discussed, as will the effect that a change to sales mix among departments would have on overall profit.
A sample balance sheet will be illustrated. An account called retained earnings is demonstrated as the link between the income statement and balance sheet in a corporate business entity. This section will also discuss the difference between the equity section of a balance sheet for sole proprietorships, partnership, and incorporated business entities.
After studying this chapter and completing the assigned exercises and problems, the reader should be able to
1 Explain the main purpose of the income statement and balance sheet.
2 Explain the value of a uniform system of accounts.
3 Define and explain the difference between a balance sheet and an income statement.
4 Using examples, describe the difference between a direct cost, indirect cost, and undistributed costs (expenses).
5 Calculate the value of ending inventory using each method discussed, and demonstrate possible adjustments to find the net cost of sales.
6 Prepare income statements in proper format.
7 Discuss the concept of responsibility accounting.
8 Explain the effect a specific change in interdepartmental revenue mix will have on overall operating income (income before tax).
9 List and give an example of each of the six major categories (classifications) of accounts that may appear on a balance sheet.
10 Define, calculate, and explain the purpose of retained earnings.
11 Prepare a balance sheet in proper format and state the two forms of balance sheet presentations. Discuss the importance and limitations of a balance sheet.
UNDERSTANDING FINANCIAL STATEMENTS
Being able to understand financial statements does not necessarily mean you must be able to prepare them. However, if you are able to prepare a set of statements, primarily a balance sheet and income statement, then you have the advantage of being able to analyze the information in greater depth and, therefore, use it to enhance the results of a business operation.
Although there are many internal (various levels of management) and external users, (employees, stockholders, creditors, county, and local and national regulatory agencies), the primary emphasis of this text is for use of internal management, from the department head up to general management. Managers at all levels need financial information if they are to make rational decisions for the immediate or near future. Rational decisions and the financial statements are sources of required information.
UNIFORM SYSTEM OF ACCOUNTS
Most organizations in the hospitality industry (hotels, motels, resorts, restaurants, and clubs) use the Uniform System of Accounts appropriate to their particular segment of the industry. The Hotel Association of New York initiated the original Uniform System of Accounts for Hotels (USAH) in 1925. The system was designed for classifying, organizing, and presenting financial information so that uniformity prevailed and comparison of financial data among hotels was possible.
One of the advantages of accounting uniformity is that information can be collected on a regional or national basis from similar organizations within the hospitality industry. This information can then be reproduced in the form of average figures or statistics. In this way, each organization can compare its results with the averages. This does not mean that individual hotel operators, for example, should be using national hotel average results as a goal for their own organization. Average results are only a standard of comparison, and there are many reasons why the individual organization's results may differ from industry averages. But, by making the comparison, determining where differences exist, and subsequently analyzing the causes, an individual operator at least has information from which he or she can then decide whether corrective action is required within the operator's own organization.
INCOME STATEMENT AND BALANCE SHEET
Although the balance sheet and the income statement are treated separately in this chapter, they should, in practice, be read and analyzed jointly. The relationship between the two financial statements must always be kept in mind. This relationship becomes extremely clear when one compares the definition and objective of each statement.
* The purpose of the balance sheet is to provide at a specific point in time a picture of the financial condition of a business entity relative to its assets, liabilities, and ownership equity. By category, each individual account, by name and its numerical balance, is shown at the end of a specific date, which is normally the ending date of an operating period.
* The purpose of the income statement is to show economic results of profit-motivated operations of a business over a specific operating period.
* The ending date of an operating period indicated in the income statement is normally the specific date of the balance sheet.
An annual operating period may be any 12-month period beginning on any date and ending on any date 12 months later. In addition, a business entity may use an interim reporting period such as weekly, monthly, quarterly, or semiannually.
The balance sheet presentations differ little from one type of hospitality business to another. As well, the presentations are quite similar to most presentations of non-hospitality-business operations. However, this similarity is not true of the income statement.
Most hospitality operations are departmentalized, and the income statement needs to show the operating results department by department as well as for the operation as a whole. Exactly how such an income statement is prepared and presented is dictated by the management needs of each individual establishment. As a result, the income statement for one hotel may be completely different from another, and income statements for other branches of the industry (resorts, chain hotels, small hotels, motels, restaurants, and clubs) will likely be very different from each other because each has to be prepared to reflect operating results that will allow management to make rational decisions about the business's future.
Discussion of the income statement in this chapter will be in general terms only and not limited to any one branch of the hospitality industry. The USAH recommends a long-form income statement, though it is not mandatory.
Revenue is defined as an inflow of assets received in exchange for goods or services provided. In a hotel, revenue is derived from renting guest rooms, while in a restaurant, revenue is from the sale of food and beverages. Revenue is also derived from many other sources such as catering, entertainment, casinos, space rentals, vending machines, and gift shop operations, located on or immediately adjacent to the property. It is not unusual to receive nonoperating revenues, which are classified as "Other income" items in the income statement following operating income (before income tax). Other income items are nonoperating revenues not directly related to the primary purpose of the business, which is the sale of goods and services. Other income includes items such as interest income on certificates of deposits, notes receivable or investment dividends, and potentially franchise or management fees. When such revenue is received, it should be shown following operating income in a classified income statement before taxes are determined.
The accrual accounting method recognizes revenue when earned, not necessarily when it is received. Revenue is created and recorded to a revenue account by receipt of cash or the extension (giving) of credit. The recognition of revenue will, in theory, increase ownership equity. In reality, ownership equity will increase or decrease after expenses incurred are matched to revenues (matching principle) earned during an operating period. Ownership equity increases if revenues exceed expenses (R > E); likewise, if revenue is less than expenses (R < E), ownership equity will decrease.
As discussed in Chapter 1, the cash basis of accounting requires that cash change hands for the recognition of revenues and/or expenses; in theory, the capital account increases with the sale of goods or services and decreases as expense items are paid. The remainder of the text will be discussed based on accrual accounting.
Expenses are defined as an outflow of assets consumed to generate revenue. The accrual method requires that expenses be recorded when incurred, not necessarily when payment is made. Although the recognition of expenses in theory increases ownership equity, in reality ownership equity will increase or decrease only after expenses incurred are matched to revenues earned at the end of an operating period.
Determining the increase or decrease in ownership equity follows the same revenue minus expense (R - E) functions noted in the preceding revenue discussion. For example, in a restaurant, food inventory is purchased for resale and recorded as an asset; the cost of sales for a food operation is not recognized until it has been determined how much food inventory was used.
DEPARTMENTAL CONTRIBUTORY INCOME
The term departmental contributory income is used in this text and shows departmental revenue minus its direct costs to arrive at income before tax.
By matching direct expenses with the various revenue-producing activities of a department, a useful evaluation tool is created. The departmental income statement provides the basis for an effective evaluation of the department's performance over an operating period. In general, the format in condensed form of a departmentalized operation is shown below, using random numbers:
Departmental sales revenue $580,000 Less: Departmental expenses (direct costs) (464,000) Departmental contributory income $116,000
It is essential that the departmental contributory income statement provide maximum detail by showing each revenue and expense account to provide the information needed by management to conduct an effective and efficient evaluation.
If departmental managers are to be given authority and responsibility for their departmental operations, they need to be provided with more accounting information than revenue less total expenses. In other words, expenses need to be listed item-by-item, otherwise department heads will have no knowledge about which expenses are out of line, and where additional controls may need to be implemented to curb those expenditures.
ANSWERS TO QUESTIONS
The income statement can provide answers to some important questions:
* What were sales last month? How does that compare with the month before and with the same month last year?
* Did last month's sales keep pace with the increased cost of food, beverages, labor, and other expenses?
* What were the sales, by department, for the operating period?
* Which department is operating most effectively?
* Is there a limit to maximum potential sales? Have we reached that limit? If so, can we increase sales in the short run by increasing room rates and menu prices or in the long run by expanding the premises?
* What were the food and beverage cost and gross profit percentages? Did these meet our objectives?
* Were operating costs (such as for labor and supplies) in line with what they should be for the sales level achieved?
* How did the operating results for the period compare with budget forecasts?
The income statement shows the operating results of a business for a period of time (week, month, quarter, half-year, or year). The amount of detail concerning revenue and expenses to be shown on the income statement depends on the type and size of the hospitality establishment and the needs of management for more or less information.
For example, a typical hotel would prepare departmental income statements for each of its operating departments. Exhibit 2.1 illustrates an income statement for the food department of a small hotel. Similar statements would be prepared for the beverage department and the rooms department. Others would be prepared for any other operating departments large enough to warrant it. Alternatively, other smaller departments could be grouped together into a single income statement. This would include operating areas such as newsstands, gift shops, laundry, telephone, parking, and so on.
In many establishments, it is not possible to show the food department as a separate entity from the beverage department because these two departments work closely together. They have many common costs that cannot accurately be identified as belonging to one or the other. For example, it is difficult to determine when a server is working for the food department and when a server is working for the beverage department if they serve both food and beverages. Because of this, there is only one income statement produced for the food and beverage department.
Excerpted from The Design and Implementation of Geographic Information Systems by John E. Harmon Steven J. Anderson Excerpted by permission.
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Chapter 1: Introduction.
Who Should Read This Book.
What Is a Geographic Information System?
Corporate or Enterprise Geographic Information Systems.
The GIS Strategic Plan.
Chapter 2: Before Design: Needs Assessment and Requirements Analysis.
Need for Education, Support, and Commitment of Management—Corporate Implementation Takes Time.
Manage Users? Expectations—No Unrealistic Promises.
Needs Assessment/Requirements Analysis.
Assessing the Current Users.
Other Factors with Users.
Evaluating Existing Data.
Assessing Costs and Benefits.
Pulling the Needs Together.
Chapter 3: Designing the GIS Database Schema.
Elements of a Schema.
Tables and Relationships.
Chapter 4: Designing Spatial Data.
Choosing the Appropriate M ix of Data Models.
Choosing a Subset of Reality.
The Two Principal Data Models.
Layers and Objects.
Representing Geographic Features.
Types of Spatial Objects.
Issues around the Third Dimension.
Accuracy, Precision, and Completeness.
Accuracy Concerns—Global Positioning Systems.
Accuracy across Layers.
Choosing a Coordinate System and Map Projection.
Decimal Longitude and Latitude or Projected Data.
Characteristics of Map Projections.
Spanning Existing Map Projection Zones.
Selection of Projection for Large Areas.
Chapter 5: Design Issues for Attribute Data.
General Principles: Fields in Both D and G Tables.
Specific Principles for G Tables.
Principles for Fields in D Tables.
Designing Input Elements.
Design of Output Elements.
Chapter 6: Remotely Sensed Data as Background Layers and Data Sources.
Aerial Photography as Backdrop Information.
Capture Data as Well?
Dealing with the Images.
Integrating Remotely Sensed Information with GIS.
Questions to Ask.
Chapter 7: Implementation: Data Development and Conversion.
System Configuration and Product Architecture Plan.
Data Development and Conversion Plan.
Capturing Digital Data.
Optical Character Recognition.
In-House or Out-Source Data Development of Conversion.
Selecting a Vendor.
Perform a Pilot Project.
Chapter 8: Implementation: Selecting Hardware and Software.
How to Select Your Software.
Types of Networks.
The Capacity of the Network.
Chapter 9: Designing the Organization for GIS.
Ownership of Geographic Information.
Staffing the Design and Implementation Process.
Where to Put the GIS.
Designing the Data Flow.
Chapter 10: Early Management Concerns: Interacting with the System.
Managing User Roles.
Managing Desktop Interfaces.
Managing World Wide Web-Based Interfaces.
GIS Interaction and the Organization.
A New Committee.
Controlling Public Access.
Managing the System—The Maintenance Plan.
GIS Data Distribution through the World Wide Web.