chap03.ppt
TRANSCRIPT
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-1
Chapter 3Introduction
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 ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-2
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 ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-3
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
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-4
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 ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-5
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
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-6
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.
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-7
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.
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-8
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.
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-9
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 ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-10
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 financial
statements
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-11
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 ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-12
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
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-13
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?
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-14
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 ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-15
Solvency Ratios Debt 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)
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-16
Profitability Ratios Profit margin
Net income / total revenue Return on assets
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
Return on equity Net income / stockholder’s equity
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-17
Activity Ratios Occupancy percentage
Occupied room nights key figure used in forecasting
Average Daily Rate (ADR) REVPAR
Occupancy x ADR Food cost percentage
Cost of food sold / food revenue Beverage cost percentage
Cost of beverage sold / beverage revenue
Hospitality Financial ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-18
Investor Ratios
P/E Ratio—price 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 ManagementBy Robert E. Chatfield and Michael C. Dalbor
©2005 Pearson Education, Inc.Pearson Prentice HallUpper Saddle River, NJ 07458
3-19
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?