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The New Lodging ScoreboardsThe uniform system of Accounts

for the Lodging IndustryFOCUS= The Summary Statement of Income

by Raymond S. Schmidgau, Ph.D, CIIAE

Editor's Note : This article is the thirdin a series reviewing various aspectsof the Uniform System of Accounts

for the Lodging Industry, NinthRevised Edition.

== . +=+Tjsi September 1998

The income statement reflects theresults of operations and is pre-

pared at least monthly formanagement's use and quarterly and/orannually for outsiders such as owners,creditors,andgovemmentalagencies.Theusers of the income statement are able toanswermanyquestions,includingthefol-lowing:• How profitable was the hospitality

organization during the most recentmonth?

• What were the total sales for the

period?• lvhat were the total labor costs for

the month?• What is the relationship between

food sales and the cost of food sales?• How much did sales increase over

the same period of the prior year?• How much was spent to market the

lodging operation 's services?These are only a few of the many

questions that are answered by reviewingthe income statements that cover several

periods of time. Further, when the resultsof operations as shown on the incomestatement are compared to the numbers inthe operating budget, management is able

to determine how well the lodging entityis meeting its financial objectives!

This article presents the major ele-ments of the income statement. It dis-cusses the various sections of the pre-scribed format for internal use, and asection of the article is devoted to high-lighting changes in the Summary State-ment of Income prescribed by the ninthedi+ionoftheuniformsystemofAccountsforthe`Lodgingindustiv(USALI).

Major Elements of the IncomeStatementThe income statement reflects the rev-enues, expenses, gains, and losses for a

period of time. Rcve/?ztef represent theinflowofassets,reductionofliabilities,ora combination of both resulting from thesale of goods or services. For a lodgingoperation, revenues generally includeroom sales, food sales, beverage sales,telephone sales, interest income from in-vestments, and rents received from les-sees of retail space.

Expe#sef are defined as the outflow ofassets, increase in liabilities, or a combi-nation of both in the production and ren-dering of goods and services. Expenses of

Raymond S. Schmidgall, Ph.D, CHAE, is Hilton Hotels Professor, the School of Hospitality Business, Michigan StateUniversity.

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Exhibit 1 - Statement of Income Format for External Use

Period

CurrentYear

RevenueRooms

Food

BeverageOther

Total Revenue

Costs and ExpensesPlooms

Food

BeverageAdministrative and General

Interest ExpenseDepreciation and Amortization

Total Costs and Expenses

Income Before Income Taxes

Income TaxesCurrent

Deferred

Total Income Taxes

Net Income

alodgingoperationgenerallyincludecostof goods sold (for example, food andbeverages), labor, utilities, advertising,depreciation, and taxes, to list a few.

Goj.#s are defined as increases in as-sets, reductions in liabilities, or a combi-nation of both resulting from the lodgingoperation's incidental transactions andfrom all other transactions and eventsaffecting the operation during the period,except those that count as revenues orinvestmentsbyowners.Forexample,theremay be a gain on the sale of equipment.Equipment is used by the business to

provide goods and services and, whensold, only the excess proceeds over its netbook value (purchase price less accumu-1ateddepreciation)arerecognizedasgain.

To illustrate this point the followingexample is provided:

The Sunset Inn has just sold the van ithas used to transport guests for the past

!11'11

three years. The van was sold for $6,000.It originally cost $25,000 and was depre-ciated by $20,000 over its three year life.The gain on the sale is $ 1,000 determinedas follows:

Selling price

Less:

Cost $25,000Accumulated

Depreciation L2QJ!QQ

NBV

Gain on Sale

$6,000

5J2QQ

rum

Statements of Income for Externaland lntemal UsersLodging organizations prepare incomestatements for both extemal and internalusers. These statements differ in theamountoffinancialinformationpresented.The statement presented to external usersis relatively brief as it provides only sum-

PriorYear

S

mary detail about the results of opera-tions. The USALJ contains two sampleformats of statements of income for exter-nal users. The shortest of the two is shownin Exhibit 1 .

The degree of detail presented in thestatement of income is somewhat discre-tionaryalthoughthefollowingcaptions-revenue, expenses, interest, depreciationand income taxes-should be shown un-less the amounts are insignificant. Anysignificant individual items should beseparately disclosed. Footnotes to pro-vide supplementary information to thestatement of income and other financialstatements are also required.

Although the amount of operating in-fomiation shown in the statement of in-come and accompanying footnotes maybe adequate for external users to evaluatethe lodging property's operations, man-agement requires considerably more in-

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The Bottomline . 25

formation. Management also needs thisinformation more frequently than outsid-ers . In general, the more frequent the needto make decisions, the more frequent theneed for financial information.Management 's information needs are of-ten met, in part, by detailed monthly in-come statements that reflect budget num-bers and report performance for the mostrecent period, the same period a year ago,and year-to-date numbers for both thecurrent and past years.

If major differences between the year-to-date numbers and the originally bud-geted numbers are expected, the incomestatements of many firms in the lodgingindustry also show the latest forecast ofresults (re-forecasting). Management isthenabletocompareactualresultsagainstthe most recent forecasts.

Management's need for financial in-formationonamonthlybasismaybemet,to a large degree, by using an incomestatement and accompanying departmen-tal statements that are contained in theUSALI .

Contents of the Statement of IncomeThis section of the article focuses on the

prescribed format of the summary state-ment of income prepared for internal useas shown in Exhibit 2.

TheincomestatementpertheusAL/isdivided into three major sections-oper-ated departments, undistributed operat-ing expenses, and the final section whichincludesmanagementfees,fixedcharges,gain or loss on sale of property, and in-come tax.

Thefirstsection,operateddepartments,reports net revenue by department forevery major revenue-producing depart-ment. Net revenue is the result of subtract-ing allowances from related revenues.Allowances include refunds and over-charges at the time of sale that are subse-quentlyadjusted.Forexample,hotelguestsmay have been charged $150 for theirrooms when they should have beencharged a group rate of $120. The subse-

quent adjustment of $30 is treated as anallowance. Revenues earned from non-operating activities such as investmentsare shown with rentals on the lines "Rent-als and Other Income." If individualamounts included are significant, theyshould be reported separately.

For each department generating rev-enues,directexpensesarereported.These

26 . Augustlseptember 1998

expenses relate directly to the departmentincurring them and consist of three majorcategories: cost of sales, payroll and re-1ated expenses, and other expenses. Costof sales is normally determined as fol-lows:

Beginning inventory

Plus: Inventory purchases

Equals: Goods available for sale

Less: Ending inventory

Equals: Cost of goods consumed

Less: Goods used internally

Equals: Cost of goods sold

Cost of sales is determined by startingfirstwithbeginninginventory.Thebegin-ming inventory is the value of the inven-tory at the start of the accounting period.Inventory purchases include the purchasecost of goods for sale plus the relatedshipping cost. An important, but rela-tively small, category of direct expense is"goodsusedintemally."Forexample,food

may be provided free of charge to em-

ployees(employeemeals),toentertainers(entertainersrfomplimentary food) , toguests for promotional pulposes (promo-tion-food), or to other departments(transfers to the beverage department). Ineach case, the cost of food transferredmust be charged to the proper account ofthebenefittingdepartmentandsubtractedto determine the cost of food sold. Forexample, cost of employee meals for therooms department is subtracted to deter-mine cost of food sold. The cost of em-

ployee meals for rooms department em-ployees is shown as an expense on therooms department schedule.

The second major direct expense cat-egoryofoperateddepartmentsis"payrolland related expenses." This category in-eludes the salaries and wages of employ-ees working in the designated operateddepartments (for example, room atten-darts in the rooms department). Salaries,wages, and related expenses of depart-ments not generating revenues but pro-viding service, such as marketing, arerecordedbyservicedepartments.Thecat-egory of "related expenses" includes all

payroll taxes and benefits relating to em-ployees of each operated and service de-partment. For example, in the rooms de-partment, the front office manager's sal-ary and related payroll taxes and benefitswould be included in the "payroll andrelated expenses" of the rooms depart-ment.

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The final major expense category forthe operated departments is "other ex-

penses."Thiscategoryincludesonlyotherdirect expenses. For example, the 14 ma-

jorotherexpensecategoriesfortheroomsdepartment(seeExhibit3fromthet/SALJ)arecable/satellitetelevision,commissions,complimentary guest services, contractservices, guest relocation, guest transpor-tation, laundry and dry cleaning, linen,operating supplies, reservations, telecom-munications,training,uniforms,andother.Expenses such as marketing, administra-tion, and transportation are recorded asexpenses of service departments. Theybenefit the rooms department and otheroperating departments, but only on anindirect basis.

Net revenue less the sum of cost ofsales, payroll and related expenses, andother expenses results in departmentalincome or loss. The departmental incomeor loss is shown on each operateddepartment's schedule. The schedule col-umn on the Summary Statement of In-come (Exhibit 2) references the depart-mental schedule. For the rooms operationthe schedule is simply numbered "1."

The second major section of the state-mentofincomeisundistributedoperatingexpenses. This section includes nine gen-eral categories: administrative and gen-eralexpenses,humanresources,informa-tion systems, security, marketing, fran-chise fees,transportation,propertyopera-tion and maintenance, and utility costs.These expense categories are related tothe various service departments. In theincome statement two of the expense ele-ments-payrollandrelatedexpenses,andother expenses-are shown for each cat-egory. Each of these nine general catego-ries will be briefly discussed. The admin-istrative and general expense categoryincludes service departments such as the

generalmanager'sofficeandtheaccount-ing office. In addition to salaries, wages,and related expenses of service depart-ment personnel covered by administra-tive and general, other expenses include,but are not limited to, credit and commis-sions,professional fees,andprovisionfordoubtfulaccounts.Theadministrativeand

general statement will be provided anddiscussed in detail in an article in a subse-

quent issue o£ The Bottomline .The LrsAL/ recommends a separate

departmental accounting of informationsystems expenses for those lodging op-

Exhibit 2 -Summary Statement of Income (Internal Use)

O|.elated DepartmentsPlooms

Food

BeverageTelecommunications

Garage and Parking

Golf Course

Golf Pro Shop

Guest Laundry

Health Center

Swimming Pool

Tennis

Tennis Pro Shop

Other Operated DepartmentsRentals and Other Income

Total Operated Departments

Undistributed Operating ExpenseslAdministrative and General

Human ResourcesInformation Systems

SecurityMarketingFranchise Fees

TransportationProperty Operation and MaintenanceUtility Costs

Net Cost ofSchedule Revenues Sales

1

23

456

7

8

9

10

11

12

13

14

Total Undistributed Operating Expenses

Totals

SS

Income After Distributed Operating ExpensesManagement Fees 23Rent, PropertyTaxes, and Insurance 24

Income Before Interest, Depreciation and Amortization and Income Taxes2Interest Expense 25

Income Before Depreciation, Amortization and Income TaxesDepreciation and Amortization 26

Gain or Loss on Sale of Property

Income Before Income TaxesIncome Taxes 27

Payroll and Other IncomeRelated Expenses Expenses (Loss)

SS

Net Income

'A separate line for preopening expenses can be included if such costs are captured separately.2Also referred to as EBITDA-Earnings before Interest, Taxes, Depreciation and Amortization.

erations with significant investments in expenses, and otherexpenses. Ifinforma- as part of administrative and general ex-information systems. As with most of the tion systems expenses are not considered penses.other service centers, the two major see- significant, then the USAL/ recommends Another service center for which thetions of expense are payroll and related informationsystemsexpensesbeincluded USAL/recommends separate departmen-

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The Bottomline . 27

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Exhibit 3 -Rooms-Schedule 1

Current Period

lllll]lmll

Revenue

Allowances

Net Revenue

ExpensesSalaries and WagesEmployee Benefits

Total Payroll and Plelated Expenses

Other ExpensesCable/SatelliteTelevision

Commissions

Complimentary Guest Services

Contract ServicesGuest Relocation

GuestTransportationLaundry and Dry Cleaning

Linen

Operating Supplies

Reservations

Telecommunications

Training

Uniforms

Other

Total Other Expenses

Total Expenses

Departmental Income (Loss)

tal accounting is the human resourcesdepartment. This schedule includes laborcosts of departmental personnel and otherexpenses such as employee housing, re-cruiting expenses, costs of relocatingemployees, and training costs. If humanresource expenses are not considered sig-nificant,thentheusAL/recommendstheybe reported as part of the administrativeand general expenses.

The fourth service department is secu-rity. The purpose of this service depart-mentistoprovidesecurityservicesforthelodging facility and the guests. The ex-

penses to be included on the securitydepartment schedule include payroll andrelatedexpenses,andotherexpensessuchas armored car service, operating sup-plies, safety and lock boxes, and training.If security expenses are not consideredsignificant, then the I/SAL/ recommendssecurity expenses be included as part ofthe administrative and general expenses.

28 . Augustlseptember 1998

Marketing expenses include costs re-lating to personnel working in marketingareas of sales, advertising, and merchan-dising. In addition, other marketing ex-

penses include advertising and merchan-dising expenses such as direct mail, in-house graphics, point-of-sale materials,and print, radio, and television advertis-ing. Agency fees and other fees and com-missions are also included as marketingexpenses.Franchise fees,whenapplicableand significant, should be listed as a sepa-rate line item on the summary statementof income. If the franchise fees are insig-nificant, they would be included as part ofthe marketing expenses.

The transportation service departmentprovides transportation services for lodg-ing guests, such as transportation to andfrom the ailport. The expenses to be in-cluded on the transportation departmentschedule include payroll and related ex-

penses, and other expenses such as fuel,

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operating supplies, and repairs and main-tenance. If guest transportation expensesare not considered significant, then theUSALJ recommends transportation ex-penses be included as part of the roomsdepartment expenses.

The eighth major category of undis-tributed operating expenses is propertyoperation and maintenance. Included in

property operation and maintenance aresalaries and related payroll costs of the

property operation and maintenance per-sonnel and the various supplies used tomaintain the buildings, grounds, furni-ture, fixtures, and equipment.

The final category of undistributedoperating expenses is utility costs. Therecommended schedule includes separatelistings of the various utilities, such aselectricity and water. Sales by the hotel totenants and charges to other departmentsare subtracted in detemining net utilitycosts.

Subtracting the total undistributed op-erating expenses from the total operateddepartments' income results in incomeafter undistributed operating expenses.Many industry personnel continue to re-fer to this difference between operatingrevenue and expense as gross operating

profit,orsimplyGOP,butthisisterminol-ogy from an earlier edition of uniformsystem of accounts for hotels.

Operating management is consideredfully responsible for all revenues and ex-

penses reported to this point on the sum-mary statement of income, as they gener-ally have the authority to exercise theirjudgment to affect all these items. How-ever, the management fees and the fixedcharges that follow in the next majorsection of the income statement are theresponsibilityprimarilyofthehospitality

property's board of directors. The ex-penses listed on this part of the statementgenerally relate directly to decisions bythe board, rather than to management de-cisions.

Management fees are the cost of usingan independent management company tooperate the hotel or motel. Managementfees often consist of a basic fee calculatedas a percentage of sales and an incentivefee calculated as a percentage of incomeafter undistributed operating expenses.

Fixed charges are also referred to ascapczc!.ty cos/f , as they relate to the physi-cal plant or the capacity to provide goodsand services to guests. Fixed charges in-clude rent, property taxes, insurance, in-terest, and depreciation and amortization.Rent includes the cost of renting realestate, computer equipment, and othermajor items that, if they had been pur-chased,wouldhavebeenrecordedasfixedassets. Rental of miscellaneous equip-ment for specific functions such as ban-

quets is to be shown as a direct expense ofthe food and beverage department.

Propertytaxesincluderealestatetaxes,

personalpropertytaxes,taxesassessedbyutilities, and other taxes (but not incomeand payroll taxes) that cannot be chargedto guests. Insurance includes the cost ofinsuring the property's building and itscontents against fire, weather, and similarcauses. In addition, the costs of generalinsurance including premiums for liabil-ity, fidelity, and theft are also included asinsurance expense.

Interest expense is the cost of borrow-ing money and is based on the amounts

borrowed, the interest rate, and the lengthof time for which the funds are borrowed.Generally, loans are approved by theoperation's board of directors, as mostrelate to the physical plant. Thus, interestexpenseisconsideredtobeafixedcharge.

Depreciation of fixed assets and amor-tization of other assets are shown on theincome statement as fixed charges. Thedepreciation methods and useful lives offixed assets are normally disclosed infootnotes.

The summary statement of income perthe USALJ then shows gains or losses onthesaleofpropertyandequipment.Againor loss on sale of property results from adifference between the proceeds from thesale and the carrying value (net bookvalue) of the fixed asset. In the USAL/' sincome statement, gains are added whilelosses are subtracted in determining in-come before income taxes.

Finally, income taxes are subtractedfrom income before income taxes to de-temine net income.

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Uniform System of Accounts for the Lodging Industry

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Major Changes in the SummaryStatement of IncomeThe changes in the Summary Statementof Income as recommended in the ninthrevised edition of the USAL/ are fairlyminor.Intheprioreditionfoodandbever-age operations were reported on a singleline, whereas they are shown separated inthe ninth revised edition. The undistrib-uted operating expenses section of thestatement has been expanded to includeseparate line items for security and fran-chise fees. In addition, minor changes interminologyinthissectionincludetheuseof information systems in place of dataprocessing and the use of utility costs toreplace energy costs. The prior editionhad a separate line item for guest enter-tainment which has been dropped fromthe ninth revised edition.

The difference between total operateddepartment income and the total undis-tributed operating expenses is called in-come after undistributed operating ex-penses. Finally, a separate line has been

inserted in the fixed charges section ofThe Summary Statement of Income forEBITDA.

SummaryThe Summary Statement of Income re-fleets the revenues, expenses, gains, andlosses of the lodging property. The state-ment is considered to be dynamic as itcovers a period of time rather than simplya point of time like the balance sheet. Thestatement consists of three major sec-tions:

• operated departments• undistributed operating expenses• non-operating elements

The operated departments section re-veals the net revenue, cost of sales, pay-roll and related expenses, other directexpenses, and income (loss) for each op-erated department. The payroll and re-latedexpenses,otherdirectexpenses,andtotal expenses are shown for each servicecenter included in the undistributed oper-ating expenses of this statement. The final

section includes management fees, fixedcharges, gain or loss on sale of property,and income taxes. These items are eitherthe result of ownership decisions (man-agementfeesandfixedcharges)orarenotdirectly related to operations (gain or losson sale of property and income).

The next article covering the new fi-nancialscoreboardswillcoverthedepart-ment schedules which supplement theSummary Statement of Income. .

The ninth revised edition ofthe Uniform System ofAccounts for the LodgingIndustry is available from theEducational Institute of theAmerican Hotel & MotelAssociation at 800-752-4567.The cost is $55.95.

HOW T0 STAFFTABLE GAMES(continued from page 12)

62 93.0 82.7 77.564 96.0 85.3 80.066 99.0 88.0 82.568 102.0 90.7 85.070 105.0 93.3 87.572 108.0 96.0 90.074 111.0 98.7 92.5

76 114.0 101.3 95.0

78 117.0 104.0 97.5

80 120.0 106.7 100.082 123.0 109.3 102.5

84 126.0 112.0 105.0

86 129.0 114.7 107.5

ConclusionThis article addressed how unique staff-ing is in the table game area of the casino.The authors reviewed how to determinetable games open and the stations re-

quired.Furthermore,theauthorsreviewedhow to staff dealers in regards to a five-day work week, how to account for vaca-tions, and how to staff floolpersons. -

SOURCESKilby, Jim. 1998. Casino Management andOperations. New York: John Wiley Publishers.

30 . Augustlseptember 1998

CAPITAL VS. REVENUE EXPENDITURES:

A SURVEY 0F THE LODGING INDUSTRY(continued from page 17)

• caulking (94 percent)• repairing signs (93 percent)• plumbing repairs (92 percent)• repairs of swimming pool leaks

(89 percent)• regrouting tile (89 percent)• painting (83 percent)• normal roof repairs (83 percent)• repairing swimming pool deck

(73 percent)Expenditures in which respondents

were split included:• reupholstering (59 percent

expensed, 41 percent capitalized)• repairs and major overhauls of

existing equipment (55 percentexpensed, 45 percent capitalized)

• boiler re-tubing (54 percent

expensed, 46 percent capitalized)

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A Need For GuidanceNearly three-quarters of the respondents(74percent)agreedthatguidelinesshouldbeestablishedtoaddresstheexpendituresdiscussed above. Over one-third (34 per-cent) responded that Hospitality Finan-cial and Technology Professionals should

provide such guidance, 18 percent ex-pected the FASB to respond, 15 percentexpectedtheAICPAtorespond,8percentlooked to the lodging industry, 3 percentanticipated guidance from other sources,and 22 percent believed more than one ofthe above mentioned parties should pro-vide guidance. In the meantime, hotelfinancial executives will have to rely ontheir gut instincts and studies such as thisto make decisions on these gray matters.Thankgoodnessweaccountantslookgoodin 8ray! .