Solution manual managerial accounting and finance for hospitality operations CHAPTER 02

CHAPTER 2
UNDERSTANDING FINANCIAL STATEMENTS OF
HOTELS AND RESTAURANTS
I.

Questions
1.

Assets are things owned by the firm, liabilities are claims of outsiders to assets,
and owners’ equity is claims of owners to assets. The relationship involving the
three is stated as follows: Assets = Liabilities + Owners’ Equity.

2.

Creditors are interested in the hospitality operation’s ability to pay its current
and future obligations. The ability to pay its current obligations is shown, in
part, by a comparison of current assets and current liabilities. The ability to pay
its future obligations depends, in part, on the relative amounts of long-term
financing by owners and creditors. Everything else being the same, the greater
the financing from investors, the higher the probability that long-term creditors
will be paid and the lower the risk that these creditors take in “investing” in the
enterprise.
Investors or owners are most often interested in earnings that lead to dividends.
To maximize earnings, an organization should have financial flexibility, which is
the operation’s ability to change its cash flows to meet unexpected needs and
take advantage of new profitable investments, thus increasing net income and,
ultimately, cash dividends for investors.

3.

Some of the limitations of the balance sheet are:

–

It often does not reflect current values of some assets, such as property and
equipment. For hospitality operations, whose assets are appreciating rather
than depreciating, this difference may be significant.

–

They fail to reflect many elements of value to hospitality operations. Most
important to hotels, motels, restaurants, clubs, and other sectors of the
hospitality industry are people. Nowhere in the balance sheet is there a
reflection of the human resource investment.

–

Other valuable elements not directly shown on the balance sheet include
such things as goodwill, superior location, loyal customers, and so on.
Understandably, it may be difficult to assign an objective value to these
elements.


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

4.

–

They are less useful because they become outdated. The user of the balance

sheet must be aware that the financial position reflected at year-end may be
quite different one month later.

–

The balance sheet, like much of accounting, is based on judgments; that is,
it is not exact. Certainly, assets equal liabilities plus owners’ equity.
However, several balance sheet items are based on estimates, e.g., the
amounts shown as accounts receivable (net) reflect the estimated amounts
to be collected.

The term “current” as used in the balance sheet refers to (1) order of the
convertibility of assets to cash, and (2) maturity of liabilities.
Current assets consist of cash and any other assets or resources that are expected
to be realized in cash or to be sold or consumed during the normal operating
cycle of the business (or one year, if the normal operating cycle is less than
twelve months).
Current liabilities are debts that will become due within the normal operating
cycle of the business, usually within one year; they normally will be paid, when
due, from current assets.
Assets and liabilities that are not current are classified as non-current.

5.

The major differences between the balance sheet and the income statement are:
a.
b.

The income statement covers a period while the balance sheet is prepared as
of the last day of the accounting period.

The income statement reflects operations of the hospitality property for the
period between balance sheet dates while the balance sheet reflects the
financial position of the hospitality operation – its assets, liabilities, and
owners’ equity – at a given date.

6.

Three examples of direct operating expenses are: cost of rooms sold, direct
labor expense (of personnel working in the rooms department) and other direct
expenses (supplies used in the rooms department).

7.

Cost of food sold is determined by adding the beginning inventory and
purchases, then subtracting from their sum the ending inventory.

8.

Creditors find that the income statement yields significant information for
determining the ability to realize income from operations which in turn will
indicate also their ability to pay interest on debts. Funds generated from
operations may be used to settle the company’s debts.


Understanding Financial Statements of Hotels and Restaurants

9.

2-3

Purposes of the Statement of Cash Flows
a. To predict future cash flows
b. To evaluate management decisions
c. To determine the ability to pay dividends to stockholders and interest
and principal to creditors
d. To show the relationship of net income to changes in the business’ cash.

10. The most important source of cash for many successful companies is from
operating activities. A large positive operating cash flow is a good sign because
it means funds have been internally generated with no fixed obligations or
commitment to return such to anybody.
11. It is possible for cash to decrease during a year when income is high because
cash may be used not only for operating activities but also for investing and
financing activities.
12. Interest expense is included as an operating activity because it enters into the
determination of net income. However, SFAS No. 20 (revised 2000) states that
financing activities may include not only the principal amount borrowed or
repaid but also the interest paid on the debt incurred.
13. Transactions involving accounts payable are not considered to be financing
activities because such transactions are used to obtain goods and services rather
than to obtain cash. Furthermore, purchases of goods and services relate to a
company’s day-to-day operating activities.
II. Practical Problems
PROBLEM 1
L
A
A
L
EQ
EQ

A
A

Accounts Payable
Marketable Securities
Land
Mortgage Payable
Capital
Common Stock Issued
Prepaid Rent Expense
Repair Parts Inventory

PROBLEM 2

A
A
A
L
EQ
EQ
A
EQ

Accounts Receivable
Investments
Building
Sales Tax Payable
Withdrawals
Retained Earnings
Food Inventory

Paid-In Capital


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

Assets
Land
Building
Equipment
Other Assets
Total

P 60,000
200,000
40,000
10,000
P310,000

PROBLEM 3
Assets
-----------------Intangible Assets
Organization Costs
Franchise

P 1,300
75,000

Other Assets

Utility Deposits
------------------

500

PROBLEM 4
The investment in Toyota Motor Company stocks maybe shown as
a)

Marketable securities if the company intends to sell them when the need for
cash arises
or
b) Investment (long-term) if the company intends to hold on them for income
purposes either in form of dividends or gain from appreciation of market
value.
and other business reasons.
PROBLEM 5
The purchase will be recorded as investment because Elle Corporation fully owns
Cosmo Company and therefore control of operations can be fully exercised.
PROBLEM 6
1. A
4. C
2. B2
5. D
3. B4
6. G
PROBLEM 7

7. A
8. B2

9. A

10. B2
11. G
12. C

13. G
14. B4
15. C

16. B1
17. G
18. B1

19. C
20. A
21. G


Understanding Financial Statements of Hotels and Restaurants

2-5

Minda’s Inn
Current Assets Section of the Balance Sheet
December 31, 2003
Current Assets
Demand deposits, BPI
Savings account, BPI
Certificates of deposit

Marketable securities
Accounts receivable
Less: Allowance for doubtful accounts
Notes receivable
Inventories
Prepaid Expenses
Total current assets

P

P 128,179
16,316

8,803
11,738
2,934
134,634

111,863
22,420
23,241
13,499
P 329,132

Minda’s Inn
Current Liabilities Section of the Balance Sheet
December 31, 2003
Current Liabilities
Accounts payable
Notes payable

Accrued salaries
Advance deposits - banquets
Dividends payable
Current maturities on long-term debt
Total current liabilities
PROBLEM 8
1.

ANSWER: P

51,000

(P21,000 + P22,000 + P8,000)

2.

ANSWER: P

30,500

(P12,000 + P18,500)

3.

ANSWER: P

(20,500)

(P30,500 – P51,000)

4.

ANSWER: P 8,000 increase

5.

ANSWER: P

110,000

6.

ANSWER: P

261,000

(P325,000 – P64,000)

7.

ANSWER: P

50,500

(P80,500 – P30,000)

PROBLEM 9

(P26,500 – P18,500)

P

58,690
42,611
78,293
14,203
21,246
25,824
P 240,867


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

Rob Roy’s Restaurant
Income Statement
For the Year Ended December 31, 2003
Sales
Food
Beverage
Other Sales
Total Sales
Cost of Sales
Food (Schedule A)
Beverage (Schedule B)
Total Cost of Sales
Gross Profit
Operating Expenses
Salaries

Wages
Fringe Benefits
Employee Meals
Payroll Taxes
Direct Operating Expenses
Music
Marketing
Heat, light and power
Administrative and general
Repairs
Rent
Depreciation
Total Operating Expenses
Operating Income
Interest
Income Before Income Taxes
Income Taxes
Net Income

P1,200,000
500,000
20,000
P1,720,000
P 458,000
128,000
586,000
P1,134,000
P 150,000
280,000
50,000

5,000
30,000
100,000
20,000
30,000
35,000
92,000
30,000
152,000
50,000
1,024,000
P 110,000
20,000
P 90,000
27,000
P 63,000

Schedule A (Cost of Sales – Food Department)
Beginning inventory
Add: Purchases
Less: Ending Inventory
Schedule B (Cost of Sales – Beverage Department)

P 20,000
460,000
P480,000
22,000
P458,000

Understanding Financial Statements of Hotels and Restaurants

Beginning inventory
Add: Purchases

2-7

P 15,000
130,000
P145,000
17,000
P128,000

Less: Ending Inventory
Cost of Sales
PROBLEM 10
Requirement (1)
Inventory, December 1, 2003
Add: Purchases

P 12,376
76,840
P 89,216
15,845
P 73,371

Less: Inventory, December 31, 2003
Less: Goods used internally
Employee meals – general manager
Employee meals – food department

Promotional meals

P 85
648
256

Add: Transfers from the Bar to Kitchen
Cost of Food Sold

989
P 72,382
46
P 72,428

Requirement (2)
1.
2.
3.
4.

Food Department
Administrative Department
Food Department
Marketing Department

PROBLEM 11
Happy Motel
Rooms Department Schedule
For the year ended December 31, 20xx
Revenue

Transient - regular
- groups
Other
Allowances
Net Revenue
Expenses

P100,000
50,000
2,000

P152,000
500
P151,500


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

Salaries
Wages
Fringe Benefits
Total Payroll and Related Expenses
Other Expenses
Commissions
Uniforms
Linen Expense
Payroll Taxes
Operating Supplies

Contract Cleaning
Dry Cleaning
Laundry
Other
Total Other Expenses
Total Expenses
Departmental Income

P 10,000
15,000
3,000
28,000
P 1,000
500
1,000
2,000
1,500
1,800
1,200
3,000
1,800
13,800
41,800
P109,700

PROBLEM 12

1.

2.

3.
4.
5.
6.
7.

Activity
Transaction
Operating Investing Financing
Short-term
investment
securities were
purchased
X
..............................
Equipment was
purchased
X
..............................
Accounts payable
increased
X
..............................
Deferred taxes
decreased
X
..............................
Long-term bonds
were issued
X

..............................
Common stock was
sold
X
..............................
Interest was paid to
long-term creditors
X
..............................

Source

Use

X
X
X
X
X
X
X


2-9

Understanding Financial Statements of Hotels and Restaurants

8.

A long-term

mortgage was
entirely paid off
..............................
A cash dividend
was declared and
paid
..............................

9.

X

X

X

X

Activity
Transaction
Operating Investing Financing
10. Inventories
decreased...................... X
11. Accounts receivable
increased...................... X
12. Depreciation
charges totaled
P200 thousand for
the year......................... X
*

Source

Use

X*
X*

X*

Adjustments to net income

PROBLEM 13
For 2003:
1.

Gross profit

P507,000

(P561,000 – P54,000)

2.

Total fixed charges

P68,000

(P17,000 + P21,000 + P30,000)

3.

Average tax rate

25%

(P21,938  P87,750)

4.

Income

P65,812

5.

Total overhead expenses

P140,250

6.

Payroll cost percentage

28.75%

(P161,000  P560,000)

7.

Food cost percentage

30%

(P54,000  P180,000)

PROBLEM 14
1.
2.
3.
4.
5.
6.

(1)
(2)
(4)
(3)
(4)
(1)

Operating
Investing
Noncash transaction
Financing
Noncash transaction
Operating

9.
10.

11.
12.
13.
14.

(2)
(1)
(1)
(1)
(1)
(3)

Investing
Operating
Operating
Operating
Operating
Financing


2-10
7.
8.

Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

(1)
(3)

Operating

Financing

15. (2) Investing

PROBLEM 15
1.
2.
3.
4.
5.
6.
7.
8.

(1)
(1)
(2)
(1)
(4)
(1)
(1)
(4)

Operating
Operating
Investing
Operating
Noncash transaction
Operating
Operating

Noncash transaction

9.
10.
11.
12.
13.
14.
15.

(5)
(1)
(1)
(1)
(3)
(1)
(1)

None of the above
Operating
Operating
Operating
Financing
Operating
Operating

PROBLEM 16
1.

Cash received from hotel guests during 2003:

Cash sales
Collection from customers
Sales on account
Less: Increase in AR
Cash received from hotel guests

P 800,000
P2,540,000
10,000

2,530,000
P3,330,000

2.

Beginning balance, Dividends payable
Dividends declared
Ending balance, Dividends payable
Dividends paid

P 10,000
120,000
(15,000)
P115,000

3.

Cost of food used
Increase in Food inventory
Decrease in Accounts payable

Cash payments for food purchases

P400,000
8,000
5,000
P413,000

4.

Analysis of long-term debt:
Balance, January 1, 2003
Balance, December 31, 2003
Net increase

P1,000,000
1,500,000
P 500,000


Understanding Financial Statements of Hotels and Restaurants

Reductions during the year
Conversion to common stock
Reclassification as current debt
Additional borrowing
Net increase

5.

Income tax expense

Beginning balance, Income tax payable
Ending balance, Income tax payable
Income tax paid

2-11

P (200,000)
(50,000)
750,000
P 500,000

P 25,000
4,000
(5,000)
P 24,000

PROBLEM 17
Ilang-Ilang Inn
Statement of Cash Flows
For 2004
Cash Flows from Operations
Net income
Add (Deduct) Adjustments to reconcile net income to cash
flows from operations:
Depreciation expense
Amortization expense (other assets)
Increase in accounts receivable
Increase in inventory
Increase in accounts payable
Increase in wages payable

Total
Cash flows from operations
Cash Flows from Investing Activities
Purchase of equipment
Cash Flow from Financing Activities
Payment of dividends
Payment of current portion of long-term debt

P100,000
200,000
100,000
(35,000)
(5,000)
45,000
5,000
310,000
410,000
(300,000)

Net increase in Cash

(50,000)
(50,000)
(100,000)
P 10,000

Cash balance, 12.31.04
Cash balance, 12.31.03
Net increase in Cash

P 40,000
30,000
P 10,000

PROBLEM 18


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

Food Department
Income Statement
For the year ended December 31, 20xx
Revenue
Banquets
Grill room
Coffee garden
Total Revenue
Cost of Sales
Gross Profit
Other Income
Gross Profit and Other Income
Expenses
Salaries and Wages Expense
Employee Meals Expense
Total Payroll and Related Expenses
Other Expenses
Supplies Expense
License Expense

Laundry and Linen Expense
Glass and Tableware Expense
Printing Expense
Miscellaneous Expense
Total Other Expenses
Total Expenses
Departmental Income

P596,800
306,200
157,800
P1,060,800
423,400
P 637,400
1,200
P 638,600
P348,800
34,400
383,200
P 20,600
3,800
26,000
8,600
9,800
12,400
81,200
464,400
P174,200

PROBLEM 19

Food inventory, March 1
Add: Food purchases, March
Less: Food inventory, March 31
Cost of Sales
Less: Employee Meals Cost
Promotional Meals Cost
Net Cost of Sales

P 4,856
17,814
P22,670
3,222
P19,448
P 418
556

974
P18,474

PROBLEM 20
Food inventory, August 1
Add: Food purchases, August
Less: Food inventory, August 31

P 29,506
97,596
P127,102
25,622

Understanding Financial Statements of Hotels and Restaurants

Cost of sales
Less: Employee meals cost
Promotional meals cost
Complimentary meals cost
Transfers kitchen to the bar

2-13

P101,480
P2,416
556
264
214

Add: Transfers bar to the kitchen
Net Cost of Sales
PROBLEM 21

3,450
P 98,030
96
P 98,126

Consolidated Income Statement

Requirement (a)
Revenues
Cost of sales

Gross profit
Direct costs
Wages & salaries
Other direct costs
Total
Contribution to indirect
costs
Requirement (b)
Allocated costs
Administrative &
general expenses (a)
Marketing expenses
Utilities expense
Property operation &
maintenance
Depreciation expense
Insurance expense
Total
Net income (loss) before
taxes

Total

Dining
Room

Banquet
Room

Beverages

P400,000
144,800
P255,200

P208,000
83,200
P124,800

P112,000
33,600
P 78,400

P 80,000
28,000
P 52,000

103,200
27,200
130,400

66,560
16,640
83,200

24,640
8,960
33,600

12,000

1,600
13,600

P124,800

P 41,600

P 44,800

P 38,400

13,000
9,000
6,000

6,760
4,680
2,400

3,640
2,520
3,000

2,600
1,800
600

12,000
14,000
2,000

56,000

4,800
5,600
800
25,040

6,000
7,000
1,000
23,160

1,200
1,400
200
7,800

P 68,800

P 16,560

P 21,640

P 30,600

(a) Allocation
(1) General & administrative (based on revenue)
Dining Room
P208,000 / P400,000
Banquet Room

P112,000 / P400,000
Beverages
P 80,000 / P400,000
(2) Marketing costs (based on revenue)

=
=
=

52%
28%
20%


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

Dining Room
Banquet Room
Beverages
(3) All other indirect costs (based on square footage)
Dining Room
2,400 / 6,000
Banquet Room
3,000 / 6,000
Beverages
600 / 6,000

=

=
=

52%
28%
20%

=
=
=

40%
50%
10%

Requirement (c)
Based on the schedule in Requirements a & b, no division should be closed because
they all showed positive contribution to indirect costs and net income after allocating
all the indirect costs. This proves the fact that they are all profitable.
PROBLEM 22
Requirement (a)
Balance Sheet
Assets
Current Assets
Cash
Credit card receivables
Accounts receivable
Inventories
Prepaid expenses
Total current assets

P 4,100
7,560
1,940
8,200
1,900
P 23,700

Noncurrent Assets
Cost
P 80,000
712,800
119,080
64,120

Land
Building
Equipment
Furnishings
China & tableware
Glassware
Total assets

Accumulated
Depreciation
P186,400
35,625
11,875

Net

P 80,000
526,400
83,455
52,245
9,680
2,420

754,200
P777,900

Liabilities and Stockholders’ Equity
Liabilities
Current Liabilities
Accounts payable
Accrued expenses payable

P 8,600
2,700


Understanding Financial Statements of Hotels and Restaurants

Income taxes payable
Current portion, Mortgage payable
Total current assets

2-15

6,100
13,100

P 30,500

Noncurrent Liabilities
Mortgage payable
Total Liabilities

406,900
P437,400

Stockholders’ Equity
Capital stock
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity

P151,000
189,500
P340,500
P777,900

Requirement (b)

Accounts
Cash
Credit Card Receivables
Accounts Receivable
Inventories
Prepaid Expenses
Land
Building

Accumulated Depreciation: Building
Equipment
Accumulated Depreciation: Equipment
Furnishings
Accumulated Depreciation: Furnishings
China and Tableware
Glassware
Accounts Payable
Accrued Expenses Payable
Income Taxes Payable
Current Portion, Mortgage Payable
Mortgage Payable
Capital Stock
Retained Earnings
Trial Balance Totals

Trial Balance
Debit
Credit
Balance
Balance
P 4,100
7,560
1,940
8,200
1,900
80,000
526,400 (net)
83,455 (net)
52,245 (net)

9,680
2,420
8,600
2,700
6,100
13,100
406,900
151,000
189,500
P 777,900

P 777,900


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations