Solution manual managerial accounting and finance for hospitality OperationsCHAPTER 03

CHAPTER 3
ANALYSIS AND INTERPRETATION OF
FINANCIAL STATEMENTS – PART I
I.

Questions
1.

The objective of financial statements analysis is to determine the extent of a
firm’s success in attaining its financial goals, namely:
a. To earn maximum profit
b. To maintain solvency
c. To attain stability

2.

Some of the indications of satisfactory short-term solvency or working capital
position of a business firm:
1. Favorable credit position
2. Satisfactory proportion of cash to the requirements of the current
volume
3. Ability to pay current debts in the regular course of business
4. Ability to extend more credit to customers
5. Ability to replenish inventory promptly

3.

These tests are:
1. Improvement in the financial position
2. Well-balanced financial structure between borrowed funds and owners’
equity

3. Effective employment of borrowed funds and owners’ equity
4. Ability to declare satisfactory amount of dividends to stockholders
5. Ability to withstand adverse business conditions
6. Ability to engage in research and development in an attempt to provide
new products or improve old products, method or processes

4.

Some indicators of managerial efficiency are:
1. Ability to earn a reasonable return on its investment of borrowed funds
and owners’ equity
2. Ability to control operating costs within reasonable limits
3. No overinvestment in fixed assets, receivables and inventories

5.

The techniques used in Financial Statement Analysis are:
I. Vertical analysis which shows the relationships of the items in the same
year: also referred to as “static measure.”


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

a.
b.

Financial ratios
Common-size statements

II. Horizontal analysis which shows the changes or tendencies of an item
for 2 or more years; also referred to as “dynamic measure.”
a. Comparative statements - showing changes in absolute amount
and percentages
b. Trend percentages
III. Use of special reports or statements
a. Statements of Changes in Financial Position
b. Gross Profit / Net Income Variation Analysis
6.

Horizontal analysis involves the comparison of items on financial statements
between years.
Analysis of comparative financial statements or the
increase/decrease method of analysis and trend percentages are the two
techniques that may be applied under horizontal analysis.
Vertical analysis involves the study of items on a single statement for a single
year, such as the analysis of an income statement for some given year.
Common-size statement and financial ratios are techniques used in vertical
analysis.

II. Practical Problems
PROBLEM 1
Total Current Working
Assets
Capital

1.
2.

3.
4.
5.
6.
7.

Food is sold for cash.
Equipment is sold at
less than its net book
value.
Beverages are sold on
account.
A cash dividend is
declared.
Accrued payroll is
paid.
Treasury stock is
purchased.
A fully depreciated
fixed asset is retired.

Current
Ratio

+

+

+

+

+

+

+

+

+

0

–

–

–

0

+

–

–

–

0

0

0

Comments
Food is assumed to have
been sold at a profit.

Cash is increased.
Assumption: Beverage
sold at a profit.
Assumption: No payment
yet but liability is set up.


Analysis and Interpretation of Financial Statements – Part I

8.

9.

Equipment is
purchased with longterm notes.
Utility expenses are
paid (they were not
previously accrued).

10. A cash dividend is

paid.

0

0

0

–

–

–

–

0

+

3-3

Assumption: Current
liability was set up when
dividends were declared.

PROBLEM 2
Requirement 1:
XYZ Corporation
Balance Sheet

As of December 31
Change
Peso
2000
Assets
Cash and equivalents
Receivables
Inventories
Prepayments and others
Total Current Assets
Property, Plant & Equipment
- net of depreciation
Total Assets

%

2001

14,000
28,800
54,000
4,800
101,600

16,000
55,600
85,600
7,400
164,600

2,000
26,800
31,600
2,600
63,000

14.29%
93.06%
58.52%
54.17%
62.01%

30,200
131,800

73,400
238,000

43,200
106,200

143.05%
80.58%

54,000
55,400
6,800
7,000
123,200
44,600

70,200

44,000
23,800
2,600
1,200
71,600
0
34,600

440.00%
73.32%
61.90%
20.69%
138.76%
0.00%
97.19%

114,800

34,600

43.14%

238,000

106,200

80.58%

Liabilities and Stockholders’ Equity
Notes payable to banks
10,000
Accounts payable
31,600
Accrued liabilities
4,200
Income taxes payable
5,800
Total current liabilities
51,600
Capital stock
44,600
Retained earnings
35,600
Total shareholders’
equity
80,200
Total liabilities and
shareholders’ equity
131,800


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

XYZ Corporation
Income Statement
Years ended December 31

(P thousands)
Change
Peso
Net sales
Cost of goods sold
Gross profit
Selling, general and
administrative expenses
Income before income taxes
Income taxes
Net Income

%

2000
266,400
191,400
75,000

2001
424,000
314,600
109,400

157,600
123,200
34,400

59.16%
64.37%

45.87%

35,500
39,500
12,300
27,200

58,400
51,000
16,400
34,600

22,900
11,500
4,100
7,400

64.51%
29.11%
33.33%
27.21%

Requirement 2:
Short-term financial position
1.

Current Assets

 62.01%



Current Liabilities

 138.76%

2.

 Unfavorable
Quick Assets
 62.40%



Current Liabilities

 138.76%

3.

 Unfavorable
Net Sales
 59.16%



Accounts Receivable

 93.06%

4.

 Unfavorable
Cost of Goods Sold  64.37%



Inventories

 58.52%



Total Liabilities

 138.76%



Total Stockholders’
Equity

 43.14%



Cost of Goods Sold

 64.37%

 Favorable
Leverage
5.

Total Assets

 80.58%

 Unfavorable
6.

Total Liabilities

 138.76%

 Unfavorable
Profitability
7.

Net Sales

 59.16%

 Unfavorable


Analysis and Interpretation of Financial Statements – Part I

3-5



Selling, general &
administrative
expenses

 64.51%



Net Income

 27.21%



Total Assets

 80.58%

STATEMENT OF INCOME
Revenues.......................................................................
Cost of goods sold.........................................................
Other expenses..............................................................
Income before income taxes..........................................
Income taxes (36.95% in 20x3).....................................
Net income....................................................................

20x3
20x2

(Thousands)
P94,749 (k) P 88,412
74,564
65,586 (a)
15,839
13,564
4,346
9,262
1,606 (l)
1,581
P 2,740
P 7,681 (b)
(m)

8.

Net Sales

9.

Net Sales

 59.16%

 Unfavorable
 59.16%

 Unfavorable
10. Net Income

 27.21%

 Unfavorable
PROBLEM 3
Requirement 1

STATEMENT OF RETAINED EARNINGS
Beginning balance......................................................... P 1,851 (n)
Net income....................................................................
2,740 (o)
Dividends......................................................................
(559)
Ending balance.............................................................. P 4,032 (p)
BALANCE SHEET
Assets:
Cash...........................................................................
Property, plant, and equipment...................................
Other assets................................................................
Total assets.............................................................
Liabilities:
Current liabilities.......................................................
Long-term debt and other liabilities............................
Total liabilities........................................................
Shareholders’ Equity:
Common stock...........................................................
Retained earnings.......................................................
Other shareholders’ equity..........................................

P 9,987
7,681 (c)

(455)
P 17,213 (d)

P

45 (q)
23,894
3,240 (r)
P 27,179 (s)

P

P 11,454 (t)
11,331
22,785

P 9,973
10,120
20,093 (f)

P

P

229
4,032 (u)
133

45 (e)
20,874

16,900
P 37,819

230
17,213 (g)
283


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

Total shareholders’ equity.......................................
Total liabilities and shareholders’ equity.................
STATEMENT OF CASH FLOWS
Net cash provided by operating activities...................
Net cash used in investing activities...........................
Net cash provided by financing activities...................
Increase (decrease) in cash......................................
Cash at beginning of year....................................
Cash at end of year..............................................

4,394 (v)
P 27,179 (w)

17,726
P 37,819 (h)

P 2,383 (x)
(3,332)

987
38
45 (y)
P
83 (z)

P 2,906
(3,792)
911
25 (i)
20
P
45 (j)

Requirement 2
a.

Operations deteriorated in 20x3 as indicated by the following:
1. Higher percentage of cost of sales to sales
(20x2 – 74.18%)
(20x3 – 78.70%)
2. Other expenses likewise increased as a percentage of sales in 20x3.
3. Tax rate significantly increased from 17.07% in 20x2 to 36.95% in 20x3.
4. Decline in total assets.
5. Increase in liabilities as a percentage of total assets
(20x2 – 53.13%)
(20x3 – 83.83%)

b.

The company had increased dividend payment despite the decline in profit.

c.

Total resources or assets, end of 20x3 – P27,179
Total resources or assets, end of 20x2 – P37,819

d.

Total liabilities, end of 20x2 – P20,093
Total liabilities, end of 20x3 – P22,785

e.

Major sources of cash in both 20x3 and 20x2 were from operations and
financing. Cash from operations had declined while cash from financing
activities increased. This is not favorable. The company had been using most
its cash in investing activities, particularly for the purchase of property and
equipment.

PROBLEM 4
Requirement (1)
Paid rooms occupied
Rooms available
*

=

No. of guest rooms
Out-of-order

Comped for valid business reasons
Comped to friends of management.

5,000
5,820*

=
200
(2)
(2)
(2)

85.9%


Analysis and Interpretation of Financial Statements – Part I

194
Requirement (2)
Rooms occupied by
2 or more guests
Rooms occupied by guests

=

3,200
5,000 + 4

=

3,200
5,004

3-7

rooms x 30 days
= 5,820 rooms available

= 63.95%

PROBLEM 5
Beginning food inventory
Add: Food purchases

P 4,500
20,500
P25,000
4,000
P21,000

Less: Ending food inventory
Less: Employee Meals Cost
Food transfers to the beverage dept.
Net Food Cost
Net Food Cost
Sales

=

P20,500

P60,000

P 400
100

=

500
P20,500

34.17%

PROBLEM 6

Requirement (1)
Current Assets
Cash
Credit card receivables
Accounts receivable
Food inventories
Beverage inventories
Prepaid expenses
Total Current Assets

Year 1
P12,800
2,800
420
4,280
1,850

1,400
P23,550

Year 2
P14,720
3,360
100
4,366
1,702
1,610
P25,858

Change
Peso
Percentage
P1,920
15.00%
560
20.00%
(320)
(76.20%)
86
2.00%
(148)
( 8.00%)
210
15.00%
P2,308
9.80%

Requirement (2)
Except for Food inventories and Beverage inventories, all other current assets
changed by more than 10%, the most notable of which is accounts receivable which
decreased by 76.20%. The decrease in accounts receivable accompanied by increase


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

in Cash and Credit card receivables could indicate the change in company’s policy of
reducing sales open account which may result to a more favorable liquidity position.
PROBLEM 7
Foxtail Hotel
Comparative Income Statement
Years Ended December 31, 2002 and 2003

Total revenue
Expenses:
Cost of goods sold
Selling and general
expenses
Interest expense
Income tax expense
Total expenses
Net income

Change
Peso
Percentage

P(37,000)
( 9.00)%

2002
P410,000

2003
P373,000

P202,000

P188,000

(14,000)

( 6.90)%

98,000
7,000
42,000
349,000
P 61,000

93,000
4,000
37,000
322,000
P 51,000

(5,000)

(3,000)
(5,000)
(27,000)
P(10,000)

( 5.10)%
(42.90)%
(11.90)%
(7.70)%
(16.40)%

Net income decreased by a higher percentage than total revenues in 2003 because
cost of goods sold and selling and general expenses decreased by a lower percentage
than revenues, thus, decreasing the profit margin. Favorable change could be
observed in interest expense which decreased by 42.9% and income tax expense by
11.9%.
PROBLEM 8
Rainee Restaurant
Common-size Balance Sheet
December 31, 2003
Common-size
Percentages
Assets
Total current assets.......................................
Long-term investments.................................
Property, plant and equipment, net................
Total assets...................................................

P 72,000
35,000

217,000
P324,000

22.22%
10.80%
66.98%
100.00%

Liabilities
Total current liabilities..................................
Long-term debt.............................................
Total liabilities..............................................

P 58,000
118,000
P176,000

17.90%
36.42%
54.32%


Analysis and Interpretation of Financial Statements – Part I

Stockholders’ Equity
Total stockholders’ equity.............................
Total liabilities and stockholders’ equity.......
PROBLEM 9

148,000

P324,000

3-9

45.68%
100.00%

Requirement (1)
Common-size Income Statement
Year Ended December 31, 2003
Net Sales.................................................
Cost of goods sold..................................
Gross profit.............................................
Operating expenses.................................
Operating income....................................
Other expenses........................................
Net income.............................................

Francisco Hotel
100.0%
63.6
36.4
20.9
15.5
0.6
14.9%

Industry Average
100.0%
65.8

34.2
19.7
14.5
0.4
14.1%

Common-size Balance Sheet
December 31, 2003
Current assets..........................................
Fixed assets, net......................................
Intangible assets, net...............................
Other assets.............................................
Total.......................................................

Francisco Hotel
77.8%
16.4
0.9
4.9
100.0%

Current liabilities....................................
Long-term liabilities...............................
Stockholders’ equity................................
Total.......................................................

Industry Average
70.9%
23.6
0.8

4.7
100.0%

46.0%
13.8
40.2
100.0%

48.1%
16.6
35.3
100.0%

Requirement (2)
(a) Ratio of gross profit to net sales
(b) Ratio of operating income to net sales
(c) Ratio of net income to net sales

=
=
=

36.4%
15.5%
14.9%

>
>
>

34.2%
14.5%
14.1%

Francisco’s profit performance is better than the industry average in year 2003.
Requirement (3)
(a) Ratio of current assets to total assets
=
(b) Ratio of stockholders’ equity to total assets =

77.8%
40.2%

>
>

70.9%
35.3%


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

Francisco’s financial position is better than the industry averages.
PROBLEM 10
Cash
Credit card receivables
Food inventories
Beverage inventories

Total current assets

July
P 8,880
1,240
4,480
2,220
P16,820

August
P 7,104
1,984
6,272
1,887
P17,247

Change
Peso
Percentage
P(1,776)
(20.00%)
744
60.00%
1,792
40.00%
(333)
(15.00%)
P 427
2.50%

August
P 7,104
1,984
6,272
1,887
P17,247

Common-size
Percentages
July
August
52.80%
41.19%
7.37%
11.50%
26.63%
36.37%
13.20%
10.94%
100.00%
100.00%

PROBLEM 11

Cash
Credit card receivables
Food inventories
Beverage inventories
Total current assets

July
P 8,880
1,240
4,480
2,220
P16,820

PROBLEM 12
Year
1
2
3

Ave. Rm. Rate
P480
440
530

Index
100.00
91.69
110.42

PROBLEM 13
Dining Room
Bar-Lounge

Sales Revenue
P128,880
P 66,586

Guests
9,206
5,202

Ave. Check
P14.00
P12.80

PROBLEM 14

Sales revenue
Cost of sales revenue
Gross margin
Direct costs
Contributory income
Indirect costs
Operating income

Year 2003
P 23,502
9,208
P 14,294
10,202
P
4,092
2,477
P
1,615

Year 2004
P 24,612
9,438
P 15,174
11,622
P
3,552
2,403
P
1,149

Changes
 Pesos
+
1,110 +
+
230 +
+
880 +
+
1,420 +
–
540 –
–
74 –
–
466 –

%
4.7%

2.5%
6.0%
13.9%
13.2%
3.0%
28.9%


Analysis and Interpretation of Financial Statements – Part I

3-11

Operating income decreased inspite of the increase in sales because of the substantial
increase in direct costs.
PROBLEM 15
Sales revenue
Cost of sales
Gross margin
Operating expenses
Operating income

Condensed Income Statement
P480,000
201,600
P278,400
206,400
P 72,000

100%
42%

58%
43%
15%

PROBLEM 16
ASSETS
Current Assets
Cash
Credit card receivables
Accounts receivable
Vending inventories
Prepaid expenses
Total Current Assets
Property, Plant &
Equipment
Land
Building
Furnishings
Equipment
Accumulated depreciation
Glassware, linen
inventories
Total Property &
Equipment (net)
Total Assets

Year 2003

Year 2004

Peso

Changes
Percent

P 11,300
3,900
11,700
7,800
3,900
P 38,600

P 15,400
6,300
18,900
8,400
4,100
P 53,100

P 4,100
2,400
7,200
600
200
P 14,500

36.28%
61.54%
61.54%
7.69%

5.13%
37.56%

P 81,200
758,100
83,712
90,688
(315,500)

P 81,200
795,300
93,412
90,688
(335,800)

37,200
9,700
20,300

4.91%
11.59%
6.43%

12,200

15,300

3,100

25.41%

P710,400
P749,000

P740,100
P793,200

29,700
P 44,200

4.18%
5.90%

P 9,100
4,200
12,400

P 12,200
4,900
15,500

3,100
700
3,100

34.07%
16.67%
25.00%

13,600

11,200

(2,400)

(17.65%)

LIABILITIES &
STOCKHOLDERS’
EQUITY
Current Liabilities
Accounts Payable
Accrued Expenses Payable
Taxes Payable
Current Portion, Mortgage
Payable


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

Total Current Liabilities
Long-term Liabilities
Mortgage Payable
Total Liabilities
Stockholders’ Equity
Capital Stock
Retained Earnings
Total Stockholders’

Equity
Total Liabilities &
Stockholders’ Equity

P 39,300

P 43,800

4,500

11.45%

423,500
P462,800

412,300
P456,100

(11,200)
(6,700)

(2.64%)
(1.45%)

P125,200
161,000

P145,200
191,900

20,000
30,900

15.97%
19.19%

P286,200

P337,100

50,900

17.78%

P749,000

P793,200

P 44,200

5.90%

1.

Significant increases could be observed in Cash, Credit card receivables and
Accounts receivable. The increase in receivable could be due to the company’s
change in policy in granting credit and an indication of inefficiency in the
collection of receivables.

2.

Furnishings and glassware, linen inventories likewise showed significant
increases. This can be viewed favorably because restaurants should keep up
with the demands of new atmosphere as well as provide for the normal wear and
tear of their supplies.

3.

Total liabilities declined a little but with significant increases in accounts
payable, accrued expenses payable and taxes payable. The company should
exercise care in increasing more liabilities that it can handle.

4.

The increase in stockholders’ equity accompanied by a decrease in total
liabilities can be viewed favorably because it indicates strengthening of the
company’s financial position. This could also mean
a) lesser reliance on borrowed capital,
b) infusion of equity capital, and
c) profitable operations as reflected in the increase in retained earnings.

PROBLEM 17
“A”
Sales Revenue
Cost of Sales
Gross margin
Direct Costs
Wages Expense
Supplies Expense
Other Direct Costs

Contributory Income
Indirect Costs

“B”
100%
39%
61%

30%
8%
3%

41%
20%

100%
38%
62%
34%
8%
3%

45%
17%


Analysis and Interpretation of Financial Statements – Part I

Rent Expense
Insurance Expense

Other Indirect Expenses
Operating Income

4%
1%
2%

7%
13%

3-13

4%
2%
2%

8%
9%

While “B” reports higher revenue, “A” has been more profitable for two main
reasons:
1.
2.

Direct costs as a percentage of revenue is only 41% as against 45% of B.
Indirect costs is also lower by 1% in A as compared with B.

“B” however has an advantage over “A” as far as cost of sales is concerned.
In conclusion, “B” should try to control their operating expenses, direct and indirect,
to realize higher profit.