Solution manual managerial accounting and finance for hospitality OperationsCHAPTER 04

CHAPTER 4
ANALYSIS AND INTERPRETATION OF
FINANCIAL STATEMENTS – PART II
I.

Questions
1.

Creditors use ratio analysis to evaluate the solvency of hospitality operations
and to assess the riskiness of future loans. For example, the current ratio may
indicate the establishment’s ability to pay its upcoming bills. In addition,
creditors sometimes use ratio to express requirements for hospitality operations
as part of the conditions set forth for certain financial arrangements. For
example, a creditor may require the maintenance of a current ratio of 2 to 1 as a
condition of a loan.

2.

Refer to pages 78 to 79.

3.

While ratios can be compared against results of a prior period and against
industry averages, ratios are best compared against planned ratio goals or
budgeted ratios. For example, in order to more effectively control the cost of
labor, management may project a goal for the current year’s labor cost
percentage that is slightly lower than the previous year’s levels. The expectation
of a lower labor cost percentage may reflect management’s efforts to improve
scheduling procedures and other factors related to the cost of labor. By
comparing actual labor cost percentage with the planned goal, management is
able to assess the success of its efforts to control labor cost.

4.

An investor would be interested on profitability ratios as well as ratios that
measure the financial stability of the hotel.

5.

Activity ratios reflect management’s ability to use the property’s assets and
resources and generate satisfactory returns on them.

6.

Turnover means the number of times a certain resource is able to generate either
revenues, guests, cash, etc.

7.

Managers are concerned about the solvency ratios because these will measure
the firm’s ability to settle its debts, defray the operating expenses and maintain
operating efficiency.


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

Creditors are likewise interested in solvency ratios because these ratios could
show whether the firm has the capacity to satisfy their claims when they become
due.

Stockholders are concerned about the ability of the company to meet its
maturing debts and other operational requirements because a sound capital
structure is necessary for continued successful operations.
II. Practical Problems
PROBLEM 1
a.

b.

Current ratio =

Quick ratio

P12,000 + P1,800 + P180 + P4,400 + P1,120
P7,800

=

P19,500
P7,800

=

P12,000 + P1,800 + P180
P7,800

=

P13,980
P7,800

=

=

2.5

1.79

PROBLEM 2
a.

Average of current liabilities =
=

P58,200 + P60,800
2
P119,000
2

=

P40,400
P59,500

b.

Cash flow from operating activities =
to current liabilities

c.

68% exceeds the recommended percentage of 40.

PROBLEM 3
a.

Food inventory turnover

= 0.68 times or 68%

P36,520
=

=
b.

P59,500

Average period in days for
=
food inventory to turnover

P8,868 + P5,740
2
P36,520
P7,304
365 days
5

=

5
=

73


Analysis and Interpretation of Financial Statements – Part II

4-3

PROBLEM 4
Current ratio has been declining from 1.44 in Year 1 to 1.20 in Year 3. This could
indicate a deterioration in the working capital condition. A restaurant should have a
higher current ratio, preferably 2:1 because of the nature of its capital requirements.
The ratio in Year 3 is therefore considered unsatisfactory.
PROBLEM 5
1.

Multiple occupancy rate

=

Rooms occupied by
2 or more people
Number of rooms
occupied by guests

40%

=

Rooms
1,400

No. of rooms
2.

3.

=

560

1.5

=

P120,000
CL

1.2

=

CL

=

P80,000

QA

=

24

=

COFS
P4,000

0.3

=

COFS =

P96,000

TFS =

QA
P80,000
P96,000
P96,000 – P1,000
TFS
P316,667

PROBLEM 6
1.

Working capital =

P86,100 – P62,400 = P23,700

2.

Working capital position is favorable. It indicates that the firm has sufficient
assets to pay its short-term debts and meet its operational expense requirements.

PROBLEM 7
a.

Cash flow from operating activities
to current liabilities ratio

=

P143,200
P68,300

=

2.096

b.

Cash flow from operating activities

to long-term liabilities ratio

=

P143,200
P823,300

=

0.174

c.

Cash flow from operating activities
margin

=

P143,200
P2,406,800

=

0.059


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

PROBLEM 8
2003
a.

b.

c.

Working capital
P35,900 – P32,800
P47,200 – P37,200

2004

P3,100
P10,000

Current ratio
P35,900
P32,800

=

P47,200
P37,200

=

1.09
1.27

Quick ratio
P28,200
P32,800

=

P36,300
P37,200

=

0.86
0.97

d.

Credit card receivables as a percentage of credit card
revenues

P4,300*
P345,948 =
0.01

e.

Credit card receivables turnover ratio

P345,948
P4,300* =

80.45

f.

Credit card average collection period

365 days
80.45

g.

Accounts receivable as a percentage of accounts
receivable credit revenue

P350**
P13,620

h.

Accounts receivable turnover ratio

P13,620
P350**

i.

Accounts receivable average collection period

365 days
38.91

j.

Cost of sales percentage of sales revenue

P212,472
P544,800 =
0.39

k.

The company has a very satisfactory collection period of credit card receivables
and satisfactory accounts receivable average collection period.

=

4.54 days

=
0.026
=
38.91
=

9.38 days


Analysis and Interpretation of Financial Statements – Part II

Cash

Credit card
Accounts receivable
Total revenues
*

=
=
=

P185,232
345,948
13,620
P544,800

Average credit card receivables

** Average accounts receivable
PROBLEM 9
a.

Return on assets

34.0%
63.5%
2.5%
100.0%

P4,880 + P3,720
2
P480 + P220

2

=
=

4-5

=

P4,300

=

P350

P20,100 + [P26,100 x (1 – 0.25)]
=

P411,200 + P395,700
2

=

P39,675
P403,450

=

0.098

b.

Net return on assets =

P20,100
P403,450

=

0.05

c.

Number of times interest is earned

d.

Net income to revenue ratio

=

P52,900
P26,100
P20,100
P851,800

=

=
=

2.03

0.02

Discussion of hotel profitability
Net income to revenue ratio is quite low. The hotel should strive to lessen its
operating costs if it wants to generate higher income on sales revenue.
P20,100
e.

Return on stockholders’ equity

=

=

P108,800 + P80,200
2
P20,100
P94,500

=

0.21

Discussion of hotel profitability
Return on stockholders’ equity is satisfactory considering that it is much higher
than the return on other investment opportunities as time deposit rate, bond
earnings rate, etc.

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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

PROBLEM 10
1.

Let x = Cost of food used
24

=

x
P8,000 + P10,000
2

24

=

x
P9,000

x

=

P216,000

Cost of food used
Less: Employees food expense
Total Cost of food sold
2.

3.

4.

Average lunch food
service check

34%

=

CFS

=

P216,000
(3,000)
P213,000

=

Lunch period revenue (%) x Total sales revenue
Seats x Lunch period seat turnover x Operating days

=

40% x P60,000
100 x 1.5 x 26

=

P24,000
3,900

=

P6.15

CFS
P80,000
P27,200

Cost of food sold
Add: Employee food expense
Cost of food used

P27,200
200
P27,400

Cost of food sold
Add: Employee meals
Cost of food used

P30,000
300
P30,300

Let x = average inventory
y = ending inventory
P30,300
=
3.1
x
x

=

P9,774


Analysis and Interpretation of Financial Statements – Part II

P9,774
P9,000 + y
–

P9,000 + y
2

=
=

P19,548

9,000

–
=

9,000
P10,548

y
PROBLEM 11
a.

Average rate per room occupied

=

P91,108
1,798

b.

Rooms occupancy percentage

=

1,798
75 seats x 31days

=

c.

Room double occupancy percentage

=

1,798
2,325

=

=

P50.67

0.77

3,417 – 1,798 = 1,619

=

1,619
1,798

=

90%

d.

Food cost percentage

=

P18,904
P45,209

=

0.42

e.

Beverage cost percentage

=

P4,805
P14,810

=

0.32

f.

Rooms labor cost percentage

=

P30,020
P91,108

=

0.33

g.

Dining room labor cost percentage

=
=

h.

Average check, dining room

=
=

P15,011
P45,209 + P14,810
P15,011
P60,019

=

0.25

P60,019
40 x 3 x 31
P60,019
3,720

=

P16.13

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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

i.

Dining room average seat turnover

3,720
40 x 31

=

=

3,720
1,240

=

3

j.

Average monthly revenue per
dining room seat

=

P60,019
40

=

P1,500.48

k.

Beverage revenue to food revenue %

=

P14,810
P45,209

=

0.33

l.

Beverage revenue to room revenue %

=

P14,810
P91,108

=

0.16

=

P60,019
P91,108

=

0.66

m. Dining revenue to room revenue %
PROBLEM 12

2003
a.

b.

c.

Working capital
P37,700 – P51,600
P45,000 – P48,300

2004

P(13,900)
P(3,300)

Current ratio
P37,700
P51,600

=

P45,000
P48,300

=

Credit card receivables as a
percentage of credit card revenue

0.73
0.93

=

P7,920 + P9,240
2
0.64 (P742,600)

P8,580
= P475,264 =
0.02
d.

Credit card receivables turnover
ratio based on credit card revenue

=

P475,264
P8,580 =
55.39

e.

Credit card receivables average
collection period ratio based on
credit card revenue

=

365 days
55.39

=
6.59


Analysis and Interpretation of Financial Statements – Part II

f.

Accounts receivable as a percentage
of accounts receivable credit
revenue

=
=

4-9

P5,280 + P6,160
2
0.14 (P742,600)
P5,720
P103,964 =
0.06

g.

Accounts receivable turnover ratio
based on accounts receivable credit
revenue

=

P103,964
P5,720 =
18.18

h.

Accounts receivable average
collection period based on accounts
receivable credit revenue

=

365 days
18.18

i.

Total assets to total liabilities

j.

k.

l.

P355,100
P243,600

=

P367,200
P229,200

=

=
20.08

1.46
1.60

Total liabilities to total assets
P243,600
P355,100

=

P229,200
P367,200

=

0.69
0.62

Total liabilities to stockholders’ equity
P243,600
P111,500

=

P229,200
P138,000

=

2.18
1.66

Return on total assets
=
=

m. Number of times interest is earned

=

P59,500
P355,100 + P367,200
2
P59,500
P361,150 =
P59,500 0.16
P19,400 =
3.07


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Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

n.

Net income total revenue ratio

=

o.

Return on stockholders’ equity

=

P27,500
P742,600 =
0.04
P27,500
P111,500 + P138,000
2

P27,500
= P124,750 =
0.22
p.

q.

Food inventory turnover ratio

Property, plant and equipment
turnover ratio

=

P301,900
P14,600 + P13,900
2

=

P301,900
P14,250 =
21.19

=

P742,600
P317,400 + P322,200
2

P742,600
= P319,800 =
2.32
PROBLEM 13
a.

Yes. This is reflected in the increasing current ratios from year 2002 to year
2004.

b.

No. Credit card turnover ratio is decreasing and this means collection period is
increasing (Note: divide 365 days by Turnover).

c.

Yes. Accounts receivable turnover is increasing and therefore average collection
period is decreasing.

d.

More money tied up in inventory. The food inventory turnover ratio is
decreasing and that means increase in average food inventory.

e.

Not improving. The return on stockholders’ equity has been decreasing over the
3-year period.

f.

Yes. Total liabilities to total equity or assets ratio has been declining.

g.

No. The decline in liabilities accompanied by the decrease in the return on
stockholders’ equity means that the company has not been using leverage to the
advantage of the stockholders.