CHAE ReviewFinancial StatementsFinancial Statements,

Capital Leases &Forms of Business

HFTPThis is a complete review of the

two volume text booktwo volume text book,Certified Hospitality Accountant

Executive Study GuideExecutive Study Guide,as published by

The Educational Institute of AH&LA.These materials represent a significant part p g p

of theCHAE examinationCHAE examination.

HFTPThese Review Notes for the CHAE

ExaminationWere Prepared By:

Stephen M. LeBruto, Ed.D, CPA, CHAEHFTP Professor of Hospitality Financial

Management and TechnologyAssociate Dean and Professor

Rosen College of Hospitality ManagementUniversity of Central Florida

Orlando, FL

HFTPThe Certified Hospitality AccountantThe Certified Hospitality Accountant

Executive CHAE ExamThere are a total of 200 multiple choice

questions divided into five sections:• Basic Accounting• Managerial AccountingManagerial Accounting• Asset Management

Operations• Operations• Tax & Law

HFTPS ti f th CHAE ESections of the CHAE Exam

I. Basic Accounting (25%) IV. Tax and Law (18%) g ( )Accounting theory Accounting flow General journal entries Statement preparation

( )Basic partnership & corporate

tax Payroll/tip credit DepreciationStatement preparation

II. Managerial Accounting (25%) Ratio analysis Cost-volume-profit analysis

Depreciation Deferred tax Sales taxes and property taxes Basic innkeepers law W d hProfit planning

Forecasting Internal controls

III Asset Management (18%)

Wage and hour Credit laws Basics of contracts BankruptcyIII. Asset Management (18%)

Cash management and analysis Inventory control Capital budgeting

Bankruptcy Antitrust

V. Operations (14%) Industry terminology Yield managementCapitalized leases Yield management Purchasing cycles and controls

HFTP

Basics

HFTP

Organizations That Influence AccountingAccounting

• American Institute of Certified Public Accountants (AICPA)American Institute of Certified Public Accountants (AICPA)• Financial Accounting Standards Board (FASB)• Securities and Exchange Commission (SEC)• Internal Revenue Service (IRS)• Hospitality Financial and Technology Professionals (HFTP)

HFTP

Accounting

• The American Accounting Association defines accounting as “the process of identifyingaccounting as “the process of identifying, measuring, and communicating economic information to permit informed judgments andinformation to permit informed judgments and decisions by users of the information.”

HFTPBookkeepingBookkeeping

• ClericalR ti• Routine

• Part of Accounting

Accounting is a Profession• Financial• Cost• Managerial• Tax• Auditing• Accounting Systems• Accounting Systems

HFTPBranches of AccountingBranches of Accounting

• Financial Accounting – RevenuesFinancial Accounting Revenues, expenses, assets & liabilities

• Cost Accounting – Record, classify, allocate & report current & prospective costs. Used mainly in manufacturing

• Managerial Accounting Analyzes &• Managerial Accounting – Analyzes & provides information to management to enhance controlsenhance controls

HFTPBranches of AccountingBranches of Accounting

• Tax Accounting – Prepare & file tax returns

A diti R i d l t• Auditing – Reviews and evaluates documents, records and control systems

• Accounting Systems – Information systems - CISAsystems CISA

HFTPFundamental Accounting EquationFundamental Accounting Equation

• Assets = Liabilities + Equity • Balance Sheet• Permanent or real accounts• Assets - Things owned• Liabilities - Obligations• Liabilities - Obligations• Equity - Residual claims on assets

Expanded Fundamental Accounting EquationExpanded Fundamental Accounting Equation• Revenue and Expense accounts• Income StatementIncome Statement• Temporary or nominal accounts• Nominal - Exist in name

Netted and closed to equity• Netted and closed to equity

HFTPFundamental EquationFundamental Equation

• Assets = Liabilities + Owners Equity• Assets = Liabilities + Owners Equity

• Assets = Liabilities+ Permanent OE+ Temporary OE

• Assets = Liabilities+ Permanent OE+ Permanent OE+ Revenue- ExpensesExpenses

HFTPAccounts• Economic events are reflected in accounts• T-account - title, left side, right side (debit or credit)• Accounts have balances - either debit or credit (left side or

right side)right side)

Asset Accounts• Cash• Notes Receivable• Accounts Receivable

A d I t t R i bl• Accrued Interest Receivable• Marketable Securities• Inventories of Merchandise• Office Supplies• Office Supplies• Other Prepaid Expenses• Investments• Property and EquipmentProperty and Equipment• Other assets (e.g. security deposits)

HFTPLiability Accounts• Notes Payable• Accounts PayableAccounts Payable• Taxes Charged to Guests and Withheld from Employees• Income Taxes Payable• Accrued Expensesp• Unearned Income• Mortgage Payable

Owners’ Equity Accounts• Capital Accounts• Retained EarningsRetained Earnings• Preferred Stock• Common Stock• Capital Surplus• Treasury Stock

HFTPRevenue Accounts• Room Sales• Food Sales• Beverage Sales

Gift Sh S l• Gift Shop Sales• Revenue Accounts• Green Fees Pro Shop Sales• Banquet Sales• Banquet Sales• Interest and Dividend Income

Expense AccountsExpense Accounts• Cost of Food Sold• Cost of Beverage Sold• Wage and Related CostsWage and Related Costs• Expense Accounts• Supplies• Rent• Utilities• Advertising

HFTPRecording Asset, Liability and Equity Changes

• Purchasing a Hotel Debit Building and Land and Credit Mortgage • Purchasing a Hotel. Debit Building and Land and Credit Mortgage Payable and Cash

• Borrowing Cash. Debit Cash and Credit Notes Payable • Purchasing Furniture. Debit Furniture and Credit Cash

Recording Revenue and Expense Changes

• Sold a Room. Debit Cash and Credit Room Sales• Paid Wages. Debit Wage Expense and Credit Cash

Recording Changes in Owners’ Withdrawal Account

• Withdrew Cash From the Business. Debit Owner’s Drawing Account and gCredit Cash

HFTPE d P d tEnd Products

Financial Reports

• Balance Sheet – as of a point in time• Income Statement – for a period of time• Income Statement – for a period of time• Statement of Cash Flows – 3 sections

HFTP

Balance Sheet

HFTPB l Sh t F t d St tBalance Sheet Formats and Structure

• Account Format - Assets on left and Liabilities and Equity on rightEquity on right

• Report Format - Assets first followed by Liabilities and Equityq y

• Current Assets - Converted to Cash or used in operation in one year or normal operating cycle

• Listed in order of liquidity– Cash (All Forms)– Marketable SecuritiesMarketable Securities– Receivables– Inventories

P id E– Prepaid Expenses

HFTPNoncurrent AssetsNoncurrent Assets

• Noncurrent Receivables - not expected to be ll t d ithicollected within one year

• Investments - securities, land not in use, and affiliate advances not to be collected within oneaffiliate advances not to be collected within one year

• Property and Equipment - Fixed Assets, p y q pCapital Leases - Less accumulated depreciationS ll i O ti E i t d• Smallwares is now Operating Equipment under the 10th edition of USALI

HFTPProperty, Equipment, and Other Assets

Property and Equipment• Balance Sheet Items• Some are depreciated p• Some are not depreciated• Used to be called “Fixed Assets”Used to be called Fixed Assets• Hospitality Industry is “Fixed Asset Intensive” • Capital not revenue expendituresCapital not revenue expenditures

HFTPProperty and Equipment Classifications

• Land• Buildings

L h ld• Leaseholds• Leasehold Improvements• Construction in Progress• Construction in Progress• Furnishings and Equipment• Special Consideration of Certain Property and Spec a Co s de at o o Ce ta ope ty a d

Equipment• Capital Leases

HFTPOther Assets - Deferred Charges,

Security Depositsy p

• Preopening Expenses - New USALIPreopening Expenses New USALI recommends to expense in current period

• Other assetsG d ill• Goodwill

• Cash surrender value of life insurance• Deferred charges• Deferred charges• Possibly deferred income taxes

HFTPCurrent LiabilitiesCurrent Liabilities

Obligations expected to be satisfied in one year or normal operating cycleyear or normal operating cycle

C t Li bilit P t ti• Current Liability Presentation– Payables

Advance deposits– Advance deposits– Current maturities (Portion) of long term

debts– Dividends payable– Income Taxes payable

HFTPLong Term Liabilities

• Obligations beyond one year• Notes payableNotes payable• Mortgages payable• Bonds payableBonds payable• Capitalized lease obligations• Possibly deferred income taxes• Possibly deferred income taxes

HFTPO ners’ Eq itOwners’ Equity

• Preferred Stock, Par @ $$$Sh A th i d• Shares Authorized

• Shares Issued• Common Stock, Par @ $$$• Shares Authorized• Shares Issued• Treasury StockTreasury Stock• Additional Paid in Capital• Retained Earnings

O ’ E it• Owners’ Equity• Sole Proprietorship Capital• Partnership - Show Each Owner’s Capital• Withdrawal Accounts

HFTPFootnotesFootnotes

• Significant Accounting Policies• Accounts and Notes ReceivableAccounts and Notes Receivable• Inventories• Investments

P t d E i t• Property and Equipment• Current Liabilities• Long Term Debt• Employee Benefit Plans• Leases• Segments of BusinessSegments of Business• Supplemental Financial Information• Commitment/Contingent Liability

Income Taxes• Income Taxes

HFTPBalance Sheet Anal sisBalance Sheet Analysis

• Comparative Statements or Horizontal Analysis– Compute absolute change– Compute relative change– Investigate significant differencesInvestigate significant differences– Internal analysis

• Common Size Statements or Vertical Analysis• Common Size Statements or Vertical Analysis– Total assets equal 100%– Total liabilities and Equity equals 100%– Balance Sheet Analysis– Each individual account is shown as a percentage

of the total– Compare to industry, like businesses or self

HFTPComparative Balance SheetComparative Balance Sheet

HFTPCommon Size Balance SheetCommon Size Balance Sheet

HFTPB l Sh t A l iBalance Sheet Analysis

Base year comparisonsSeries of Years– Series of Years

– Compared to a Base Year

Balance Sheet LimitationsBalance Sheet Limitations• Does not reflect current values of Assets (Booked

according to Cost Principle)g p )• Does not include some items of value such as

Personnel, Location, Customer Base, Goodwill• Becomes quickly outdated• Becomes quickly outdated• Some account balances are estimates such as

Depreciation and Estimates for Uncollectibles

HFTP

Income Statement

HFTPThe Income Statement

• Statement of Earnings• Profit and Loss Statement• Statement of Operations• Frequency - Daily, Weekly, Monthly, Quarterly,

Ann allAnnually• Reports on a Period of Time• Departmental Income Statements• Departmental Income Statements• Uniform System of Accounts

HFTPElements of Income StatementElements of Income Statement

• Revenue –– Sale of Goods and Services– Investment Income– Rental Income

• Expenses –• Expenses –– Outflows to Produce Goods– Cost of Goods Sold– Labor– Controllable Expenses– Noncontrollable Expenses

• Other Gains and Losses –– From Incidental Transactions– From Incidental Transactions– Acts of Nature

• Period Income or Loss –– Add/Deduct To/From Equity

HFTPIncome Statement Anal sisIncome Statement Analysis

• Comparative Statements or Horizontal Analysis– Compute absolute change– Compute relative change– Investigate significant differencesInvestigate significant differences– Internal analysis

• Common Size Statements or Vertical Analysis• Common Size Statements or Vertical Analysis– Total Revenues equal 100%– Each individual account is shown as a percentage

f T t l Rof Total Revenue– Compare to industry, like businesses or self

HFTPHorizontal Analysis ExampleHorizontal Analysis Example

HFTPVertical Analysis ExampleVertical Analysis Example

HFTP

Statement of Cash Flows

HFTPSt t t f C h FlStatement of Cash Flows

• Required Statement Since 1988 by the FASB• Replaces the Statement of Changes in

Financial Position• Focused on Cash Changes From Operating

Activities, Investing Activities Financing ActivitiesC h E i l t C h• Cash Equivalents = Cash

HFTPUse and Purpose of The StatementUse and Purpose of The Statement

of Cash Flows• Assess ability to generate future cash flows• Assess ability to meet current obligations• Shows the difference between Net Income and Cash Generated

Sh th ff t f C h d N C h Fi i d• Shows the effect of Cash and Non-Cash Financing and Investing Activities

• Internal users - Management– Assess LiquidityAssess Liquidity– Assess Financial Flexibility– Determine Dividend Policy– Plan Investing and Financingg g– Use and Purpose of The Statement of Cash Flows

• External users - Investors and Creditors– Assess Ability to Pay Bills– Assess Ability to Pay Dividends– Assess Need for Financing

HFTPDetermine Change in CashDetermine Change in Cash Account - The “Answer”

Summarize Operating ActivitiesSummarize Operating Activities– Cash in From Sale of Services– Cash in From Interest and Dividends– Cash Out for Expenses and interest on debtp

Summarize Investing Activities– Cash in From Property Sales– Cash in From Investment and Security SalesCash in From Investment and Security Sales– Cash Out for Loans and Purchases of Property and

InvestmentsSummarize Financing ActivitiesSummarize Financing Activities

– Cash in From Sale of Stock– Cash in From Issuing Debt– Cash Out for Paying Debt - Principaly g p– Cash Out to Pay Dividends – on own stock– Cash Out to Reacquire Capital Stock – Treasury Stock

HFTPDetermine Change in CashDetermine Change in Cash Account - The “Answer”

S h d l f N h I i dSchedule of Non-cash Investing and Financing Activities– Exchange of Capital Stock for Property and Equipment– Capital Lease Obligations Incurred

Present the Statement of Cash Flows– Cash Flows From Operating Activities– Cash Flows From Investing Activities– Cash Flows From Financing Activities– Net Increase (Decrease) in Cash– Cash At Beginning of Period– Cash At End of Period

S l t l S h d l N C h T ti– Supplemental Schedule - Non Cash Transactions

HFTPO ti A ti iti Di t M th dOperating Activities - Direct Method

• Accrual Accounting - Recognize expenses when incurred and revenue when earned.

• Convert each item on the Income Statement from l b i ti t h b i tiaccrual basis accounting to cash basis accounting

• Ignore non-cash transactions

• Cash receipts from sales plus interest and dividends received

• Cash disbursements for operating expenses

• FASB Prefers Direct Method, but Indirect Method is d i th h it lit i d tused more in the hospitality industry

HFTPOperating Activitiesp g

- Indirect Method• Used in hospitality operations

St t ith t i• Start with net income• Adjust for non-cash expenses such as depreciation (add)• Adjust for gains (deduct) or Losses (add) on sale of non-

current assets or marketable securitiescurrent assets or marketable securities • Adjust for changes in current accounts except cash and

dividends payable• Accounting for changes in current accounts using indirect

th dmethod– A Decrease in a Current Asset Is Added to Net Income– An Increase in a Current Asset Is Deducted From Net

IncomeIncome– A Decrease in a Current Liability Is Deducted From Net

Income– An Increase in a Current Liability Is Added to Net Income

HFTPNet Cash Flows From InvestingNet Cash Flows From Investing

ActivitiesE i N C t A t t f h• Examine Non-Current Asset accounts for changes between the Balance Sheet dates– Investments– Property and Equipment– Look at Journal Entries

• Read footnotes to Statements• Examine Non-Current Liability and Owners’ Equity

accounts for changes between the Balance Sheet datesdates– Look at Journal Entries– Read footnotes to Statements for Non-Cash transactions– Analyze Dividends Payable account for cash payments– Analyze Dividends Payable account for cash payments

HFTPDi id d E lDividend Example

• Beginning dividend payable $100• Beginning dividend payable $100• Dividend declared $200• Ending dividend payable $120• How much dividend was paid?p• $180 (beginning + declared – ending)

HFTP

Capital Leases

HFTPCapital Leases

• Called “leased asset under capital lease”

• Recorded at present value of future lease payments• Recorded at present value of future lease payments

• Strict criteria as to whether a leased asset is a capital lease (Balance Sheet) or an operating leasecapital lease (Balance Sheet) or an operating lease (Income Statement)

O ti L i ti• Operating Lease is an operating expense

HFTPLease AccountingLease Accounting

• An Agreement Conveying the Right to Use Resources for Specified Purposes and Time

• Lessor Owns the Property and Conveys Right to UseLessor Owns the Property and Conveys Right to Use• Lessee Uses Property in Exchange for Periodic Payments

Advantages of LeasesAdvantages of Leases• Conserves Working Capital• Acquisition Requires Less Internal Processes• Easy to Change Equipment and UpdateEasy to Change Equipment and Update• Tax Benefits - Pass Through Advantage of Lessors Tax Credits

in the Form of Lower Rent• Contracts Are Less Restrictive• Not Shown on Balance Sheet - Improves Ratios• May Acquire Without Capital Budgets

HFTPDisad antages of LeasingDisadvantages of Leasing

• Residual Value of Asset May Benefit Lessor• Cost May Be Higher Than Purchase• Cost May Be Higher Than Purchase• Lease Termination May Be Expensive

Provisions of LeasesProvisions of Leases• Term• Purpose• Rental Payment• Renewal Options• Obligations For Property Taxes, Insurance and Maintenance

(Triple Net Leases)(Triple Net Leases)• Inspection of Books• Sublease• Security Depositsy p• Indemnity Provisions

HFTPOperating LeasesOperating Leases

• Short Duration• Lessor Retains Responsibility for Executory Costs

( )(Property Taxes, Insurance, Maintenance)• Easily Canceled• Expensed on Income StatementExpensed on Income Statement

Capital Leasesp• Long Duration• Lessee Often Is Responsible for Executory Costs• Non-Cancelable• Capitalized on Balance Sheet

HFTPFASB Capitalization CriteriaFASB Capitalization Criteria

If the Lease Meets Any One of the Following Criteria It Must Be Treated As a CapitalizedCriteria, It Must Be Treated As a Capitalized Lease - Not As an Operating Lease– Title Transfer ProvisionTitle Transfer Provision– Bargain Purchase Provision– Economic Life Provision - 75% Rule– Value Recovery Provision - 90% NPV

HFTPAcco nting for Operating LeasesAccounting for Operating Leases

• Simple Rental Agreement• Debit Rent Expense and Credit Cash• Accrual Accounting Rules Apply If Rent Is Paid in Advance• If Pay in Advance Greater Than 12 Months - Treat As a Deferred

Charge on the Balance Sheet

Accounting for Capital Leases• Similar to the Purchase of a Fixed Asset• Recognize Asset and Applicable Liabilities• Asset Value Is the Net Present Value of Future Lease Payments

- Excluding Executory PaymentsU L ’ I t l B i R t L ’ I li it• Use Lessee’s Incremental Borrowing Rate or Lessor’s Implicit Rate If Lower and Is Known

HFTPOther Lease InformationOther Lease Information

• Leasehold Improvements - Capital Improvements Made to Leased Space. Amortize Cost Over the Shorter of Life of Improvements orCost Over the Shorter of Life of Improvements or Life of Lease

S l d L b k O S ll R l E t t• Sale and Leaseback - Owner Sells Real Estate and Leases It Back From Investor. Raises Capital - Defer and Amortize Profit Over Life of Lease. Recognize Losses Immediately

HFTP

Forms Of Business

HFTPForms Of Business Organization

• Sole Proprietorship• Sole Proprietorship• Partnership• Limited Partnership• “C” Corporationp• “S” Corporation – best of both

worldsworlds• Limited Liability Company

** t d t• ** tax advantage

HFTPSole ProprietorshipSole Proprietorship

• Easiest to organize / dissolveEasiest to organize / dissolve

• Legally not a separate business – liability issuesLegally not a separate business liability issues

• It is separate for accounting purposes however• It is separate for accounting purposes, however

• Owner not paid a salary or wage withdrawals• Owner not paid a salary or wage - withdrawals

HFTPPartnershipsPartnerships

• Two or more people joined together in a• Two or more people joined together in a non-corporate manner for conducting business Can use a written or oralbusiness. Can use a written or oral agreement

HFTPPartnerships

• Advantages– Greater financial

t th

• Disadvantages– Partners are taxed on

fit dl fstrength– Does not pay taxes

profits regardless of cash distributionLimits decision– Shares liability

– Greater t

– Limits decision making processUnlimited legal liabilitymanagement

strength– Unlimited legal liability

HFTPLi it d P t hiLimited Partnerships

• Offers liability protection to limited partnersOffers liability protection to limited partners– General Partner(s) – responsible for debts of

the partnership – Must have at least 1p p– Limited Partner(s) – may not actively

participate in the day to day operations of the p p y y pbusiness

– Agreement must be written– Limited partners liability is limited to the amount

of their investment

HFTPC tiCorporations

• A legal entity created by a state or other politicalA legal entity created by a state or other political authority

• Characteristics– An exclusive name– Continued existence independent of

stockholders– Paid in capital represented by shares of stock

O ll t l t d i it di t– Overall control vested in its directors

HFTPC tiCorporations

Ad t Di d t• Advantages– Shareholders liability limited

to amount of investment

• Disadvantages– Double taxation

Ownership control– Owners are taxed on

distributed profits (dividends)– Employee equity participation

– Ownership control

– Employee equity participation (ESOP)

– Lower tax rates– Corporation continues on in

perpetuity

HFTPCorporation FundamentalsCorporation Fundamentals

• Pays taxes on profits• Common stock• Common stock• Par value• Additional Paid-In Capital in Excess of Par• DividendsDividends• Retained earnings statement• Stock subscriptions

Preferred Stock• Preferred in terms of dividends• Preferred in event of liquidation• Cumulative• Callable• Non-Voting• Some are convertible

HFTPOther Corporation IssuesOther Corporation Issues

• Cash dividends versus stock dividends• Stock splitsp• Treasury stock (contra equity account :

Debit Treasury stock, Credit Cash)y )• Book value per share of common stock

HFTPOther Forms Of Business Organization

• S-Corp– Eliminates

• Limited Liability Company (LLC)

double taxation– Limited to 75

– May have unlimited number of owners

shareholders– Only one class

– May have a single owner

of stock– Shareholders

– Not restricted to one class of stock

pay taxes

HFTP

CHAE ReviewFinancial StatementsFinancial Statements,

Capital Leases &Forms of Business