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Hospitality Management AccountingHospitality Management Accounting

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Chapter 3Chapter 3

Income Statement (P&L)Income Statement (P&L)

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Users of Financial ReportsUsers of Financial Reports

InvestorsInvestors

CreditorsCreditors

ManagementManagement

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Level of detail is determined by whoLevel of detail is determined by who

the audience is:the audience is: ManagerManager most detailmost detail

Creditor, Owner (Shareholder)Creditor, Owner (Shareholder) less detailless detailoften referred to as a summary P&L. Eachoften referred to as a summary P&L. Each

Companys format will be differentCompanys format will be different

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Income Statement, also called a ProfitIncome Statement, also called a Profit

and Loss Statement (P&L), reportsand Loss Statement (P&L), reportsthe revenue (sales) and expensesthe revenue (sales) and expenses

(costs) over a period of time.(costs) over a period of time.

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Income StatementIncome Statement

Prepared over several periods of timePrepared over several periods of time(weekly, monthly, quarterly, yearly)(weekly, monthly, quarterly, yearly)

Most internal P&L's (used by mgmt) areMost internal P&L's (used by mgmt) areeither weekly or monthlyeither weekly or monthly

Weekly income statements are usuallyWeekly income statements are usually

based upon estimates and are prepared atbased upon estimates and are prepared atthe location (Some Webthe location (Some Web--Based systemsBased systemsallow for Daily P&L at location)allow for Daily P&L at location)

Other reports availableOther reports available -- see exhibit 2see exhibit 2

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Generally divided between revenuesGenerally divided between revenues(sales), expenses and subsequent(sales), expenses and subsequentprofitabilityprofitability

Contain current period (usually month)Contain current period (usually month)and Yearand Year--toto--DateDate

Typically compare actual results vs.Typically compare actual results vs.budget and prior period (month and yearbudget and prior period (month and year--toto--date)date)

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Department income statements are typicalDepartment income statements are typicalin a hotel operation (Rooms, Food andin a hotel operation (Rooms, Food andBeverage, Telephone, Golf, Garage, etc.)Beverage, Telephone, Golf, Garage, etc.)

Uniform System of AccountsUniform System of Accounts -- companiescompanieswill have a chart of accounts and expectwill have a chart of accounts and expect

managers to be consistent as to treatmentmanagers to be consistent as to treatmentof expenses.of expenses.

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Income StatementIncome Statement -- DefinitionDefinition Revenue is the inflow of cash or other propertiesRevenue is the inflow of cash or other properties

(credit cards and/or Accounts Receivable) in(credit cards and/or Accounts Receivable) in

exchange for goods and servicesexchange for goods and services -- renting a roomrenting a roomin a hotel or having a meal at a restaurant.in a hotel or having a meal at a restaurant.

Revenue is typically subdivided into categoriesRevenue is typically subdivided into categoriessuch as rooms and food/beverage in a hotel andsuch as rooms and food/beverage in a hotel and

food, wine/beer, alcohol in a restaurant. Can alsofood, wine/beer, alcohol in a restaurant. Can alsobe segmented by meal period or dining room/barbe segmented by meal period or dining room/barin a restaurantin a restaurant

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Income StatementIncome Statement -- DefinitionsDefinitions

Expenses (costs) are the outflow of cash or other propertiesExpenses (costs) are the outflow of cash or other properties(credit cards and/or Accounts Payable) in exchange for(credit cards and/or Accounts Payable) in exchange forgoods and servicesgoods and services -- Examples include food cost, laborExamples include food cost, laborcost, utilities, linen, etc.cost, utilities, linen, etc.

Expenses are subdivided into categories such as rooms andExpenses are subdivided into categories such as rooms andfood/beverage in a hotel and food, wine/beer, alcohol in afood/beverage in a hotel and food, wine/beer, alcohol in a

restaurant. Labor costs are segmented by payroll (furtherrestaurant. Labor costs are segmented by payroll (furtherdivided into front and back of house) and payroll relateddivided into front and back of house) and payroll related(taxes and benefits).(taxes and benefits).

98 different expenses (25 categories)98 different expenses (25 categories)

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Hospitality Management AccoutingHospitality Management Accouting

RevenuesRevenuesNet income orNet income or

Net lossNet loss =ExpensesExpenses

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Income StatementIncome Statement -- UsesUses

Report Card for determining financialReport Card for determining financialperformance (sales, expenses,performance (sales, expenses,profitability)profitability)

Relationship between expenses and salesRelationship between expenses and sales

Variances in sales and expenses to budgetVariances in sales and expenses to budget

and prior period (usually prior month andand prior period (usually prior month andyear)year)

Most bonus plans have some piece tied toMost bonus plans have some piece tied tothe income statementthe income statement

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Income StatementIncome Statement -- Location LevelLocation Level

Typical FormatTypical Format -- major categoriesmajor categories

RevenuesRevenuesCosts ofGoodsCosts ofGoods

Gross ProfitGross Profit

Labor ExpensesLabor Expenses

Operating ExpensesOperating Expenses

Occupancy ExpensesOccupancy Expenses

Operating ProfitOperating Profit

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Cost ofGoods (food, beverage,etc.)Cost ofGoods (food, beverage,etc.)

Beginning InventoryBeginning Inventory

PlusPlus PurchasesPurchases

EqualsEquals Food Available for SaleFood Available for SaleMinusMinus Ending InventoryEnding Inventory

EqualsEquals Cost ofGoodCost ofGood

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Cost ofGoods ExampleCost ofGoods Example

Food CostFood Cost -- NovemberNovember

Begin. Inventory (10/31)Begin. Inventory (10/31)$3,000$3,000

PlusPlus PurchasesPurchases 2,0002,000

Food Available for SaleFood Available for Sale 5,0005,000Minus End. Invent(11/30)1,000Minus End. Invent(11/30)1,000

Equals Food CostEquals Food Cost $4,000$4,000

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Food CostFood Cost Other factors that may impact foodOther factors that may impact food

cost depending on detail ofcost depending on detail of

accounting:accounting:Employee MealsEmployee Meals

Transfers to Beverage (Bar) Dept.Transfers to Beverage (Bar) Dept.

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Food CostFood Cost Problem 5 in bookProblem 5 in book

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Labor CostLabor Cost Labor Cost is broken down into Payroll andLabor Cost is broken down into Payroll and

Payroll RelatedPayroll Related Payroll is often broken down into Hourly (UnitPayroll is often broken down into Hourly (Unit

Staff) and Management (Front of House and BackStaff) and Management (Front of House and Backof House)of House)

Unit staff categories (kitchen, servers, bussers,Unit staff categories (kitchen, servers, bussers,host, etc.)host, etc.)

Easier to manage and discover problem areasEasier to manage and discover problem areas

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Labor CostLabor Cost Payroll related includes taxes, workersPayroll related includes taxes, workers

compensation insurance, and benefitscompensation insurance, and benefits(health, unemployment, etc.)(health, unemployment, etc.)

Increasing at a faster rate than payrollIncreasing at a faster rate than payroll

For every dollar of payroll you canFor every dollar of payroll you canmanage, another $0.20manage, another $0.20 -- $.30 is saved$.30 is saveddue to payroll related costsdue to payroll related costs

Typically largest area to manageTypically largest area to manage

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Other CostsOther Costs

Can be divided between ControllableCan be divided between Controllableand Nonand Non--ControllableControllable

Controllable are those expenses thatControllable are those expenses thatmanagement at location can impact.management at location can impact.

Example of controllable costs includeExample of controllable costs includelinen, repair and maintenance,linen, repair and maintenance,utilities, menus,utilities, menus,

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Analysis of Income StatementsAnalysis of Income Statements

Horizontal AnalysisHorizontal Analysis Vertical Analysis (Common SizeVertical Analysis (Common Size

Statements)Statements)

BaseBase--Year ComparisonsYear Comparisons

Ratio AnalysisRatio Analysis

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Preparing comparative IncomePreparing comparative IncomeStatementsStatements

Variance calculation is in both $ and %Variance calculation is in both $ and %termsterms

$ Variance is calculated by subtracting$ Variance is calculated by subtracting

2006 from 2007 figures2006 from 2007 figures % Variance is calculated by dividing% Variance is calculated by dividing

variance figure byvariance figure by 2006 figures2006 figures

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Horizontal AnalysisHorizontal Analysis20072007 20062006 Diff.Diff. % chg% chg

SalesSales $50,000$50,000 $40,000$40,000 $10,000$10,000 25%25%

C.G.SoldC.G.Sold 15,00015,000 11,50011,500 3,5003,500 30%30%

LaborLabor 20,00020,000 16,00016,000 4,0004,000 25%25%

ProfitProfit $15,000$15,000 $12,500$12,500 2,5002,500 20%20%

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Vertical Analysis (CommonVertical Analysis (Common--Size)Size)20072007 % of % of

salessales2006.2006. % of % of

salessales

SalesSales $50,000$50,000 $40,000$40,000

C.G.SoldC.G.Sold 15,00015,000 30%30% 11,50011,500 28.8%28.8%

LaborLabor 20,00020,000 40%40% 16,00016,000 40%40%

ProfitProfit $15,000$15,000 30%30% $12,500$12,500 31.2%31.2%

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Preparing comparative IncomePreparing comparative IncomeStatementsStatements -- % of Sales% of Sales

Only way that an expense, as aOnly way that an expense, as apercentage of sales, can increase is ifpercentage of sales, can increase is ifthat expense is increasing at a fasterthat expense is increasing at a fasterrate than revenuerate than revenue -- should only occurshould only occur

under unusual circumstances (largeunder unusual circumstances (largeincrease in product cost).increase in product cost).

In prior example cost of goodsIn prior example cost of goodsincreased by 30% on a 25% increase inincreased by 30% on a 25% increase in

salessales

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Analysis (Combo)Analysis (Combo)20072007 % of % of

SalesSales20062006 % of % of

SalesSales%/% pt.%/% pt.inc/(dec)inc/(dec)

Rev.Rev. 50,00050,000 40,00040,000 25%25%

C.G.S.C.G.S. 15,00015,000 30%30% 11,50011,500 28.8%28.8% 1.2 pts1.2 pts

LaborLabor 20,00020,000 40%40% 16,00016,000 40%40% 0.0 pts0.0 pts

OtherOther 3,0003,000 6%6% 2,8002,800 7%7% (1.0)pts(1.0)pts

ProfitProfit 12,00012,000 24%24% 9,7009,700 24.2%24.2% (1.2) pts(1.2) pts

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Golden Rule #1" Golden Rule #1" -- Under NormalUnder NormalCircumstances , profits shouldCircumstances , profits should

increase at a faster rate than salesincrease at a faster rate than sales

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"Golden Rule #2""Golden Rule #2" -- Under normalUnder normalcircumstances, for every additional $circumstances, for every additional $

of revenue over a prior periodof revenue over a prior period

(month, year), $0.50 should fall to(month, year), $0.50 should fall tothe bottom linethe bottom line

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Income StatementIncome StatementDepartment/Supplemental SchedulesDepartment/Supplemental Schedules

Responsibility AccountingResponsibility Accounting Provide management with detailedProvide management with detailed

information by operating departmentsinformation by operating departments(profit center) and service centers (cost(profit center) and service centers (costcenter).center).

Difference between operating departmentDifference between operating departmentand service center is operatingand service center is operatingdepartment directly generates revenuedepartment directly generates revenue(room department vs. security center)(room department vs. security center)

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Hotel AccountingHotel Accounting

Much of the typical hotel incomeMuch of the typical hotel incomestatement is done by departmentsstatement is done by departments(departmental accounting)(departmental accounting)

Appendix A in bookAppendix A in book

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End of Chapter 3End of Chapter 3

Documents

Chapter 3 336