Industry Guide Finance Basics

LODGING PROPeRTIeS
First in a series, including benchmarking, statements of income and balance sheets
By Tanya Venegas, MBA, MHM

FINANCe FOR THe NON-FINANCIAL MANAGeR:

ue to the economic downturn in the United States, many hospitality companies are facing troubling financial times. Therefore, company stakeholders have started to take a closer look at financial statements. In some cases, stakeholders may not have an in-depth knowledge of financial statements and financial jargon or they may be more familiar with widget accounting. This article is the first in a series of articles which will focus on explaining finance in the hospitality industry. The articles will cover the various financial statements including the balance sheet, statement of income, statement of owners equity and statement of cash flows. Additional accounting and finance topics such as GAAP, ratios, statistics, benchmarking and expense dictionary will be covered.

Benchmarking and Comparative Analysis

There is one very important benefit to following the guidelines for financial reporting: benchmarking data. Each and every stakeholder in an organization; whether they are a manager, stockholder, member or owner, wants to know how their organization compares to other similar properties or companies. To ensure that a comparative analysis can be done correctly, financials must be recorded correctly. First of all, accounting rules such as GAAP (general accepted accounting principles) and IFRS (international financial reporting standards) dictate a framework for how publicly traded companies must record financial accounting information. Some organizations may operate as a private entity and feel that they do not need to conform to GAAP or IFRS, but this is only true for organizations which operate in a vacuum. One primary example is funding. The majority of banks in the U.S. require financials which conform to U.S. GAAP before providing financing. At this time, many organizations are encountering problems with their debts. Numerous hotels and clubs are under

foreclosure because they are unable to make debt payments. Even for the organizations that are able to make their debt service, they may be defaulting on their loan covenants which are financial requirements set forth by lenders. In addition to GAAP and IFRS, the hospitality industry has several texts which provide financial accounting guidance. These publications include the following: Uniform System of Accounts for the Lodging Industry (USALI), Uniform System of Financial Reporting for Clubs (USFRC), Uniform System of Financial Reporting for Spas (USFRS), and Uniform System of Accounts for Restaurants (USAR). There are multiple other publications which address various parts of the hospitality industry including: health clubs, racquet clubs, sportclubs, timeshares and condominiums. In addition to a chart of accounts, most of these texts also include guidance on development of financial statements and an expense dictionary. The expense dictionary is a detailed listing of expense items which includes the item name, department/ schedule and account name. Even though there are certain rules pertaining to accounting in the hospitality industry, not everything is covered. Therefore, organizations must continue to rely on the expertise of accounting professionals within their companies to make the right decisions when it comes to financial reporting. Reporting in the hospitality industry is fundamentally complex compared to other industries. Most college graduates are required to take an accounting course in which examples are focused on manufacturing firms. For those familiar with this process they are used to hearing terms such as cost of goods sold (COGS) and gross income rather than

Tanya Venegas, MBA, MHM is program director of the HFTP Research Institute at the University of Houston and frequent speaker at HFTP conferences.

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revenues, expenses and income before income taxes which is the format provided in the USALI. A similar format is also used in the USFRC. It is all a matter of understanding the jargon for the hospitality industry. The Statement of Income can be referred to by many names such as the Income Statement, Earnings Statement, Statement of Operations, and Profit and Loss Statement. Basically, the Statement of Income provides information on the revenues and expenses of the company. As can be seen in Examples A and B in Table 1 at right, the two examples of the statement of income are very similar. The only difference is the way revenues and expenses are listed. Some confusion typically surrounds revenues and expenses in lodging properties and how to divide them into the appropriate categories. For example, how should revenues for the rental of cribs or rollaway beds be recorded? These items are recorded under Other Rooms Revenue and are included in the calculation of Total Rooms Revenue. Another area of debate is the recording of service charge revenues. According to the USALI, all service charge revenues must be recorded as revenue even if a portion of the service charge is paid to the wait staff. Of course, not everything is this simple, but the majority of questions pertaining to the recording of revenues and expenses can be answered by a quick look at the USALI. The examples in this article deal specifically with the USALI, but uniform systems for clubs, spas and restaurants follow a similar format.

Table 1. Statement of Income: COGS vs. uSALI

example A COGS Method ABC Manufacturing Co. Income Statement For the Year Ended December 31, 20XX Sales Cost of Goods Sold Beginning Inventory Add: Purchases Total Less: Ending Inventory Less: Direct Labor Cost of Goods Sold expenses Advertising Insurance Payroll Taxes Rent Repairs and Maintenance Utilities Wages Total Expenses Net Income Revenue Rooms Food and Beverage Other Operated Departments Rentals and Other Income Total Revenue expenses Rooms Food and Beverage Other Operated Departments Administrative and General Sales and Marketing Property Operation and Maintenance Utilities Management Fees Rent, Property Taxes, and Insurance Interest Expense Depreciation and Amortization Loss or (Gain) on the Disposition of Assets Total Expenses Income Before Income Taxes Lets first look at the definition for assets in the USALI. Assets are anything of economical value to the company and can be divided into several categories: current assets, non-current receivables, investments, property and equipment, and other assets. Current assets include items which can easily be converted into cash in less than a year. Examples of current assets include cash, accounts receivable and inventories. The next section if for non-current receivables which includes notes that will be collected in over a year. The third section includes information on investments such as equity securities and debt securities. The property and equipment section follows investments and includes items such as land, buildings, furnishings, and equipment. The final section under assets is called other assets and it is a catch-all for everything remaining including intangible assets, deferred charges and restricted cash. The second major section of the balance sheet contains liabilities. Liabilities are broken down into shortterm and long-term liabilities. Current liabilities must be paid within one year and include items such as accounts payable, accrued expenses, income taxes payable and current maturities of example B uSALI Method ABC Hotel Co. Statement of Income For the Year Ended December 31, 20XX

Balance Sheet
The balance sheet presents three major sections: assets, liabilities and owners equity (find the definition of each in Table 2 and the example in Table 3, both on page 30). The balance sheet can also be referred to as the statement of financial position. In accounting courses students learn that Assets Liabilities = Owners Equity. Typical accounts include current assets, long-term assets, intangible assets, current liabilities and long-term liabilities. The structure of the balance sheet differs slightly in the USALI.

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Table 2: Balance Sheet Dictionary

Account Type Assets Definition Items of Economic Value Type Current Assets Non-current Receivables Prepaid or Deferred Assets Intangible Assets Liabilities Financial Obligations Current Liabilities Long-Term Liabilities Owners Equity Total Assets Total Liabilities Corporation Partnership Limited Liability Company Sole Proprietorship long-term debt. The next section covers long-term debts that are payable in over a year and include mortgage notes and obligations under capital leases. Other sections under liabilities include other long-term liabilities, deferred income taxes, and commitments and contingencies. The final section of the balance sheet covers owners equity which can take many different shapes depending on the ownership structure of the company. Some of the basic structures include a corporation, limited liability company, partnership and sole proprietorship. This article is intended to shine light on financial reporting in the hospitality industry. Specifically, the topics of benchmarking, comparative analysis, statement of income and balance sheet were addressed. If you have a topic relating to financial statements or accounting standards that you would like to see covered in a future article please contact the HFTP Research Institute at hftp@hrm.uh.edu. examples Cash, Cash Equivalents, Inventory and Accounts Receivable Property, Plant and Equipment Insurance, Taxes, and Rent Goodwill, Copyrights, Trademarks and Patents Accounts Payable, Accrued Expenses, and Current Portion of Long-term Debt Mortgage Notes and Deferred Compensation Capital Stock, Retained Earnings and Treasury Stock Contributions and Withdrawals Contributions and Withdrawals Contributions and Withdrawals

Table . Sample Hotel Balance Sheet Format

ABC Hotel Company; Balance Sheet; December 31, 20XX Assets
Current Assets Cash Short-Term Investments Receivables Inventories Operating Equipment Prepaid Expenses Deferred Income Taxes - Current Other Total Current Assets Non-Current Receivables Investments Property and equipment Land Buildings Leaseholds and Leasehold Improvements Furnishings and Equipment Construction in Progress Total Property and Equipment Less Accumulated Depreciation and Amortization Net Property and Equipment Other Assets Intangible Assets Deferred Charges Deferred Income Taxes - Non-current Operating Equipment Restricted Cash Other Assets Total Other Assets Total Assets

Liabilities and Owners equity

Current Liabilities Notes Payable Accounts Payable Accrued Expenses Income Taxes Payable Deferred Income Taxes - Current Current Maturities of Long-Term Debt Other Total Current Liabilities Long-Term Debt Mortgage Notes Obligations Under Capital Leases Total Long-Term Debt Other Long-Term Liabilities Deferred Income Taxes Non-current Commitments and Contingencies Owners equity Total Liabilities and Owners equity

Resources
Hotel Association of New York City, Inc. Uniform System of Accounts for the Lodging Industry, 10th ed. (2006). American Hotel & Lodging Association Educational Institute.

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Industry Guide Finance Basics

FINANCE FoR THE NoN-FINANCIAL MANAGER: STATEMENT oF CASH FLow

Second in a series: Reviewing changes in cash and temporary cash investments within the same period as the statement of income
By Tanya Venegas, MBA, MHM

n addition to managing the financial aspects of a business, financial managers are also responsible for communicating financial information to stakeholders of the business which may include shareholders, owners, managers and board members. This article is the second article in a series of articles which will provide financial explanations for non-financial managers. The first article covered questions pertaining to the statement of income and the balance sheet (The Bottomline December 2009/January 2010, pg. 28). This article will include explanation of the statement of cash flows. Look for future articles which will cover topics such as the statement of equity, expense dictionary, ratio analysis, capital expenses, accruals and depreciation.

Statement of Cash Flows

Simply stated, the statement of cash flows provides information on the change in cash and temporary cash investments during the same period as the statement of income (Hotel Association of New York City, Inc., 2006). Temporary cash investments are defined as investments which can easily be converted into cash in less than three months. The purpose of the statement of cash flow is to provide investors, managers and creditors information on how the companys cash is being used. According to Weygandt, Kieso, Kimmel and DeFranco, the statement of cash flows answers the following questions. 1. Where did the cash come from during the period? 2. What was the cash used for during the period? 3. What was the change in the cash balance during the period? (2008) Activities in the statement of cash flows are divided into three separate sections: operating, investing and financing activities (See table on page 11). Cash flows from operating activities include cash generated from property operations.

These items can be easily described as transactions that create revenues and expenses and enter into the determination of net income (Weygandt, et al., 2008). Cash flows from investing activities include transactions such as the acquisition or disposal of property and facilities, the purchase and sale of investments, lending money and collecting loans. The final section, financing activities, includes items such as obtaining and repaying debt, issuing and repurchasing stock and dividend payments. Sometimes there may be some confusion between each of the categories. For example, some people may want to categorize interest payments to lenders under financing activities. The rule of thumb is that anything that would be considered a revenue or expense on the statement of income should be included under operating activities.

Statement of Cash Flow continued on page 12.

Tanya Venegas, MBA, MHM is program director of the HFTP Research Institute at the University of Houston and frequent speaker at HFTP conferences.

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Cash Flow from operating, Investing and Financing Activities

operating Activities Cash Inflows
Sale of goods or services Returns on loans Returns on equity securities Guest receipts

Investing Activities Cash Inflows

Sale of property, plant and equipment Sale of debt or equity securities Collection of principal on loans to other entities

Financing Activities Cash Inflows

Sale of equity securities Issuance of debt

Cash Outflows
Payments to suppliers for inventory Payroll disbursements Payments to government for taxes

Cash Outflows
Capital expenditures to purchase property, plant and equipment Purchase debt or equity securities Make loans to other entities

Cash Outflows
Dividends to stockholders Redeeming long-term debt Reacquire capital stock

Noncash Activities
Conversion of bonds into common stock Exchange of plant assets Issuance of common stock to purchase assets Purchase of capital assets by incurring debt Purchase of capital assets through capital lease transactions Transactions involving the sale of assets where the seller provides financing

Sources A and B

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Determining operating Activities Direct or Indirect

Another aspect of the statement of cash flows is the determination of operating activities. Either the Direct or Indirect Method can be used. In the direct method, operating cash receipts and cash disbursements are identified (see Direct Method at right). The majority of companies use the Indirect method which determines the cash from operations by adjusting net income for noncash items (see Indirect Method on page 13). As can be seen in the examples of the Direct and Indirect Methods of the statement of cash flows, the only difference is the determination of cash flows from operating activities. Another important aspect of the statement of cash flows is the reporting of noncash investing and financing activities (find noncash examples on page 11). These items are typically provided in a narrative form below the cash flow statement as seen in the example cash flow statements presented.

Direct Method Statement of Cash Flows

Cash Flows from operating Activities Guest Receipts Payroll Disbursements Other Operating Disbursements Interest Paid Income Taxes Paid

Period Current Year $ $ Prior Year

Net cash Provided by (Used In) Operating Activities

Cash Flows from Investing Activities Capital Expenditures Decrease (Increase) in Restricted Cash Proceeds from Asset Dispositions Proceeds from Sale of Investments Purchases of Investments

Making use of the Information

As mentioned earlier in this article, the primary purpose of the statement of cash flows is to determine the change in cash and temporary cash investments. The most important question is how to use the information contained in the statement of cash flows. There are many uses of this information including: the ability to generate future cash flows, the ability to pay dividends and meet obligations, determining the difference between net income and net cash provided by operating activities, and understanding cash investing and financing activities (Weygandt, et al., 2008). When analyzing the statement of cash flows individuals can get a better look at how the company is generating cash. Keep in mind, a company does not have to have a positive cash flow to be in good standing. Some companies will have a negative cash flow when they are in an expansion phase, which typically indicates a positive move in growth. After examining the overall cash situation at the end of the period, stakeholders need to look further into the separate segments of cash flow: operating, investing, and financing activities. Typically, a company will generate the majority of cash flows from operating activities because these are the companys core operations. Analysts, managers, investors and employees can then look at the sections pertaining to investing and financing activities to determine how the company is managing these aspects of the business.

Net Cash Provided By (Used In) Investing Activities

Cash Flows from Financing Activities Proceeds from Debt or Equity Financing Debt Repayments Dividends Paid Distribution to Owners/Partners

Net Cash Provided By (Used In) Financing Activities

Increase (Decrease) in Cash and Temporary Cash Investments Cash and Temporary Cash Investments, Beginning of Period Cash and Temporary Cash Investments, End of Period Supplemental Information Related to Noncash Investing and Financing Activities
Source A

Sources

A. Hotel Association of New York City, Inc. (2006). Uniform System of Accounts for the Lodging Industry. Lansing, MI: American Hotel & Lodging Educational Institute. B. Weygandt, J., Kieso, D., Kimmel, P., & DeFranco, A. (2008). Hospitality Financial Accounting. Hoboken, NJ: John Wiley & Sons, Inc.

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Indirect Method Statement of Cash Flows

Cash Flows from operating Activities Net Income Adjustments to Reconcile Net Income To Cash Provided By (Used In) Operating Activities: Depreciation and Amortization Loss (Gain) on Sale of Property and Equipment Deferred Taxes Decrease (Increase) in Accounts Receivable Decrease (Increase) in Inventory Decrease (Increase) in Prepaids Increase (Decrease) in Payables Increase (Decrease) in Accruals

Period Current Year $ $ Prior Year

Have the Information? Now what? Uses for the data from your Statement of Cash Flow
Ability to generate cash flows It is much easier for investors and managers to analyze the organizations ability to generate future cash flows using the statement of cash flows versus the accrual basis of accounting. The statement of cash flows provides a better look at the companys cash situation because noncash items such as accounts receivable, accounts payable and inventories have been adjusted to reflect the amount of cash held by the organization. Ability to pay dividends and meet obligations The companys ability to pay employees, meet various obligations and pay dividends is also provided by the statement of cash flows. Employees, creditors and stockholders can examine this statement to determine if the organization has enough money to make its financial obligations. Determining the difference between net income and net cash provided by operating activities The calculation of net income includes all revenues and does not account for receivables which may not be collected. Many other estimates are used in developing the net income figure, which can cause some individuals to question the calculation. In the statement of cash flows, individuals can assess why there is a difference between net income and net cash provided by operating activities. This provides a better look at the organizations ability to generate cash from operations. understanding cash investing and financing activities In analyzing the sections which include cash flows from investing activities and cash flows from financing activities, individuals can better understand the companys ability to properly manage assets and liabilities. This section provides a look at why assets and liabilities changed during the time period.
Source B

Net cash Provided by (Used In) Operating Activities

Cash Flows from Investing Activities Capital Expenditures Decrease (Increase) in Restricted Cash Proceeds from Asset Dispositions Proceeds from Sale of Investments Purchases of Investments

Net Cash Provided By (Used In) Investing Activities

Cash Flows from Financing Activities Proceeds from Debt or Equity Financing Debt Repayments Dividends Paid Distribution to Owners/Partners

Net Cash Provided By (Used In) Financing Activities

Increase (Decrease) in Cash and Temporary Cash Investments Cash and Temporary Cash Investments, Beginning of Period Cash and Temporary Cash Investments, End of Period Cash Paid for Interest Cash Paid for Income Taxes Supplemental Information Related to Noncash Investing and Financing Activities (Disclose Significant Items Separately)
Source A

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Industry Guide Finance Basics

FINANCE FOR THE NON-FINANCIAL MANAGER: By Tanya Venegas, FINAL CHAPTER MBA, MHM
Third in a series: Finishing up with multiple topics, including ratio analysis, departmental payroll titles, expense dictionary, statement of owners equity and HFTP member questions

Ratio Analysis
Oftentimes, stakeholders want to see in-depth analysis of financial statements and ratio analysis as one of the ways to analyze the well-being of the organization. The following ratios provide a look at the organization and how it is operating and can be used for any type of business club, hotel, restaurant, etc. Solvency Ratio = Total Assets / Total Liabilities Debt-Equity Ratio = Total Liabilities / Total Owners Equity Debt Service Coverage Ratio = Adjusted Net Operating Income / Debt Service

Liquidity Ratios
Liquidity ratios measure an organizations ability to meet its short-term financial obligations. Examples of liquidity ratios include the current ratio, acid-test ratio and accounts receivable turnover ratio. Current Ratio = Current Assets / Current Liabilities Acid-Test Ratio = Quick Assets* / Current Liabilities Accounts Receivable Turnover = Total Revenue / Average Accounts Receivable
* Quick Assets are calculated by subtracting inventories and prepaid expenses from current assets.

Activity Ratios
Activity ratios measure managements ability to produce income utilizing the resources that they are provided. One of the primary measurements in this area is inventory turnover. Food Inventory Turnover = Cost of Food Sales / Average Food Inventory

Profitability Ratios
Profitability ratios allow organizations to compare bottom line profits against their competitors. Examples of profitability ratios include gross operating profit margin, income before fixed charges margin ratio and net operating income margin ratio. Gross Operating Profit Margin Ratio = Gross Operating Profit / Total Revenue Income Before Fixed Charge Margin Ratio = Income Before Fixed Charges / Total Revenue Net Operating Income Margin Ratio = Net Operating Income / Total Revenue

Solvency Ratios
Solvency ratios determine the operations ability to meet its long-term obligations by measuring the degree of debt financing used by the company. Examples of solvency ratios include debt-equity ratio and debt service coverage ratio. Solvency ratios have been greatly scrutinized due to the downturn in the economy. Most debt covenants require a certain debt service coverage ratio and many companies are not making the mark because their net operating income has declined.

Tanya Venegas, MBA, MHM is program director of the HFTP Research Institute at the University of Houston and frequent speaker at HFTP educational events.

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Operating Ratios
Operating ratios allow owners and managers to analyze the relationship between revenues and expenses for an operation. These calculations can be used as a control by comparing against budgeted amounts, industry standards and competitors. Operating ratios will vary depending on the type of property. For example, hotel properties would look at room rates and occupancy percentages while golf clubs would focus on rounds of golf.

Average Food Check = Total Food Revenue / Number of Covers Food Cost Percentage = Cost of Food Sales / Food Revenue Beverage Cost Percentage = Cost of Beverage Sales / Beverage Revenue Labor Cost Percentage = Total Payroll and Related Expenses / Total Revenue

Departmental Payroll Titles

Included in the USALI is a section which discusses departmental payroll titles. This section is useful when comparing common tiles in departments such as rooms, accounting, purchasing, and information systems. Many organizations have their own variations of titles for positions. One example would be for individuals working on information systems at the property level. According to the USALI, common titles in this department include director of information systems, MIS manager, systems manager, systems analyst, programmer and computer operator (2006).

Expense Dictionary
The expense dictionary is a useful tool for hospitality accounting managers. An expense dictionary is included in the Uniform System of Accounts for the Lodging Industry (USALI), Uniform System of Financial Reporting for Clubs (USFRC) and other uniform systems such as for spas and restaurants. The purpose of the expense dictionary is to assist hospitality managers in classifying expense items. Managers can look up the name of the item and the department/schedule is listed along with the account name. Unfortunately, every individual item may not be included in the expense dictionary, but it provides guidelines to assist accounting managers in account classification. It is important to appropriately classify items for comparability purposes.

Statement of Owners Equity

The purpose of the Statement of Owners Equity is to show the changes in owners equity over a specified period of time. According to the Uniform System of Accounts for the Lodging Industry (USALI) 10th edition, a separate statement of owners equity must be presented if there is significant activity in the equity accounts during the period (2006). The change in owners equity can be included in the Statement of Income if net income or loss is the only change experienced in the equity accounts. The Statement of Owners Equity is also known as the statement of retained earnings, equity statement or statement of shareholders equity. Typically, the name is dependent on the structure of the company. For example, the statement of shareholders equity title would be used by a corporation in which investors hold shares. The USALI outlines several different versions of the Statement of Owners Equity which can be used depending on the type of entity. An example can be found accompanying this article (page 16). The Statement of Stockholders Equity is the most complicated form, because of the different equity types: preferred stock, common stock, additional paid-in capital and treasury stock. The statements for partnerships, members and sole proprietorships are much simpler and only have slight variations.

DOWNLOAD THIS
Finance for the Non-financial Manager
This series was written to serve as a resource to share with your staff. Download a pdf of the full series on the HFTP web site under the Recent Research Articles page of the Resources>HFTP Research Institute section on the site. Previous topics in the series include: Statement of Cash Flow, Benchmarking, Statements of Income, and Balance Sheets

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Statement of Owners Equity (continued)

EXAMPLE. Statement of Owners Equity
Owner Balance at the Beginning of Prior Year Add (Deduct) Net Income Contributions Change in Unrealized Gains (Losses) Withdrawals Other Balance at End of Prior Year Add (Deduct) Net Income Contributions Change in Unrealized Gains (Losses) Withdrawals Other Balance at End of Current Year $ $ $ $ $ $ Total

DEFINITIONS.
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income represents gains and losses that have yet to be realized.

Preferred Stock

Additional Paid in Capital

Is the difference between the par-value of a common stock and its purchase price.

Common Stock

Preferred shareholders have priority over common shareholders when it comes to earnings and assets at liquidation and typically earn a fixed dividend which is paid before common shareholders receive dividends. On the downside, preferred stockholders typically do not have voting rights and do not have as much earning potential as common stockholders.

Common stockholders own a portion of a corporation, have the ability to elect the board of directors, and set corporate policies. On the downside, common stockholders are at the bottom when it comes to claims to the companys assets at liquidation.

Retained Earnings

Retained earnings are the percentage of net earnings which is retained by the company to reinvest and grow its core business.

Dividends Declared

Treasury Stock

When dividends are declared, retained earnings is reduced because this is considered a distribution to shareholders.

Treasury stock is shares that the company currently owns which were either repurchased or were never offered to the public for purchase.

Net Income

Income that remains after subtracting costs (operating, depreciation, interest and taxes) from the companys revenues. This can also be referred to as earnings or net profit.
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Unrealized Gains (Losses)

A profit or loss that results from holding onto an asset rather than selling it.

Finance Basics

HFTP Member Questions

HFTP members were asked to supply questions that they often receive pertaining to financial statements. These questions are briefly answered below. For more in-depth answers you can contact the HFTP Research Institute. Can you explain the difference between a capital and operating expense? A capital expense is one that results in an economic benefit of greater than one year. Capital expenses include land, buildings and most equipment. Expenses should also be considered capital expenditures if it significantly extends the life or increases the value of the item. Operating expenses are those which a business incurs while performing normal daily operations such as utilities, salaries and other basic operating costs. Can you please explain accruals and how they apply to payroll? There are two basic accounting systems: cash or accrual. Cash basis accounting only records cash transactions, but accrual accounting allows companies to record items such as accounts receivable, accounts payable and future tax expenses. Accrual accounting allows the company to see the big picture and know what expenses are on the horizon and the revenues which will be received. It also allows a company to match expenses to the appropriate period of time. How does this apply to payroll? Here is a simple example. Johnny works at the front desk for ABC Hotel. Johnny receives a paycheck every two weeks; therefore, the hotel needs to set aside the money that Johnny is earning along with any taxes that need to be paid. Money which will be paid to Johnny can easily be recorded on the balance sheet as a liability by debiting an account such as wage expense and crediting a current liability such as accrued payroll. Accruals also allow accountants to match payroll to the appropriate time period. If Johnnys paycheck spans two months, than the proportionate amount of payroll needs to be recorded in each month. That allows the business to match revenues to expenses. Please provide an explanation for depreciation and why it has to be done. Depreciation is an expense which matches the expense of the asset to the revenue which the asset will help produce. In addition, depreciation is a non-cash expense that will decrease earnings and increase free cash flow over time. For example, a restaurant may purchase an ice machine for $5,000. The expected useful life of the unit is seven years; therefore, it will be used for seven years to provide guests with ice for their beverages and used for various purposes in the kitchen. Depreciation for the ice machine would then be recorded over a seven year period. How can the percentage of sales calculation be used as a financial tool and what does it mean in a departmental P&L? When analyzing the Profit & Loss Statement (P&L) or Statement of Income, percentage of sales can be a powerful tool. In general, this allows an organization to see where revenues are originating and what portion of these revenues is eaten up by expenses. The following is a simple example of percentages of sales for departmental revenues and expenses. First of all, examine the top portion containing revenues. These figures were all calculated using total revenues; therefore, they add up to 100 percent.

Hotel ABC
Revenues Rooms F&B Telecommunications Other Operated Departments TOTAL Expenses Rooms F&B Telecommunications Other Operated Departments TOTAL

Percentages 65 25 1 9 100 27 68 101 5 42

The second section contains expenses as a percentage of departmental revenues, which is the reason the expense totals do not add up to 100 percent. For example, the percentage for rooms department expenses was calculated by dividing rooms expenses by rooms revenue totaling 27 percent. This allows managers to analyze what percentage of revenues is being used to create sales. Finally, when you get down to total expenses it is calculated using total sales. Then departmental profit can be calculated by subtracting total expenses (42 percent) from total revenues (100 percent) resulting in departmental profit of 58 percent. The above questions were covered in a brief manner. For further information on any of the topics in this article contact the HFTP Research Institute.

Sources
Hotel Association of New York City, Inc. (2006). Uniform System of Accounts for the Lodging Industry, 10 ed. American Hotel & Lodging Educational Institute, Lansing, MI.
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