HRIM 336 Hospitality Management Accounting

HRIM 336 Hospitality Management Accounting

Chapter 3 Income Statement (P&L)

HRIM 336 Users of Financial Reports

Investors

Creditors

Management

HRIM 336 Hospitality Management Accounting



Level of detail is determined by who the audience is:

 

Manager most detail Creditor, Owner (Shareholder) less detail often referred to as a summary P&L. Each Companys format will be different

HRIM 336 Hospitality Management Accounting

Income Statement, also called a Profit and Loss Statement (P&L), reports the revenue (sales) and expenses (costs) over a period of time.

HRIM 336 Hospitality Management Accounting

Income Statement


Prepared over several periods of time (weekly, monthly, quarterly, yearly) Most internal P&L's (used by mgmt) are either weekly or monthly Weekly income statements are usually based upon estimates and are prepared at the location (Some Web-Based systems Weballow for Daily P&L at location) Other reports available - see exhibit 2

HRIM 336 Hospitality Management Accounting

Income Statement


Generally divided between revenues (sales), expenses and subsequent profitability Contain current period (usually month) and Year-to-Date Year-toTypically compare actual results vs. budget and prior period (month and yearyeartoto-date)

HRIM 336 Hospitality Management Accounting

Income Statement


Department income statements are typical in a hotel operation (Rooms, Food and Beverage, Telephone, Golf, Garage, etc.) Uniform System of Accounts - companies will have a chart of accounts and expect managers to be consistent as to treatment of expenses.

HRIM 336 Hospitality Management Accounting

Income Statement - Definition


Revenue is the inflow of cash or other properties (credit cards and/or Accounts Receivable) in exchange for goods and services - renting a room in a hotel or having a meal at a restaurant. Revenue is typically subdivided into categories such as rooms and food/beverage in a hotel and food, wine/beer, alcohol in a restaurant. Can also be segmented by meal period or dining room/bar in a restaurant

HRIM 336 Hospitality Management Accounting

Income Statement - Definitions


Expenses (costs) are the outflow of cash or other properties (credit cards and/or Accounts Payable) in exchange for goods and services - Examples include food cost, labor cost, utilities, linen, etc. Expenses are subdivided into categories such as rooms and food/beverage in a hotel and food, wine/beer, alcohol in a restaurant. Labor costs are segmented by payroll (further divided into front and back of house) and payroll related (taxes and benefits). 98 different expenses (25 categories)

HRIM 336 Hospitality Management Accouting

Revenues

Expenses

Net income or = Net loss

HRIM 336 Hospitality Management Accounting

Income Statement - Uses


 

Report Card for determining financial performance (sales, expenses, profitability) Relationship between expenses and sales Variances in sales and expenses to budget and prior period (usually prior month and year) Most bonus plans have some piece tied to the income statement

HRIM 336 Hospitality Management Accounting



Income Statement - Location Level Typical Format - major categories Revenues Costs of Goods Gross Profit Labor Expenses Operating Expenses Occupancy Expenses Operating Profit

HRIM 336 Hospitality Management Accounting

Income Statement Cost of Goods (food, beverage,etc.) Beginning Inventory Purchases Food Available for Sale Ending Inventory Cost of Good

Plus Equals Minus Equals

HRIM 336 Hospitality Management Accounting

Income Statement Cost of Goods Example Food Cost - November Begin. Inventory (10/31) $3,000 Plus Purchases 2,000 Food Available for Sale 5,000 Minus End. Invent(11/30)1,000 Equals Food Cost $4,000

HRIM 336 Hospitality Management Accounting

Income Statement Cost of Goods Example Food Cost " I don't know why my Food Cost is so high since I hardly bought anything this month" In prior example, Cost of Goods is a combination of $2,000 in purchases and a $2,000 reduction in inventory from the month before ($1,000 vs. $3,000)

HRIM 336 Hospitality Management Accounting

Income Statement Cost of Goods Example Food Cost Other factors that may impact food cost depending on detail of accounting: Employee Meals Transfers to Beverage (Bar) Dept.

HRIM 336 Hospitality Management Accounting

Income Statement Cost of Goods Example Food Cost Problem 5 in book

HRIM 336 Hospitality Management Accounting

Income Statement Labor Cost
 

Labor Cost is broken down into Payroll and Payroll Related Payroll is often broken down into Hourly (Unit Staff) and Management (Front of House and Back of House) Unit staff categories (kitchen, servers, bussers, host, etc.) Easier to manage and discover problem areas

HRIM 336 Hospitality Management Accounting

Income Statement Labor Cost


 

Payroll related includes taxes, workers compensation insurance, and benefits (health, unemployment, etc.) Increasing at a faster rate than payroll For every dollar of payroll you can manage, another $0.20 - $.30 is saved due to payroll related costs Typically largest area to manage

HRIM 336 Hospitality Management Accounting

Income Statement "Prime Cost"
  

Typically won't find this term in an accounting book Combination of Cost of Goods and Labor Costs By combining these two cost areas, allows you to compare different kinds of concepts (Steak vs Italian) for profitability. Industry benchmark = 60-62% 60-

HRIM 336 Hospitality Management Accounting

Income Statement Other Costs Can be divided between Controllable and Non-Controllable NonControllable are those expenses that management at location can impact. Example of controllable costs include linen, repair and maintenance, utilities, menus,

HRIM 336 Hospitality Management Accounting

Income Statement Other Costs NonNon-Controllable cost are those that management at location cannot impact. Example of non-controllable costs noninclude credit card discount, rent and depreciation

HRIM 336 Hospitality Management Accounting

Income Statement Analysis of Income Statements Horizontal Analysis Vertical Analysis (Common Size Statements) BaseBase-Year Comparisons Ratio Analysis

 

 

HRIM 335


Preparing comparative Income Statements

Variance calculation is in both $ and % terms $ Variance is calculated by subtracting 2006 from 2007 figures % Variance is calculated by dividing variance figure by 2006 figures

HRIM 336 Hospitality Management Accounting

Income Statement Analysis of Income Statements Horizontal Analysis
2007
Sales C.G.Sold Labor Profit $50,000 15,000 20,000 $15,000

2006
$40,000 11,500 16,000 $12,500

Diff.
$10,000 3,500 4,000 2,500

% chg
25% 30% 25% 20%

HRIM 336 Hospitality Management Accounting

Income Statement Analysis of Income Statements Vertical Analysis (Common-Size) (Common2007
Sales C.G.Sold Labor Profit $50,000 15,000 20,000 $15,000 30% 40% 30%

% of sales

2006.
$40,000 11,500 16,000 $12,500

% of sales

28.8% 40% 31.2%

HRIM 336


Preparing comparative Income Statements - % of Sales

Only way that an expense, as a percentage of sales, can increase is if that expense is increasing at a faster rate than revenue - should only occur under unusual circumstances (large increase in product cost). In prior example cost of goods increased by 30% on a 25% increase in sales

HRIM 336 Hospitality Management Accounting

Income Statement Analysis of Income Statements Analysis (Combo)
2007 Rev. C.G.S. Labor Other Profit 50,000 15,000 20,000 3,000 12,000 30% 40% 6% 24% % of Sales 2006 40,000 11,500 16,000 2,800 9,700 28.8% 40% 7% 24.2% % of Sales %/% pt. inc/(dec) 25% 1.2 pts 0.0 pts (1.0)pts (1.2) pts

HRIM 336 Hospitality Management Accounting

Income Statement Analysis of Income Statements Golden Rule #1" - Under Normal Circumstances , profits should increase at a faster rate than sales

HRIM 336 Hospitality Management Accounting

Income Statement Analysis of Income Statements " Golden Rule #2" - Under normal circumstances, for every additional $ of revenue over a prior period (month, year), $0.50 should fall to the bottom line

HRIM 336 Hospitality Management Accounting

Income Statement Department/Supplemental Schedules
 

Responsibility Accounting Provide management with detailed information by operating departments (profit center) and service centers (cost center). Difference between operating department and service center is operating department directly generates revenue (room department vs. security center)

HRIM 336 Hospitality Management Accounting

Income Statement Hotel Accounting Much of the typical hotel income statement is done by departments (departmental accounting) Appendix A in book

HRIM 336 Hospitality Management Accounting

Income Statement End of Chapter 3