Hospitality Management Accounting – Ch 2

Uniform System of Accounts
a method of presenting financial statement information so that comparison is made easier between establishments or with hospitality industry averages.
The purpose of the balance sheet
is to provide at a specific point in time a picture of the financial condition of a business entity relative to its assets, liabilities, and ownership equity. By category, each individual account, by name and its numerical balance, is show at the end of a specific date, which is normally the ending date of an operating period.
The purpose of an income statement
is to show economic results of profit-motivated operations of a business over a specific operating period.
The ending date of an operating period
indicated in the income statement is normally the specific date of the balance sheet.
The accrual accounting method recognizes sales revenue when earned
not necessarily when received. (credit card transactions)
List of fixed charges:
Salary of the GM and other administrative employees
Secretarial and general office salaries and worker’s wages
Accountant and accounting office personnel salaries/wages
Data processing and/or credit office employee’s salaries and wages
Postage and fax expense
Printing and stationery expense
Legal expense
Bad debts and/or collections expense
Dues and subscriptions expenses
Travel expenses
Cost of Sales Calculation (using the periodic method)
Beginning inventory (BI) + Purchases (P) = Goods available (GA) – Ending inventory (EI) = Cost of Sales (CS)

This equation determines cost of inventory used!

Inventory Valuation Methods:
1. Specific item cost
2. First-in, first-out (FIFO)
3. Last-in, first-out (LIFO)
4. Weighted average cost
Specific Item Cost
this method records the actual cost of each item.
Sales Revenue
an inflow of assets received in exchange for goods or services provided.
Other income
aka non-operating revenues not directly related to the primary purpose of the business, which is the sale of goods and services. Other income includes items such as interest income on certificates of deposit, notes receivable or investment dividends, and potentially franchise or management fees.
OE increases
if revenues exceed expenses (R>E)
OE decreases
if revenues is less than expenses (R
Expenses
outflow of assets consumed to generate sales revenue
Departmental Contributory Income
the income of an individual operating department after direct expenses have been deducted from sales revenue; sometimes referred to as contributory income.
The term net food cost
implies that all necessary adjustments to cost of food sales have been made, and represent the actual cost incurred to produce the sales revenue.
(EI)
Ending Inventory
(BI)
Beginning Inventory
(GA)
Goods Available
(P)
Purchases
(CS)
Cost of Sales
The Cost of Sales (normally used for HIGH COST Items, such as high cost wines and expensive cuts of meat)
$36 BI + $454 P = GA – $204 EI = $286 CS
FIFO
creates tiers of inventory available. The first tier is the oldest, the second is the next oldest, and so on. The FIFO method generally produces a higher net income when cost prices are increasing and a lower net income when cost prices are declining. It is generally the easiest method to use, particularly when the inventory records are manually maintained. FIFO is often the preferred method used for food inventories. FIFO is also consistent with the stock rotation required to maintain fresh food inventories.
LIFO
the newest and last items received are assumed to be the first items sold, leaving the oldest items in inventory. The value of ending inventory, cost of sales, and purchases can be verified as: $36 (BI) + $454 (P)= (GA_ – $200 (EI)= $290 Cost of Sales (CS) The use of LIFO during inflationary periods will cause an increase to cost of sales and will reduce the gross margin. This effect is true because newer inventory purchases will cost more than older inventory purchases.
LIFO is favored
If inventory cost is increasing, then generally sales revenues are expected to increase because cost increases are passed on to customers through higher selling prices. Higher costs will be matched to higher revenues, resulting in lower taxable operating income and lower taxes. LIFO will also reduce the value of inventory for resale and will be lower than if FIFO were used.
Weighted Average Inventory Cost Method
a method of inventory costing where the average cost of each item in stock is recalculated each time more of that item is purchased or received.
Weighted Average Cost Calculation
Total cost of units available (TC)/Total units available= weighted average cost per unit. For instance:
(2 X $18) + (6 x $20) / 2+6 Units Available = WCPU
156.00 /8= $19.50 per unit
Adjustments to Cost of Sales – Food
List of possible adjustments:
*Interdepartmental and inter-divisional transfers
*Employee meals
*Promotional Expense
Responsibility Accounting
a method of accounting in which department heads or managers are made responsible for the departmental profit achieved.
The two objectives for establishing responsibility centers:
1. Allow top-level management to delegate responsibility and authority to department heads so they can achieve departmental operating goals compatible with the overall establishment’s goal.
2. Provide top-level management with information (generally of an accounting nature) to measure the performance of each department in achieving its operating goals.
Cost Center
a department (such as maintenance) in a hospitality operation that generates no sales revenue.
Sales Revenue Center
a department (an retail store inside a hotel) that receives sales, but has little or no direct costs associated with their operation. the rent income provides revenue for the department, all of which is profit.
Profit Center
a department (such as the rooms department) that generates profit or net income while controlling costs.
Investment Center
Parts of a large or chain operation with units located in several different towns or cities. Each unit in the organization is given full authority over how it operates and is held responsible for the results of its decisions. In a large organization such as this, each unit is said to be decentralized. These units are referred to as Investment Centers. Investment centers are measured by the rate of return their general managers achieve on the investment in that center.
Transfer Pricing
In some organizations products are transferred from one unit to another. Many different pricing methods are available. For example – the commissary’s cost plus a fixed percentage markup to cover its operating costs. Another method might be to base the transfer price on the market price of the of the products.