Professional Documents
Culture Documents
Chapter Outline
Learning Outcomes
State the purpose of regularly preparing a balance
sheet for a hospitality business.
Explain the way managers and accountants actually
prepare a balance sheet.
Analyze a balance sheet to better understand the
financial condition of your own business.
Owners
The balance sheet, prepared at the end of each defined
accounting period, lets the owners of the business know
about the amount of that business which they actually
own.
A lien is the legal right to hold anothers property to satisfy
a debt.
A banks lien is similar to a businesss liabilities.
These liabilities must be subtracted from the value of the
business before its owners can determine the amount of
their own equity (free and clear ownership).
The balance sheet is designed to show the amount of a
business owners free and clear ownership.
2009 John Wiley & Sons
Hoboken, NJ 07030
Investors
Investors seek to maximize the return on investment
(ROI) they receive.
When a businesss balance sheet from one accounting
period is compared to its balance sheet covering
another time period, investors can measure their return
on investment.
Investors must have the information contained in a
balance sheet if they are to accurately compute their
annual returns on investment (ROI).
Lenders
Lenders are most concerned about a businesss ability
to repay its debts.
Lenders read the balance sheet of a business in an
effort to better understand the financial strength (and
thus the repayment ability) of that business.
Creditors
Business creditors, much like lenders, are concerned
about repayment.
It would not be unreasonable for vendors to ask to see
their customers respective balance sheets before a
decision was made regarding the wisdom of extending
credit to them.
The balance sheet is the financial document that most
accurately indicates the long-term ability of a business
to repay a vendor who has extended credit to that
business.
Managers
Managers most often are more interested in the
information found on the income statement than that
found on the balance sheet.
However, they too must be able to read and analyze
their own balance sheets to determine items such as
the current financial balances of cash, accounts
receivable, inventories, and accounts payable, and
other accounts that have a direct impact on operations.
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Current Assets
Current Assets are those which may reasonably be
expected to be sold or turned into cash within one year.
Liquidity is defined as the ease in which current assets
can be converted to cash in a short period of time (less
than 12 months).
Current assets, typically listed on the balance sheet in
order of their liquidity, include:
Cash
Marketable securities
Accounts receivable (net receivables)
Inventories
Prepaid expenses
2009 John Wiley & Sons
Hoboken, NJ 07030
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Current Assets
For purposes of preparing a balance sheet, the term
cash refers to the cash held in cash banks, money held
in checking or savings accounts, electronic fund
transfers from payment card companies, and
certificates of deposit (CDs).
Marketable securities include those investments such
as stocks and bonds that can readily be bought sold
and thus are easily converted to cash.
These are stocks and bonds the business purchases
from other companies. These are not to be confused
with a companys stocks that are listed on its balance
sheet as owners equity.
2009 John Wiley & Sons
Hoboken, NJ 07030
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Current Assets
Accounts receivable represent the amount of money
owed to a business by others (such as customers).
Net receivables (the term net means that something
has been subtracted out) are those monies owed to the
business after subtracting any amounts that may not be
collectable (doubtful accounts).
In the hospitality industry, inventories will include the
value of food, beverages and supplies used by a
restaurant, as well as sheets, towels and the in-room
replacement items (hangers, blow dryers, coffee
makers and the like) used by a hotel.
Prepaid expenses are best understood as items that will
be used within a years time, but which must be
completely paid for at the time of purchase.
2009 John Wiley & Sons
Hoboken, NJ 07030
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Current Assets
Cash is listed first because it is already cash.
Marketable securities are less liquid than cash, but can
be readily sold for cash.
Net receivables can be collected from others
(customers), but not as easily as converting marketable
securities to cash.
Inventories must be made ready for sale to customers
and the money must be collected.
There is no guarantee that payment for all inventories
will be collected in full, and thus some may end up
being reported as receivables.
2009 John Wiley & Sons
Hoboken, NJ 07030
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Current Assets
Prepaid expenses are the least liquid current asset
because once paid, refunds for this money are very
difficult (if not impossible) to receive.
Those prepaid expenses that will be of value or benefit
to the business for more than one year (for example a
three year pre-paid insurance policy) should be listed on
the balance sheet as Other Assets.
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Liabilities
Current liabilities are defined as those obligations of the
business that will be repaid within a year.
The most important sub-classifications of current
liabilities include notes payable, income taxes payable,
and accounts payable.
In the hospitality industry, current liabilities typically
consist of payables resulting from the purchase of food,
beverages, products, services and labor.
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Liabilities
Current period payments utilized for the reduction of
long-term debt are also considered a current liability.
Guests pre-paid deposits (such as those required by a
hotel that reserves a ballroom for a wedding to be held
several months in the future) are also listed as a current
liability (because these monies are held by the business
but have not been earned at the time the hotel accepts
the deposit).
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Liabilities
Dividends that have been declared but not yet paid and
income taxes that are due but not yet paid will also be
included in this liability classification.
Long-term liabilities are those obligations of the
business that will not be completely paid within the
current year.
Typical examples include long-term debt, mortgages,
lease obligations, and deferred incomes taxes resulting
from the depreciation methodology used by the
business.
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Owners Equity
While the liabilities section of the balance sheet
identifies non-owner (external) claims against the
businesss assets, the owners equity portion identifies
the asset claims of the businesss owners.
When a company is organized as a sole proprietorship,
the balance sheet reflects that single ownership.
When a partnership operates the business, each
partners share is listed on the balance sheet.
For corporations, common stock is the balance sheet
entry that represents the number of shares of stock
issued (owned) multiplied by the par value (the value of
the stock recorded in the companys books).
2009 John Wiley & Sons
Hoboken, NJ 07030
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Owners Equity
Common stock is valued at its historical cost regardless
of its current selling price.
Initially, most companies designate a stated or par value
for the stock they issue and as each share is sold, an
amount equal to the par value is reported in the
common stock section of the balance sheet.
Differences between the selling price and par value are
reported in the paid in capital portion of the balance
sheet.
Some companies also issue preferred stock that pays
its stockholders (owners) a fixed dividend.
2009 John Wiley & Sons
Hoboken, NJ 07030
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Owners Equity
When more than one type of stock is issued by a
company, the value of each type should be listed
separately on the balance sheet.
Retained earnings are the final entry on the owners
equity portion of the balance sheet.
Retained earnings refer simply to the accumulated
account of profits over the life of the business that have
not been distributed as dividends.
If net losses have occurred, the entry amount in this
section may be a negative number.
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Determining Variance
The dollar change or variance shows changes from
previously experienced levels, and will give you an
indication of whether your numbers are improving,
declining, or staying the same.
All dollar variances and percentage variances on the
balance sheet can be calculated in the same way.
The dollar differences between identical categories
listed on two different balance sheets is easy to
compute and is always the numerator in any percentage
change (variation) calculation.
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Inflation Accounting
The second reason for computing percentage change in
the preparation of balance sheets (as well as other
financial documents) is because the value of money
changes over time.
As economists (as well as managerial accountants)
know well, if you don't adjust for inflation (the tendency
for prices and costs to increase) just about everything is
more expensive today than it was 30 years ago.
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Inflation Accounting
Because of the potential effects of inflation and deflation
(the tendency for prices and costs to decrease),
managerial accountants must know how to properly
consider them when comparing financial data from two
different time periods.
The purchasing power (amount of goods and service
that can be bought) of money is likely diminished over
time due to the effects of inflation.
Accounting for inflation (sometimes called current dollar
accounting) can be very complex.
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