D

Chapter 5: Analysis of Income Statement Accounts

Chapter 5: Analysis of Income Statement Accounts

Income Statement

  • Revenues: Rooms, Food, Beverage

  • Expenses: Cost of Goods Sold, Operating Expenses, Fixed Expenses, Income Tax Expense

  • \text{NET INCOME} = \text{Revenues} - \text{Expenses}

Income Statement Characteristics

  • Indicates earnings or profit from operating activities.

  • Reports amounts for a period of time (typically one year).

  • Based on:

    • Revenues earned

    • Expenses incurred to earn revenues

Relationship between Balance Sheet and Income Statement

  • The income statement links the beginning and ending balance sheets.

  • Retained Earnings:

    • Increased by net income

    • Decreased by dividends

Statement of Retained Earnings

\text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends} = \text{Ending Retained Earnings}

Revenue Classification

  • Sales

  • Revenues

  • Sales Taxes

  • Servers' Tips

Accounting for Sales Revenue

  • Revenue Principle: Revenues are recorded when earned:

    1. An exchange has taken place.

    2. Collection is probable.

    3. The earnings process is nearly complete.

Sales Taxes

  • Sales Account: Does not include sales taxes.

  • Sales taxes are collected from customers and remitted to the taxing authority.

  • Sales taxes are a liability.

Sales Tax Payable

  • To record sales of 200,000 plus 5% sales tax:

    • Cash: 200,000 \times 1.05 = 210,000

    • Sales Tax Payable: 200,000 \times 0.05 = 10,000

    • Sales Revenue: 200,000

Servers’ Tips

  • Service gratuities

  • Belong to employees

  • Paid at the end of each shift

  • If paid in cash: not recorded by the business

  • If paid via checks or cards: tips are liabilities for the business

Expense Classification

  • Day-to-day expenses incurred in operating the business

  • Expired costs of assets (depreciation)

  • Cost of assets that are consumed

  • Cost of sales

  • Operating expenses

  • Income tax expense

  • Depreciation (Fixed charges)

Cost of Sales Expense

  • Cost of inventory used

  • Cost of food sales

  • Cost of beverage sales

  • Employees meals consideration

  • Rooms department does not have a cost of room sales

Food Cost and Gross Profit

  • Cost of raw materials (food) used to make a sale to a guest

  • Cost of goods sold

  • \text{Food used} - \text{Cost of employees meals} = \text{Cost of sales}

  • \text{Sales} - \text{Cost of sales} = \text{Gross Profit}

Cost of Sales: Considerations

  • Employees meals

  • Delivery charges

  • Inventory accounting system:

    • Perpetual inventory system

    • Periodic inventory system

Periodic versus Perpetual Inventory Systems

Periodic Inventory Systems
  • Purchases are recorded to a purchase account, but withdrawals are not recorded.

  • Physical counts of inventory are made at the end of an accounting period, and the inventory value is adjusted after adding in purchases.

  • Less costly method.

Perpetual Inventory Systems
  • Purchases and withdrawals are made directly to inventory during the period.

  • Provides more timely information about inventory.

  • Easily maintained with today’s computer systems.

Perpetual Inventory System

  • Every time inventory is acquired, the inventory record is increased.

  • Whenever issues are made, inventory is decreased.

  • Purchases and issues in the storeroom (storeroom clerk).

  • Receipts and issues.

  • Advantage: Provides instant inventory status.

  • Internal Control.

Perpetual Bookkeeping Accounts

  • Receipts and issues (documents) are sent to the accounting department.

  • Inventory account (receipts).

  • Cost of sales (issues).

  • Employee Meals expense.

Perpetual Bookkeeping Accounts (cont.)

  • The inventory is constantly updated.

  • Storeroom purchases.

  • Direct purchases:

    • Delivered directly to the kitchen for immediate consumption

    • Cost of sales

  • \text{Cost of sales} = \text{Total issues} + \text{Direct purchases}

Perpetual Inventory Accounting - Transactions

  • Storeroom purchase: Inventory (+)

  • Direct Purchase: Cost of sales (+)

  • Issues: Inventory (-), Cost of sales (+)

  • Employee Meals: Cost of sales (-), Employee Meals expense (+)

Perpetual Inventory Accounting - Calculation

\text{Beginning Inventory} + \text{Purchases} - \text{Issues} = \text{Ending Inventory}

Perpetual Inventory Accounting - Employee Meals

\text{Beginning Inventory} + \text{Purchases} - \text{Employee Meals} - \text{Cost of sales} = \text{Ending Inventory}

Periodic Inventory System

  • Perpetual inventory cards are not maintained.

  • Advantage: No costs for maintaining cards.

  • Disadvantage: Internal Control (impossible), Product Shortage.

Periodic Bookkeeping Accounts

  • No issues prepared.

  • Inventory account:

    • Beginning and ending balances only

    • Purchases (Both storeroom and direct purchases).

  • Employee Meals expense:

    • For Each department

  • Employee Meals Credit:

    • For all departments of the hospitality business.

Periodic Inventory Accounting

  • The inventory account (beginning balance).

  • No purchases or issues are recorded during the period.

  • Ending inventory determined by physical count.

  • Cost of sales account does not exist; instead a purchases account is used.

Periodic Inventory Accounting - Calculation

\text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory} - \text{Employee Meals} = \text{Cost of sales}

Other Business Expenses

  • Operating Expenses

  • Fixed expenses

  • Income taxes expense

  • Depreciation

Operating Expenses

  • Payroll

  • Payroll taxes

  • Employee Meals

  • Advertising

  • Supplies

  • Kitchen fuel

  • Utilities

  • Telephone

Fixed Expenses

  • Rent

  • Property Taxes

  • Property Insurance

  • Interest

  • Depreciation

  • Amortization

Income Taxes Expense

  • Levied by the Government on the income of a corporation.

  • Municipalities, cities tax business income.

Depreciation

  • Depreciation is a cost allocation process that systematically and rationally matches acquisition costs of operational assets with periods benefited by their use.

  • Cost Allocation:

    • Unused portion on the Balance Sheet.

    • Used portion on the Income Statement as an Expense.

  • Acquisition Cost gets allocated as Depreciation.

Depreciation (cont.)

  • Depreciation Expense: Income Statement.

  • Accumulated Depreciation: Balance Sheet (Total of depreciation to date on an asset).

Book Value

  • Book value is not an indication of its market value; it is an accounting term.

  • \text{Book Value} = \text{Asset’s Cost} - \text{Accumulated depreciation}