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:
An exchange has taken place.
Collection is probable.
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}