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SOLUTION MANUAL

SOLUTIONS MANUAL for Accounting Essentials for Hospitality Managers, 3rd Edition by Chris Guilding Solutions – Accounting Essentials for Hospitality Managers (3rd edition) CHAPTER 1 Introduction Problem 1.1: Solution a) Functional interdependency exists when the performance of one functional area is affected by the performance of a separate functional area. For example, in a hotel complex that is dominated by a casino, the success of the rooms and food and beverage departments will be affected by the success of the casino operations in attracting clients to the complex. b) Functional interdependency is an important issue for the designers of a hotel’s system of accountability because care should be taken to hold a manager accountable for only those aspects of the hotel’s performance that he or she can influence. For example, the heads of rooms and food and beverage departments should not be held accountable for a decrease in their room sales if it is caused by reduced casino activity.

Problem 1.2: Solution a) The four main dimensions of sales volatility in the hotel industry are: 1. economic cycle induced sales volatility, 2. seasonal sales volatility, 3. weekly sales volatility, 4. intra-day sales volatility. b) The implications that these dimensions of sales volatility carry for hotel accounting systems are as follows: 1. Economic cycle induced volatility: Hotel sales’ high susceptibility to general economic conditions highlights the importance of hotels carefully forecasting economic cycles as part of the annual budgeting process. 2. Seasonal sales volatility: Three accounting implications arise: • Seasonal sales volatility can be so severe to warrant temporary closure for some resort properties. This possibility of having to make a closure decision signifies that cost and revenue data should be recorded in a manner that will enable a well informed financial analysis of the pros and cons of closing. • Seasonal sales volatility can also pose particular cash management issues. During the middle and tail-end of the busy seasons, surplus cash balances are likely to result, while in the off-season and the build up to the busy season, deficit cash balances are likely to result. Careful cash budgeting will therefore need to be conducted. 1

Accounting Essentials for Hospitality Managers (C. Guilding)

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Seasonal sales volatility will also affect price discounting decisions. To ensure such decisions are well informed, careful forecasting as part of the annual budgetary process, will have to be conducted. 3. Weekly sales volatility: Accurate forecasting of weekly sales volatility will inform management’s decision making with respect to the amount and timing of room rate discounting, staffing needs as well as restaurant purchasing needs. 4. Intra-day sales volatility: Intra-day demand volatility has led to widely-used pricing strategies such as “early bird specials” in restaurants and “happy hours” in bars. Records concerning demand at different times of the day will have to be maintained in order to inform such hotel pricing issues. •

Problem 1.3: Solution Examples of business decisions requiring the use of financial accounting data include: (a) A bank manager deciding whether to lend money to a company. (b) A shareholder deciding whether to sell her shares due to a fear that the company she has invested in might go bankrupt. (c) A potential shareholder thinking about purchasing shares in a company and interested in determining if the company is profitable. Examples of business decisions requiring the use of management accounting data include: (a) Determining whether accounts are being collected on time. (b) Determining whether the business will have sufficient cash over the next year to avoid the need to arrange a line of credit. (c) Determining whether a drinks vending machine or a confectionary vending machine should be installed in a hotel’s foyer area. (d) Determining what room rate to charge to achieve a target level of profit. (e) Determining whether a seasonal hotel should be closed down during the quiet season. (f) Determining whether a restaurant manager is performing well.

Problem 1.4: Solution a) High product perishability signifies that an item cannot be held in inventory for sale at a later time. Food items have a limited life in inventory because of their rapid physical deterioration. Room nights and conference facilities cannot be placed in inventory because they relate to a particular time period that expires. b) The absolute perishability of rooms, conference and banquet facilities and the relative perishability of food underlines the importance of accurate hotel demand forecasting as part of the budgeting process. Generally, the most important aspect of forecasting is room occupancy, as room sales drive sales levels of other hotel services. Accurate restaurant forecasting provides the basis for maintaining a full menu of options while also minimising the cost of food wastage.

Accounting Essentials for Hospitality Managers (C. Guilding)

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Problem 1.5: Solution Fixed costs are costs that do not vary as a function of sales activity levels. Hotels involve considerable investment in fixed assets such as buildings on prime land as well as extensive furnishings, fittings and equipment. This investment generates high rent and depreciation costs, which together with significant salary costs, result in a high fixed cost structure for hotels.

Problem 1.6: Solution a) Major hotel activities include room housekeeping, restaurant food preparation and service as well as bar service. Despite the advent of the machine and computer age, the physical aspect of all of these activities has changed little over the last fifty years, as they continue to have a high labour component. b) High labour intensive activities in hotels signifies the importance of performance measures that focus on labour productivity. Such performance indices include restaurant covers per employee hour worked and restaurant sales per employee hour worked. Monitoring differences between actual labour cost and budgeted labour cost represents another dimension of labour cost management. An appropriate analysis of the difference between budgeted and actual labour cost enables a distinction to be drawn between labour rate and labour efficiency factors.

Problem 1.7: Solution Financial accounting concerns the preparation of financial reports for external users such as shareholders, banks and government authorities. In order for these financial reports to be meaningful, it is important that they are produced in a standardised way and are seen to be reliable. Management accounting concerns the provision of financial information to internal management. This information is designed to help managers in their decision making and control of businesses. Financial information sought by hotel managers includes determining the cost of providing a meal to inform the menu pricing decision, determining how many delegates need to attend a conference in order to achieve break even, and determining what level of profit is made by each selling unit of a hotel to inform any rationalisation decision to drop a unit. The provision of all these types of financial information falls within the scope of management accounting.

Problem 1.8: Solution The main accounting information users are: • Managers within the company being accounted for. Managers use accounting information in planning and controlling business activities.

Accounting Essentials for Hospitality Managers (C. Guilding)

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Outside parties such as shareholders, potential shareholders, creditors and government agencies. These parties use accounting information to make investing, lending, taxing and regulatory decisions.

Problem 1.9: Solution Accounting reports represent the main source of information that the investing community uses when attempting to make wise equity investments. A lack of confidence in accounting systems is bound to translate into a reluctance to invest in companies. This will inhibit the ability of economically viable companies to expand, which in turn will carry negative implications for employment, availability of goods and services, and our standard of living. It is critically important that a reliable financial accounting system that engenders trust and encourages corporate development is established, otherwise economic activity suffers.

Problem 1.10: Solution Any of the elements referred to in Box 1.3 could be used as an answer to this question.

Problem 1.11: Solution Amongst the advantages deriving from the USALI are the following: • it can save on accounting system design costs as it represents a “blueprint” accounting system that can be adopted by any business in the hotel industry, • the system can be viewed as “state of the art” as it benefits from the accumulated experience of the parties that have contributed to the system’s development over many years, • by promoting consistent account classification schemes as well as formatting of reports, it facilitates comparison across hotels, • it represents a common point of reference for hotels within the same hotel group.

Problem 1.12: Solution 3 main organizational forms and their main differences Characteristics Number of owners

Sole proprietorship One

Partnership Two or more

Company Generally many

Business size

Small

Generally small

Key decision makers

Owner

Partners

Larger and can be very large Board of directors

Owner liability

Unlimited

Limited

Organisation life

Limited

On-going

Accounting Essentials for Hospitality Managers (C. Guilding)

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Problem 1.13: Solution At the outset of a business, ‘capital raised’ refers to the long term funds invested in the business.

Accounting Essentials for Hospitality Managers (C. Guilding)

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CHAPTER 2 Analysing transactions and preparing year-end financial statements Problem 2.1: Solution a) Simply defined, assets are things that are owned by a business. Typical hotel assets include: cash, accounts receivable, prepayments, inventory, cars, china, silver, glass, linen, uniforms, equipment, land and buildings. b) Simply defined, liabilities comprise financial obligations of the organisation. Typical liabilities include: wages & salaries payable, accounts payable and bank loans. c) Simply defined, owners’ equity represents the residual claim that owners have on the assets of an organisation subsequent to the acquittal of all liabilities. Owners equity increases when owners introduce more funds to the organisation and when the organisation makes profit.

Problem 2.2: Solution The balance sheet equation relates to the fact that assets minus liabilities equals owners’ equity. The equation can also be stated as assets equal liabilities plus owners’ equity. Underlying the first equation is the notion that the value of the owners’ equity in a business equals the surplus assets that would remain following acquittal of all liabilities. Sense can also be made of the second equation as a business raises money and then invests the money in various assets.

Accounting Essentials for Hospitality Managers (C. Guilding)

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Problem 2.3: Solution Analysis of SerenitySleep Hotel’s financial transactions in first 10 days of June Assets June 1 2 3 4 5 6 7 8 9 10

Cash at Bank +20,000 -3,000 -900

Accounts Receivable

Inventory

Office equipment

Liabilities Accounts Loan Payable Payable

Owner’s Equity Profit or Capital Loss +20,000

+3,000 +900 +1,400

-1,500

+1,400 +6,000

+4,500

+1,000

-800 +1,300

-800 -400

-240 14,860

1,000

1,900

9,000

1,400

$26,760

$5,900

4,500

19,200 +

+1,300 -400 -240 1,660

$20,860

Problem 2.4: Solution A business balance sheet summarises the assets, liabilities and owners’ equity pertaining to the business. It can thus be seen to be one representation of the wealth of the organisation. It relates to a particular moment in time. In the income statement sales revenue and expenses (i.e., resources consumed) for a period of time are summarised. The deduction of total expenses from total revenue provides profit (or loss if expenses are greater than revenue).

Problem 2.5: Solution An expense records the idea of something consumed or used up in connection with generating revenue. Expense items are included in the computation of profit – they have a negative impact on profit. Owners drawings do not affect profit. They represent an allocation of a portion of the computed profit to owners.

Problem 2.6: Solution The income statement always relates to a time period. For example, it may report revenue earned and expenses incurred during the last financial year. Note that revenue and expenses only make sense when talking about a period of time. A balance sheet, however, relates to a 7

Accounting Essentials for Hospitality Managers (C. Guilding)

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moment in time, not a period of time. As a balance sheet reports assets, liabilities and owners equity, these are things that will always be changing in a large company. Therefore a particular moment in time has to be selected for reporting these items.

Problem 2.7 Buildings : ASSET Wages : EXPENSE Drawings : OWNERS EQUITY Sales : REVENUE Loan owed : LIABILITY Cash: ASSET Accounts payable : LIABILITY Loan interest paid : EXPENSE Inventory used : EXPENSE Inventory on hand : ASSET Bank account interest earned : REVENUE

Problem 2.8: Solution Analysis of LusciouslyLong restaurant’s financial transactions in first 10 days of May Assets May 1 2 3 4 5 6 7 8 9 10

Cash at Bank

Accounts Receivable

+1,200 -750 +660 -2,400 -330 -350 +4,200 +1,500

+800

3,730

= Furniture

Inventory +350

Liabilities Accounts Loan Payable Payable +350

Owner’s Equity Profit or Capital Loss +2,000 -750

-660 -2,400 -330 -350 +4,200 +1,300

+2,800

1,440

350

3,160 3,160

$8,680

$7,360

4,200

-2,400 +

$1,320

3,720

Accounting Essentials for Hospitality Managers (C. Guilding)

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Problem 2.9: Solution a) Johnson Hotel Income Statement for the month ending 31 December 20X1 $ $ Sales revenue 38,000 less Stock used 6,500 Miscellaneous expenses 3,000 9,500 Profit $28,500 b) Johnson Hotel Statement of Owner’s Equity for the month ending 31 December 20X1 $ Opening owner’s equity 148,000 Net profit 28,500 176,500 Less: Drawings 4,000 Closing owner’s equity $172,500 c) Johnson Hotel Balance Sheet as at 31 December 20X1 Assets Cash Accounts receivable Linen Uniforms Buildings

$ 5,000 12,000 8,000 7,500 250,000 $282,500

Liabilities Accounts payable Loan payable

$ 10,000 100,000

110,000 Owner’s equity Capital

172,500 $282,500

Accounting Essentials for Hospitality Managers (C. Guilding)

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Problem 2.10: Solution MacNoodle Restaurant’s Balance Sheet Equation Assets Cash at Bank April 1 + £10,000 2 - £400 4 - £100 5 7 + £350 8 - £450 14 - £100 18 - £300 27 28 + £460 29 - £280 30 30 £9,180

Accounts Receivable

Inventory

Liabilities Accounts Payable

Equipment

Loan Payable

Owners’ Equity

Capital + £10,000

Profit or Loss

+ £400 + £1,000

+ £900

+ £500

+ £500 + £350 - £450 - £100 - £300

- £250

- £60 + £340 £340 £11,110

£590

£1,000

£200 =

£900 £1,100

£10,000 +

- £250 + £460 - £280 - £60 + £340 £10

£10,010

Accounting Essentials for Hospitality Managers (C. Guilding)

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Problem 2.11: Solution a) MacNoodle Restaurant Income Statement for April 20X1 £ Sales revenue less Expenses Cost of sales Wages Rent

£ 1,150

310 380 450 1,140 £ 10

Profit

b) MacNoodle Restaurant Statement of Owner’s Equity for April 20X1 £ 10,000 10 10,010 0 £10,010

Owner’s equity contribution plus Net profit less Drawings Owner’s equity at end of period

c) In the interest of consistency, in this solution the balance sheet format used is the same as that used in Exhibit 2.2. As the question draws on a setting in the UK, however, one could justifiably present the balance sheet using the format presented in Exhibit 2.3. MacNoodle Restaurant Balance Sheet as at 30 April 20X1 Assets Cash Accounts receivable Inventory Equipment

£ 9,180 340 590 1,000

Liabilities Accounts payable Loan payable

£ 200 900

1,100 Owners’ equity Capital

£11,110

10,010 £11,110

Accounting Essentials for Hospitality Managers (C. Guilding)

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Problem 2.12 Solution a) Paul Eastwell Hotel Income Statement for the year ending 30 June 20X1 $ $ 115,000

Sales revenue less Food & Beverage used Wages Miscellaneous expenses

23,000 41,700 4,200 68,900 $46,100

Profit b)

Paul Eastwell Hotel Statement of Owner’s Equity for the year ending 30 June 20X1 $ 199,900 46,100 246,000 6,000 $240,000

Opening owner’s equity Net profit Less: Drawings Closing owner’s equity c)

Paul Eastwell Hotel Balance Sheet as at 30 June 20X1 Assets Accounts receivable Food inventory Beverage inventory Cleaning supplies Tennis ball stock Furniture Buildings Land

$ 12,000 3,800 2,400 1,100 800 13,000 125,000 230,000

Liabilities Bank overdraft Accounts payable Wages owing Tax payable Loan payable

$ 7,300 22,000 4,600 14,200 100,000

148,100 Owner’s equity

$388,100

240,000 $388,100