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Comprehensive Financial Statement Analysis Guide | Answering Key Questions

Explore financial statement analysis methods including horizontal and vertical analysis, ratio analysis, and limitations. Understand liquidity, solvency, activity, profitability, and operating ratios. Learn key terms, calculations, and interpretation of balance sheet and income statement.

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Comprehensive Financial Statement Analysis Guide | Answering Key Questions

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  1. HFT 2401Financial Statement Analysis & Presentation Chapter 18

  2. Financial Statement Analysis- Answers Users Questions • Is There Sufficient Cash to Meet the Establishment’s Obligations for a Given Time Period? • Are the Profits of the Hospitality Operation Reasonable?

  3. Financial Statement Analysis- Answers Users Questions • Is the Level of Debt Acceptable in Comparison With the Stockholder’s Investment? • Is the Inventory Usage Adequate?

  4. Financial Statement Analysis- Answers Users Questions • Is the hospitality operation able to service its debt? • Are Accounts Receivable Reasonable in Light of Credit Sales?

  5. Analysis of Balance Sheet • Horizontal Analysis • Also called comparative analysis • Compute Absolute Change • This Year minus Last Year • Compute Relative Change • Absolute Change / Base Amount • Vertical Analysis • Also called common size analysis • Total Assets = 100% • Everything is a percentage of Total Assets

  6. Analysis of Income Statement • Horizontal Analysis • Also called comparative analysis • Compute Absolute Change • This year minus last year • Compute Relative Change • Absolute Change / Base Amount • Vertical Analysis • Also called common size analysis • Total revenue = 100% • Everything is a percentage of total revenue

  7. Ratio Analysis • Communicate Information • Unlimited Combinations • Choose the Most Useful Combination

  8. Ratio Analysis • Compare Against Something Prior Period Industry Standard Budget

  9. Ratio Analysis • Express in a Number of Ways Percentage Per Unit Basis Turnover Coverage

  10. Limitations ofRatio Analysis • Do Not Resolve Problems • Only Indicate That There May Be a Problem • Comparisons Must Be From Related Numbers • Most Useful When Compared to a Standard

  11. Limitations ofRatio Analysis • When Comparing to Other Businesses - Must Be Comparable • Uses Historical Data - May Not Tell the Whole Story • Does Not Address Leases

  12. Classes of Ratios • Liquidity- Ability to Meet Short Term Obligations • Solvency - Extent to Which the Enterprise Has Been Financed-meet long term debt • Activity (Turnover)- Ability to Use the Property’s Assets

  13. Classes of Ratios • Profitability - Measurement of Management’s Overall Effectiveness • Operating - Analysis of Hospitality Establishment Operations

  14. Key Terms • Average Calculation beginning balance + ending balance = total available • Average = Total Available / 2

  15. Key Terms • Covers = Meals Served • Revenues = Sales • Lease Expense = Rent • Working Capital Current Assets - Current Liabilities

  16. Liquidity Ratios • Current Ratio Current Assets / Current Liabilities ie: $338,000 / 214,000 = 1.58 Times The closer to 2:1, the better

  17. Liquidity Ratios • Acid Test (Quick Ratio) = (Cash ($) + Marketable Securities + Notes Receivable + Accounts Receivable) / Current Liabilities ie: $309,000 / 214,000 = 1.44 times s/b > 1, the higher the better

  18. Liquidity Ratios • Accounts Receivable Turnover Total Revenue Current Period / Average Accounts Receivable ie: $1,352,000 / (.5) ( 90,000 + 140,000) AR Yr 1 AR YR 2 = 11.76 Times Higher is better

  19. Liquidity Ratios • Average Collection Period • How fast the receivables are collected = 365 days / AR Turnover Times ie: 365 / 11.76 = 31 days (lower is better)

  20. Solvency Ratios • Solvency • Total Assets / Total Liabilities ie: 1,176,300 / 659,000 = 1.784 times Higher is Better

  21. Solvency Ratios • Debt - Equity Ratio • Determines funding mix • Total Liabilities / Total Owners Equity ie: 659,000 / 517,300 = 1.27 times Lower is better

  22. Activity ( Turnover) Ratios • Inventory Turnover Cost of Food Used / Average Inventory ie: 122,000 / (.5) ( 11,000 + 9,000) Beg Inv End Inv = 12.20 times ( Higher is better) Can be used for any inventory (food, beverage, etc)

  23. Activity Ratios • Inventory Turnover in Number of Days = 365 days / Inventory Turnover Times ie: 365 / 12.20 = 29.91 days Lower is better

  24. Activity Ratios • Paid Occupancy Percentage Paid Rooms Occ / Total Available Rooms ie: 21,000 / 29,200 = 71.92% Higher is better

  25. Activity Ratios • Seat Turnover Total Food Covers / # of Available Seats 56,000 / (100 * 365) # covers # of seats Days In Year 1.53 times Higher is better

  26. Profitability Ratios • Profit Margin Net Income / Total Revenue ie: 146,700 / 1,352,000 10.85% Higher is Better

  27. Profitability Ratios • Operating Efficiency Ratio Income after Undistributed Oper. Expenses / Total Revenue ie: 415,500 / 1,352,000 = 30.73% Higher is Better

  28. Operating Ratios • Mix of Sales Divide each revenue source by total revenues Rooms 810,000 59.9% Food 300,000 22.2 Beverage 145,000 10.7 Phone 42,000 3.1 Other 55,0004.1 Total 1,352,000 100.0%

  29. Operating Ratios • Average Room Rate Total Room Revenue / Number of Rooms Sold ie: $810,000 / 21,000 Higher is better

  30. Operating Ratios • Revenue per Available Room (REVPAR) Total Room Revenue / Total Available Rooms ie: $810,000 / ( 80 * 365) # of rooms days =$27.74 Higher is better

  31. Operating Ratios • Average Food Service Check Total Food Revenue / # of Food Covers ie: $300,000 / 56,000 = $5.36 Higher is better

  32. Operating Ratios • Cost of Goods Sold Percentage • Use for food, beverage, etc. Cost of Goods Sold $ / Total Revenue for that category ie: Cost of Food Sold % Cost of Food Sold / Total Food Revenue $120,000 / $300,000 = 40% (Lower is better)

  33. Operating Ratios • Labor Cost Percentage Total Labor Cost by Department / Revenue for that Department ie: Rooms Department Labor $ 145,000 / $810,000 Rooms Labor Room Revenue = 17.90% (Lower is better)

  34. Operating Ratios • Flow Through (Retention of Profit) Change in net profit / Change in Revenue ($146,700 – 141,300) / ($1,352,000 – 1,300,000) (Yr 2 NP - Yr 1 NP) / (Yr 2 Rev - Yr 1 Rev) 5,400 / 52,000 = 10.38% Higher is better

  35. Top Ten Ratios - General Managers Perspective • Profit Margin • Occupancy Percentage - Month to Date • Labor Cost Percentage • Occupancy Percentage - Daily • Average Daily Rate

  36. Top Ten Ratios - General Managers Perspective • Food Cost Percentage • Beverage Cost Percentage • Room Sales to Total Sales • Retention of Profit (Flow Through)

  37. Homework • Problem 10 • Problem 11; Questions 1-6 only

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