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HFT 2401

HFT 2401. Chapter 5 The Income Statement. Income Statement Statement of Operations Profit & Loss Statement Reports Revenues and Expenses Covers a period of time. Balance Sheet Statement of Financial Position Covers a particular point in time Static in nature.

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HFT 2401

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  1. HFT 2401 Chapter 5 The Income Statement

  2. Income Statement Statement of Operations Profit & Loss Statement Reports Revenues and Expenses Covers a period of time Balance Sheet Statement of Financial Position Covers a particular point in time Static in nature Major Financial Statements Used by Business

  3. Users of the Financial Statements • Internal – Managers of the business • External • Potential Investors • Creditors • Owners not active in managing the business

  4. Major Elements of the Income Statement • Revenues (Sales) • Cost of Goods Sold • Expenses • Gains and Losses • Income Taxes • Extraordinary Items • Earnings per share

  5. Revenues • Revenues for services are recorded when the event occurs • Legal title passes from the seller to the buyer • Selling price has been established • Seller’s obligation is complete • The service has been exchanged for another asset (cash or accounts receivable)

  6. Cost of Goods Sold • Goods that are purchased for resale are initially recorded as inventory • When they are sold, they are transferred to the Cost of Goods Sold expense account

  7. Cost of Goods Sold Calculation • Beginning Inventory • + Purchases • = Goods Available for Sale • - Ending Inventory • = Cost of Goods Used • + Transfers in • - Transfers out • = Cost of Goods Sold

  8. Expenses • Day to Day Operational Expenses • Payroll Expenses • Specific Departmental Expenses • Repair & Maintenance Expense • Sales Expenses • Administrative Expenses • Other Undistributed Expenses

  9. Gains & Losses • Gains – Increases in assets, reductions in liabilities or a combination of both resulting from incidental transactions • ie: Sale of used equipment • Losses – Decreases in assets, increases in liabilities or a combination of both resulting from incidental transactions • ie: Storm Damage Deductibles

  10. Income Taxes • Based on the relevant revenues and expenses • Usually a variance in taxes booked and taxes paid – due to various accruals • Recorded as deferred income taxes (liability)

  11. Extraordinary Items • Must meet two criteria • Must be of a high degree of abnormality and be clearly unrelated to the ordinary and typical activities of the business • Infrequent occurrence – must not be reasonably expected to occur again

  12. Earnings per Share • Total net earnings of the business for each common share outstanding • EPS = Net Income Common Shares Outstanding • Only used for business organized as corporations or LLC

  13. Income Statements for External Users • Usually contain only summary detail about operational results • Sales (total) by segment • Expenses (total) by segment • Operating profit by segment • Overhead expenses (total) • Interest Expense • Interest Income • Income before taxes • Provision for taxes • Net income • Earnings per share

  14. Income Statements for Internal Users • In addition to summary information, internal users require detailed departmental statements listing each individual line item • Departmental statements are also known as schedules • Uses the Uniform System of Accounts for the Lodging Industry (USALI) • Allows better comparisons • Based on responsibility accounting

  15. Income Statement per USALI • Three major sections • Operated Departments • Undistributed Operating Expenses • Other • Management fees • Fixed charges • Gains / losses • Income Taxes

  16. Operated Departments • Reports net revenue by department for every major producing department • Revenues • - Allowances • - Cost of Goods Sold • - Payroll and Related Expenses • - Specific Departmental Expenses • = Departmental Net Income

  17. Undistributed Operating Expenses • Administrative and General • Human Resources • Information Systems • Security • Sales and Marketing • Franchise Fees • Transportation • Property Operations and Maintenance • Utilities

  18. Other Expenses • Management fees • Fixed Expenses – Capacity Costs • Rent • Property Taxes (Real Estate & Personal Property) • Insurance • Interest Expense • Capital Leases • Depreciation and Amortization

  19. Statement of Retained Earnings • Used for corporations • Similar to statement of owners equity Beginning Retained Earnings + Net Income - Net Loss - Dividends Declared + (-) Prior Period Adjustments = Current Retained Earnings Balance

  20. Income Statement Analysis • Common Size Statements • Vertical Analysis • Total Revenue Equal 100% • Each Expense Shown As a Percentage of Total Revenue • Compare to Industry, Like Businesses or Self

  21. Vertical Analysis Example Rooms Revenue 500,000 50% Food Revenue 100,000 10% Beverage Revenue 200,000 20% Other Revenue 200,000 20% Total Revenue 1,000,000 100% Expenses Room Expenses 100,000 10% Food Expenses 50,000 5% Beverage Expenses 70,000 7% Other Expenses 100,000 10% Total Expenses 320,000 32% Net Income 680,000 68%

  22. Homework Assignment • Problem 1 • Problem 2 • Problem 5 • Problem 9 • Problem 10 • Problem 11

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