Hospitality Industry Managerial Accounting

1
Hospitality Industry Managerial Accounting

• HRT 374
• Chapter 5
• Don St. Hilaire

2
Chapter 5 Ratio Analysis

• Identify standards against which the results of
  ratio analysis may be compared.
• Ratios from a past period.
• Industry averages.
• Budgeted ratios.

3
Chapter 5 Ratio Analysis

• Explain the function and purposes of ratio
  analysis.
• Used to interpret information.
• Monitor operating and financial performance.
• Evaluate solvency.
• Assess the riskiness of future loans.

4
Chapter 5 Ratio Analysis

• Discuss the different views that creditors,
  owners, and managers may hold regarding ratio
  results.
• Management.
• Creditors.
• Investors and potential investors.
• Management often caught between owners and
  creditors.

5
Chapter 5 Ratio Analysis

• Identify common classes of ratios and describe
  the general purpose of each. (OPALS)
• O - Operating.- assist in the analysis of
  hospitality establishment operations.
• P - Profitability. - show managements overall
  effectiveness as measured by returns on sales and
  investments.

6
Chapter 5 Ratio Analysis

• Identify common classes of ratios and describe
  the general purpose of each. (OPALS) continued
• A - Activity. - reflect managements ability to
  use the propertys assets.

7
Chapter 5 Ratio Analysis

• Identify common classes of ratios and describe
  the general purpose of each. (OPALS) continued
• L - Liquidity. - reveal the ability of a
  hospitality business to meet its short-term
  obligations.
• S - Solvency. - measure the extent to which a
  business has been financed by debt and is able to
  meet its long-term obligations.

8
Chapter 5 Ratio Analysis

• Calculate common operating ratios and describe
  how managers use them to evaluate operational
  results.
• Allow managers to make comparisons to sales mix
  objectives.
• Relate expenses to revenues.
• Useful for control purposes.
• Assist users in analyzing operations.
• Virtually no limit to operating ratios.

9
Chapter 5 Ratio Analysis

• Calculate common operating ratios and describe
  how managers use them to evaluate operational
  results. continued
• Mix of sales Average food service check.
• Average daily room rate. (ADR)
• Revenue per available room (revpar)
• Food cost, Bev. Cost, Labor Cost percentages.
• Prime cost percentage.

10
Chapter 5 Ratio Analysis

• Calculate common profitability ratios and
  describe how creditors, owners, and managers view
  them.
• Profit margin.
• Operating efficiency ratio.
• Return on assets.
• Gross return on assets.

11
Chapter 5 Ratio Analysis

• Calculate common profitability ratios and
  describe how creditors, owners, and managers view
  them. continued
• Return on owners equity.
• Return on common stockholders equity.
• Earnings per share.
• Price earnings ratio.
• Residual income.

12
Chapter 5 Ratio Analysis

• Calculate common activity ratios and describe how
  creditors, owners, and managers view them.
• Inventory turnover Asset turnover.
• Property and equipment (fixed asset) turnover.
• Paid occupancy percentage Complimentary
  occupancy.
• Average occupancy per room Multiple occupancy
  percentage.

13
Chapter 5 Ratio Analysis

• Calculate common liquidity ratios and describe
  how creditors, owners, and managers view them.
• Current ratio.
• Acid-test ratio.
• Operating cash flows to current liabilities.
• Accounts receivable turnover.
• Average collection period.
• Working capital turnover.

14
Chapter 5 Ratio Analysis

• Calculate common solvency ratios and describe how
  creditors, owners, and managers view them.
• Solvency ratio Debt-equity ratio.
• Long-term debt to capitalization ratio.
• Number of times interest earned ratio.
• Fixed charge coverage ratio.
• Operating cash flows to total liabilities ratio.

15
Chapter 5 Ratio Analysis

• Define the concept of financial leverage.
• The use of debt in place of equity to finance
  operations and increase the return on equity
  dollars already invested. p. 229 of the text.

16
Chapter 5 Ratio Analysis

• Review the ratios listed on p. 227 of the text.
  Review the chapter summary on pages 226 and 228.
• What do ratios tell us about the vital
  relationships within the organization?
• In your groups - Select one example from each
  class of ratio. What does it mean if each ratio
  were to double? To decrease by half? What
  questions would you ask?

17
Chapter 5 Ratio Analysis

• Explain the limitations of ratio analysis.
• Ratios are only indicators of problems.
• Compared figures must be related.
• Comparing properties can be misleading.
• One ratio cannot tell the whole story.
• Important events may not affect financial
  statements.
• Based on historical costs.