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Accounting
for the Hospitality
Industry
Second edition
Basic Management Accounting for the Hospitality Industry
Basic Management
Accounting for the
Hospitality Industry
Michael N. Chibili
Second edition
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Michael N. Chibili
February 2010
6 Risk and uncertainty analyses has been extended, and the weighted
average cost of capital (WACC) has been included.
Michael N. Chibili
September 2015
Table of contents
4 Adjustments to the balance sheet and the profit and loss account 71
4.1 Accounting conventions – accruals and recognition 72
4.2 Adjusting the accounts 72
4.2.1 Stock (inventory) 72
4.2.2 Accounts receivable 74
4.2.3 Depreciation and amortization 75
4.2.4 Returns of goods 76
4.2.5 Discounts 77
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4.2.6 Delivery charges 77
Glossary 78
Multiple choice questions 79
Exercises 79
5 The cash flow statement (also called the statement of cash flow) 81
5.1 Cash in the business 82
5.1.1 The importance of cash in the business 82
5.1.2 Differentiating profits from cash 83
5.1.3 The need for cash flow statements 83
5.1.4 Categories of activities 84
5.2 Establishing cash flow statements 86
5.2.1 Determine the net cash flow from operating activities 86
5.2.2 Determine the net cash flow from investing activities 88
5.2.3 Determine the net cash flow from financing activities 89
5.2.4 Collate all the previous 3 net cash flows into the definitive SCF 89
5.3 A worked example in the establishment of the SCF using the indirect
method 89
Glossary 95
Multiple choice questions 96
Exercises 96
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9 Cost management 165
9.1 The nature of costs and assumptions 166
9.2 Types of costs 166
9.3 Activity-based costing 169
9.4 Allocating indirect (overhead) costs to the operating departments 172
9.4.1 Responsibility accounting 172
9.4.2 Determining allocation bases 173
9.4.3 Common methods of cost allocation 174
9.4.4 Illustration of the direct method of cost allocation 176
9.4.5 Illustration of the step method of cost allocation 178
9.5 Separating mixed-costs between their fixed and variable elements 181
9.5.1 High/low two-point method 182
9.5.2 Scatter diagram 185
9.5.3 Regression analysis 186
Glossary 189
Multiple choice questions 191
Exercises 191
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11.3.3 Other considerations in breakeven analysis 243
11.3.3.1 First situation – two room types 243
11.3.3.2 Second situation – two room types plus additional services 244
11.3.3.3 Third situation – integrating desired profit levels 246
Glossary 248
Multiple choice questions 249
Exercises 249
13 Forecasting 273
13.1 Nature and limitations of forecasting 274
13.2 Understanding historical data patterns 275
13.3 Approaches to forecasting 276
13.3.1 Qualitative forecasting methods 277
13.3.2 Quantitative forecasting methods 277
13.3.2.1 Time series forecasting methods 278
13.3.2.2 Causal forecasting methods 281
13.4 Selecting forecasting methods 283
13.5 Forecasting in hospitality industry practice 284
Glossary 285
Multiple choice questions 287
Exercises 287
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15.7 Incidence of taxes on DCF analysis 344
15.8 Choosing between projects 348
Glossary 350
Multiple choice questions 352
Exercises 352
Index 374
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Introduction to
management accounting
1 1.1
1.2
Setting the scene
Understanding the hospitality industry
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1.1 Setting the scene
Cost principle
This principle indicates that a transaction should be recorded at its
acquisition price or cash cost and this should represent its accounting
value. It is difficult for example to compare income statements for
different periods during periods of long-lasting inflation or deflation.
There are however some exceptions such as in the case of valuing
inventory for resale, which can be done in terms of current currency
values instead of the historical value.
Objectivity principle
This principle indicates that all accounting transactions should be
justified as much as possible on objective evidence. This evidence is
required to support a transaction before it can be entered into the
accounting records. Some examples include the receipt for the
payment of a guest cheque, or an invoice for the purchase of a new
oven. In rare situations where such evidence cannot be obtained,
expert estimates can be assumed.
Consistency principle
This principle indicates that once an accounting method has been
chosen by management, this should be used from period to period
unless a change is necessary and this change must be disclosed. This
principle was established to ensure comparability and consistency of
the procedures and techniques used in the preparation of financial
statements from one accounting period to the next.
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Matching principle
This principle indicates that expenses should be related to their
revenues. This principle requires that for each accounting period all
sales revenues earned, whether received or not, must be recognized.
It goes the same way with operating expenses, in the sense that they
should all be recognized during the period, whether paid or not paid.
This principle ensures that resulting net incomes or net losses provide
the most accurate estimate of profit or loss for the period.
Conservatism principle
This principle indicates that expenses should be recognized as soon as
possible whereas revenues should be recognized only when they are
verified. A business should not understate its expenses or liabilities.
On the other hand it should not overstate its assets or revenues.
Materiality principle
This principle indicates that events or information must be accounted
for if they make a difference to the user of the financial information.
This means that, items that may affect the decision of a user of
financial information which are considered important must be
reported in a correct way.
Realization principle
This principle indicates that revenues are only recognized only when
it is earned. Generally, realization occurs when goods are sold or a
service is rendered.
The Uniform System of Accounts for the Lodging Industry (USALI) in brief
Most organizations in the hospitality industry (hotels, motels, resorts,
restaurants, and clubs) use the Uniform System of Accounts for the
Lodging Industry (USALI). This was initiated by the Hotel Association
of New York in the original Uniform System of Accounts for Hotels
(USAH) in 1925. The system was designed for classifying, organizing,
and presenting financial information so that uniformity prevailed and
comparison of financial data among hotels was possible. A major
advantage of accounting uniformity is that information can be
collected and compared between similar organizations within the
hospitality industry. Changes are constantly made to the USALI in
order to keep pace with the evolving hospitality business
environment, and it is now in its 11th revised edition (2014).
The IFRS are designed as a common global language for business affairs so
that company accounts are understandable and comparable across
international boundaries. They are a consequence of growing international
shareholding and trade and are particularly important for companies that
have dealings in several countries as is the case with many hospitality
operations that have chains and brands operating across many countries at
the same time. The IFRS are progressively replacing the many different
national accounting standards. The IFRS are now mandated for use by
more than 100 countries, including the European Union and by more
than two-thirds of the G20 countries. The G20 and other international
organisations have consistently supported the work of the IASB and its
mission of global accounting standards. Since 2005, the European Union
has decided that all listed companies should prepare their financial
statements in compliance with these international standards.
Source: Data base MKG Hospitality – official supplier of hotel chains – March 2008
Source: Data base MKG Hospitality – official supplier of hotel chains – March 2008
Conference hotels
These provide meeting and banquet rooms, and usually food service,
to large groups of people. They are usually designed to meet the
business needs of the guests offering all types of services to cater for
the needs of the conference delegates.
Airport hotels
These are hotels located on airport properties in major urban markets.
These hotels permit guests to walk directly between one’s hotel room
and the flight boarding area and also save travellers time and money
related to ground transportation. If in addition they have conference
facilities, this adds to the convenience for meetings involving parties
from multiple destinations. They are particularly convenient for
guests with flight delays or cancellations.
Resort hotels
These offer luxurious surroundings with a variety of recreational
facilities, such as swimming pools, golf courses, tennis courts, game
rooms, and health spas, as well as planned social activities and
entertainment. Resorts typically are located in vacation destinations
or near natural settings, such as mountains, seashores, theme parks, or
other attractions. As a result, the business of many resorts fluctuates
with the season. Some resort hotels and motels provide additional
convention and conference facilities to encourage customers to
combine business with pleasure. During the off season, many of these
establishments seek for conventions, sales meetings, and incentive
tours to fill their otherwise empty rooms; some resorts even close for
the off-season.
Extended-stay hotels
These typically provide rooms or suites with fully equipped kitchens,
entertainment systems, office space with computer and telephone
lines, fitness centres, and other amenities. Typically, guests use these
hotels for a minimum of 5 consecutive nights often while on an
extended work assignment or lengthy vacation or family visit. All-suite
hotels offer a living room or sitting room in addition to a bedroom.
Casino hotels
These provide both lodging and legalized gaming on the same
premises. Along with the typical services provided by most full-service
hotels, casino hotels also contain casinos where patrons can wager at
Bed-and-breakfast inns
These provide lodging for overnight guests and are included in this
industry. Bed-and-breakfast inns provide short-term lodging in private
homes or small buildings converted for this purpose and are
characterized by highly personalized service and inclusion of breakfast
in the room rate. Their appeal is charm, with unusual service and decor.
Consistency principle – is where the accountants are expected to use the same
methods from period to period unless a change is necessary and this change
must be clearly explained in the financial statements.
Going concern principle – is the assumption that the accounting entity will
maintain proper accounting records from the date of its establishment to
the date of its liquidation.
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Management accounting – is the process of identification, measurement,
accumulation, analysis, preparation, interpretation, and communication of
financial information used by management to plan, evaluate, and control
within an organization and to assure appropriate use of, and accountability
for its resources.
1.1 Which of the following is one of the key characteristics of the hospitality
industry?
a consistent activity level throughout the year
b long distribution channels
c low barriers to entry for capital and labour
d slow transformation of the raw materials into a finished product
1.3 The generally accepted accounting principle that supports recording the
value of a property at the purchase price when the market value is higher is
the:
a conservatism principle
b cost principle
c going concern principle
d monetary principle
Exercises
1.1 Fill in the blanks below with the accounting principle that best applies.
1.2 Match the following situations with the accounting principle that best
applies. In some cases, more than one principle may apply.
Conservatism Materiality
Consistency Monetary unit
Cost Objectivity
Full disclosure Realization
Going concern Time period
Matching
· Airport hotels
· Bed-and-breakfast inns
· Casino hotels
· Conference hotels
· Extended-stay hotels
· Guesthouses
· Resort hotels
· Motels
· RV parks and campgrounds
· Youth hostels