Download Ratio Analysis

Chapter 6
Ratio Analysis
© 2009 John Wiley & Sons
Hoboken, NJ 07030
1
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Chapter Outline




Purpose and Value of Ratios
Types of Ratios
Comparative Analysis of Ratios
Ratio Analysis Limitations
© 2009 John Wiley & Sons
Hoboken, NJ 07030
2
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Learning Outcomes
 State the purpose and value of calculating and using
ratios to analyze the health of a hospitality business.
 Distinguish between liquidity, solvency, activity,
profitability, investor, and hospitality-specific ratios.
 Compute and analyze the most common ratios used in
the hospitality industry.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
3
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Percentages
 A ratio is created when you divide one number by
another.
 A special relationship (a percentage) results when the
numerator (top number) used in your division is a part of
the denominator (bottom number).
 To convert from common form to decimal form, move
the decimal two places to the left, that is, 50.00% =
0.50.
 To convert from decimal form to common form, move
the decimal two places to the right, that is, 0.50 =
50.00%.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
4
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Value of Ratios to Stakeholders
 All stakeholders who are affected by a business’s
profitability will care greatly about the effective operation
of a hospitality business. These stakeholders may
include:
 Owners
 Investors
 Lenders
 Creditors
 Managers
© 2009 John Wiley & Sons
Hoboken, NJ 07030
5
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Value of Ratios to Stakeholders
 Each of these stakeholders may have different points of view
of the relative value of each of the ratios calculated for a
hospitality business.
 Owners and investors are primarily interested in their return
on investment (ROI), while lenders and creditors are mostly
concerned with their debt being repaid.
 At times these differing goals of stakeholders can be
especially troublesome to managers who have to please their
constituencies.
 One of the main reasons for this conflict lies within the
concept of financial leverage.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
6
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Financial Leverage
 Financial leverage is most easily defined as the use of debt to
be reinvested to generate a higher return on investment (ROI)
than the cost of debt (interest).
go figure!
To illustrate, assume a hospitality manager:
Borrows $10,000 to be repaid at 10% interest
Reinvests the same $10,000 in an investment that gains 12% ROI
And thus, creates a surplus of 2% gain
In this case, borrowing $10,000 and reinvesting the same $10,000 at a higher
rate of return earns a net gain of 2% after the debt is repaid. The manager, in
this case, has leveraged debt to secure a gain.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
7
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Financial Leverage
 Because of financial leverage, owners and investors generally
like to see debt on a company’s balance sheet because if it is
reinvested well, it will provide more of a return on the money
they have invested.
 Conversely, lenders and creditors generally do not like to see
too much debt on a company’s balance sheet because the
more debt a company has, the less likely it will be able to
generate enough money to pay off its debt.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
8
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Ratio Comparisons
 Ratios are most useful when they compare a company’s
actual performance to a previous time period, competitor
company results, industry averages, or budgeted (planned for)
results.
 When a ratio is compared to a standard or goal, the resulting
differences (if differences exist) can tell you much about the
financial performance (health) of the company you are
evaluating.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
9
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Types of Ratios
 Managerial accountants working in the hospitality industry
use:
 Liquidity Ratios
 Solvency Ratios
 Activity Ratios
 Profitability Ratios
 Investor Ratios
 Hospitality Specific Ratios
 Most numbers for these ratios can be found on a company’s
income statement, balance sheet, and statement of cash flows.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
10
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Figure 6.1 Condensed Income Statement
Blue Lagoon Water Park Resort
Condensed Income Statement
For the Period: January 1 through December 31, 2010
Income Statement
Revenue
Cost of Sales
Payroll and Related Expenses
Other Expenses
Gross Operating Profit
Rent, Property Taxes, and Insurance
Depreciation and Amortization
Net Operating Income
Interest
Income Before Income Taxes
Income Taxes
Net Income
© 2009 John Wiley & Sons
Hoboken, NJ 07030
11
25,201,800
2,854,080
8,877,600
5,934,240
7,535,880
1,760,400
1,260,000
4,515,480
1,272,000
3,243,480
1,297,390
1,946,090
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Figure 6.2 Balance Sheet
Blue Lagoon Water Park Resort
Balance Sheet
December 31, 2010
Assets
Current Assets
Cash
Marketable Securities
Net Receivables
Inventories
Total Current Assets
2,314,750
3,309,600
1,053,950
1,497,200
8,175,500
Investments
Property and Equipment
Land
Building
Furnishings and Equipment
Less Accumulated Depreciation
Net Property and Equipment
Other Assets
Total Assets
5,023,500
7,712,550
22,290,500
7,289,000
4,668,900
32,623,150
669,800
46,491,950
Liabilities and Owners’ Equity
Current Liabilities
Accounts Payable
Notes Payable
Other Current Liabilities
Total Current Liabilities
1,438,100
1,319,900
1,264,600
4,022,600
Long-Term Liabilities
Long-Term Debt
Total Liabilities
14,577,400
18,600,000
Owners’ Equity
Common Stock
Paid in Capital
Retained Earnings
Total Owners’ Equity
3,000,000
18,775,100
6,116,850
27,891,950
Total Liabilities and Owners’ Equity
© 2009 John Wiley & Sons
Hoboken, NJ 07030
46,491,950
12
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Figure 6.3 Statement of Cash Flows
Blue Lagoon Water Park Resort
Statement of Cash Flows
December 31, 2010
Net Cash Flow from Operating Activities
Net Income
Adjustments to reconcile net income to net
cash flow from operating activities
Depreciation
Decrease in Net Receivables
Increase in Inventories
Decrease in Accounts Payable
Decrease in Other Current Liabilities
Net cash flow from operating activities
Net Cash Flow from Investing Activities
Decrease in Marketable Securities
Increase in Investments
Increase in Furnishings and Equipment
Increase in Other Assets
Net cash flow from investing activities
Net Cash Flow from Financing Activities
Decrease in Notes Payable
Increase in Long-Term Debt
Increase in Capital Stock
(Common Stock + Paid in Capital)
Dividends Paid
Net cash flow from financing activities
1,946,090
1,260,000
601,350
(600,000)
(600,000)
(550,000)
800,000
(800,000)
(2,225,345)
(81,000)
(2,306,345)
(784,355)
755,650
1,000,000
(778,440)
192,855
Net decrease in cash during 2010
Cash at the beginning of 2010
Cash at the end of 2010
(56,050)
2,370,800
2,314,750
Supplementary Disclosure of Cash Flow
Information:
Cash paid during the year for:
Interest
Income Taxes
© 2009 John Wiley & Sons
Hoboken, NJ 07030
111,350
2,057,440
1,272,000
1,297,390
13
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Figure 6.4 Statement of Retained Earnings and Investor Information
Blue Lagoon Water Park Resort
December 31, 2010
© 2009 John Wiley & Sons
Hoboken, NJ 07030
Statement of Retained Earnings
Retained Earnings, December 31, 2009
Net Income for 2010
Subtotal
Cash Dividends Paid in 2010
Retained Earnings, December 31, 2010
4,949,200
1,946,090
6,895,290
778,440
6,116,850
Investor Information
Dividends paid to common shareholders
Common shares outstanding
Market price per share
Earnings per share
Dividends per share
$778,440
1,000,000
$25.00
$1.95
$0.78
14
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Liquidity Ratios
 Liquidity is defined as the ease at which current assets can be
converted to cash in a short period of time (less than 12
months).
 Liquidity ratios have been developed to assess just how
readily current assets could be converted to cash, as well as
how much current liabilities those current assets could pay.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
15
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Liquidity Ratios
 Three widely used liquidity ratios and working capital are:
 Current Ratio
 Quick (Acid-Test) Ratio
 Operating Cash Flows to Current Liabilities Ratio
 Working Capital
© 2009 John Wiley & Sons
Hoboken, NJ 07030
16
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Liquidity Ratios
Ratio Name
Definition
Source of Data
Formula
Current Ratio
Current ratio shows
the firm’s ability to
cover its current
liabilities with its
current assets.
Numerator: Balance Sheet
Current Assets
Current Liabilities
Quick ratio shows
the firm’s ability to
cover its current
liabilities with its
most liquid current
assets.
Numerator: Balance Sheet
Operating Cash
Flows to Current
Liabilities Ratio
Operating cash
flows to current
liabilities ratio
shows the firm’s
ability to cover its
current liabilities
with its operating
cash flows.
Numerator: Statement of cash flows
Working Capital
Working capital is
the difference
between current
assets and current
liabilities.
Balance Sheet
Quick
(Acid-Test) Ratio
© 2009 John Wiley & Sons
Hoboken, NJ 07030
Denominator: Balance Sheet
Cash + marketable securities + accounts receivable
Current liabilities
Denominator: Balance Sheet
or
Current assets – (inventories + prepaid expenses)
Current liabilities
Operating cash flows
Current liabilities
Denominator: Balance sheet
Current assets – Current liabilities
17
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Solvency Ratios
 Solvency ratios help managers evaluate a company’s ability
to pay long term debt.
 Solvency ratios are important because they provide lenders
and owners information about a business’s ability to
withstand operating losses incurred by the business. These
ratios are:
 Solvency Ratio
 Debt to Equity Ratio
 Debt to Assets Ratio
 Operating Cash Flows to Total Liabilities Ratio
 Times Interest Earned Ratio
© 2009 John Wiley & Sons
Hoboken, NJ 07030
18
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Solvency Ratios
Ratio Name
Definition
Source of Data
Formula
Solvency Ratio
Solvency ratio shows the firms
ability to cover its total
liabilities with its total assets.
Numerator: Balance Sheet
Total assets
Total liabilities
Debt to equity ratio compares
total liabilities to owners’
equity.
Numerator: Balance Sheet
Debt to assets ratio shows the
percentage of assets financed
through debt.
Numerator: Balance Sheet
Operating cash flows to total
liabilities ratio shows the firm’s
ability to cover its total
liabilities with its operating
cash flows.
Numerator: Statement of cash
flows
Times interest earned shows
the firm’s ability to cover
interest expenses with
earnings before interest and
taxes.
Numerator: Income statement
Debt to Equity
Ratio
Debt to Assets
Ratio
Operating Cash
Flows to Total
Liabilities Ratio
Times Interest
Earned Ratio
© 2009 John Wiley & Sons
Hoboken, NJ 07030
Denominator: Balance Sheet
Total liabilities
Total owners’ equity
Denominator: Balance Sheet
Total liabilities
Total assets
Denominator: Balance Sheet
Operating cash flows
Total liabilities
Denominator: Balance sheet
Earnings Before Interest and Taxes (EBIT)
Interest Expense
Denominator: Income statement
19
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Activity Ratios
 The purpose of computing activity ratios is to assess
management’s ability to effectively utilize the company’s
assets.
 Activity ratios measure the “activity” of a company’s selected
assets by creating ratios that measure the number of times
these assets turn over (are replaced).
 This assesses management’s efficiency in handling
inventories and long-term assets.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
20
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Activity Ratios
 These ratios are also known as turnover ratios or efficiency
ratios.
 In this section you will learn about the following activity
ratios:
 Inventory Turnover
 Property and Equipment (Fixed Asset) Turnover
 Total Asset Turnover
© 2009 John Wiley & Sons
Hoboken, NJ 07030
21
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Inventory Turnover
 Inventory turnover refers to the number of times the total
value of inventory has been purchased and replaced in an
accounting period.
 In restaurants, we calculate food and beverage inventory
turnover ratios.
 See Go Figure! for calculations (after Figure 6.5)
 The obvious question is, “Are the food and beverage turnover
ratios good or bad?”
 The answer to this question is relative to the target (desired)
turnover ratios.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
22
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Figure 6.5 Condensed Food and Beverage Department Schedule
Blue Lagoon Water Park Resort
Condensed Food and Beverage Department Schedule
For the Period: January 1 through December 31, 2010
Sales
Cost of sales:
Beginning inventory
+ Purchases
- Ending inventory
= Cost of goods consumed**
- Employee meals
= Cost of goods sold**
Gross profit
Operating expenses:
Payroll and related expenses
Other expenses
Total expenses
Department income
Food
7,200,000
Beverage
2,880,000
120,000
2,160,400
90,000
2,190,400
52,000
2,138,400
5,061,600
60,000
436,440
45,000
451,440
0
451,440
2,428,560
2,188,800
532,800
2,721,600
2,340,000
534,960
201,600
736,560
1,692,000
**The discussion of cost of goods sold and cost of goods consumed will be
explained later in this chapter in the Hospitality-Specific Ratios section.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
23
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
go figure!
For example, assume the Blue Lagoon food and beverage manager desires to
turn over food inventory 26 times per year. This means that food inventory will
be replaced every two weeks (52 weeks per year/26 times = 2 weeks). The
following shows situations in which actual food inventory turnover is above and
below the Blue Lagoon target of 26 times.
Blue Lagoon food inventory turnover:
Actual turnover (low)
Target turnover
Actual turnover (high)
20.9 times
26.0 times
32.0 times
A low turnover (20.9 times) might have occurred because sales were less than
expected, thus causing food to move slower out of inventory (bad). It could also
mean that the food and beverage manager decided to buy more inventory each
time (thus, making purchases fewer times) because of discount prices due to
larger (bulk) purchases (good).
A high turnover (32.0 times) might have occurred because sales were higher
than expected, thus causing food to move faster out of inventory (good). It could
also mean that significant wastage, pilferage, and spoilage might have occurred
causing food to move out of inventory faster, but not due to higher sales (bad).
© 2009 John Wiley & Sons
Hoboken, NJ 07030
24
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Activity Ratios
Ratio Name
Definition
Source of Data
Formula
Food Inventory
Turnover Ratio
Food inventory turnover shows the
speed (# of times) that food inventory
is replaced (turned) during a year
Numerator: Income statement
Cost of food consumed
Average food inventory*
Denominator: Balance sheet
*(Beginning food inventory
+ Ending food inventory)/2
Beverage Inventory
Turnover Ratio
Beverage inventory turnover shows
the speed (# of times) that beverage
inventory is replaced (turned) during a
year
Numerator: Income statement
Property and Equipment
(Fixed Asset) Turnover
Ratio
Property and equipment turnover ratio
shows management’s ability to
effectively use net property and
equipment to generate revenues.
Numerator: Income statement
Total Asset Turnover
Ratio
Total asset turnover shows
management’s ability to effectively
use total assets to generate revenues.
Numerator: Income statement
© 2009 John Wiley & Sons
Hoboken, NJ 07030
Cost of beverage consumed
Average beverage inventory**
Denominator: Balance sheet
**(Beginning beverage inventory
+ Ending beverage inventory)/2
Total Revenue
Net Property and Equipment
Denominator: Balance sheet
Total Revenue
Total Assets
Denominator: Balance sheet
25
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Profitability Ratios
 It is the job of management to generate profits for the
company’s owners, and profitability ratios measure how
well management has accomplished this task.
 There are a variety of profitability ratios used by
managerial accountants:
 Profit Margin
 Gross Operating Profit Margin (Operating
Efficiency)
 Return on Assets
 Return on Owner’s Equity
© 2009 John Wiley & Sons
Hoboken, NJ 07030
26
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Profitability Ratios
Ratio Name
Definition
Source of Data
Formula
Profit Margin
Profit margin shows management’s
ability to generate sales, control
expenses, and provide a profit.
Numerator: Income statement
Net income
Total revenue
Gross Operating Profit
Margin
(Operating Efficiency
Ratio)
Gross operating profit margin shows
management’s ability to generate
sales, control expenses, and provide a
gross operating profit.
Numerator: Income statement
Return on Assets Ratio
Return on assets shows the firm’s
ability to use total assets to generate
net income.
Numerator: Income statement
Return on equity shows the firm’s
ability to use owners’ equity to
generate net income.
Numerator: Income statement
Return on Equity Ratio
© 2009 John Wiley & Sons
Hoboken, NJ 07030
Denominator: Income statement
Gross operating profit
Total revenue
Denominator: Income statement
Net income
Total assets
Denominator: Balance sheet
Net income
Total owners’ equity
Denominator: Balance sheet
27
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Investor Ratios
 Investor ratios assess the performance of earnings and stocks
of a company.
 Investors use these ratios to choose new stocks to buy and to
monitor stocks they already own.
 Investors are interested in two types of returns from their
stock investments:
 Money that can be earned from the sale of stocks at higher
prices than originally paid
 Money that can be earned through the distribution of
dividends
© 2009 John Wiley & Sons
Hoboken, NJ 07030
28
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Investor Ratios
 Investors use many different ratios to make decisions on
investments:
 Earnings per Share
 Price/Earnings Ratio
 Dividend Payout Ratio
 Dividend Yield Ratio
© 2009 John Wiley & Sons
Hoboken, NJ 07030
29
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Investor Ratios
Ratio Name
Definition
Source of Data
Formula
Earnings Per Share
Ratio
Earnings per share
compares net income
to common shares.
Numerator: Income statement
Net income
Total number of common
shares outstanding
Price/earnings ratio
shows the perception
of the firm in the
market about future
earnings growth of the
company.
Numerator: Statement of Retained Earnings and
Investor Information
Dividend payout ratio
shows the percentage
of net income that is to
be paid out in
dividends.
Numerator: Statement of Retained Earnings and
Investor Information
Dividend yield shows
the stockholders’
return on investment
paid in dividends.
Numerator: Statement of Retained Earnings and
Investor Information
Price/Earnings (P/E)
Ratio
Dividend Payout
Ratio
Dividend Yield Ratio
© 2009 John Wiley & Sons
Hoboken, NJ 07030
Denominator: Statement of Retained Earnings
and Investor Information
Market price per share
Earnings per share
Denominator: Statement of Retained Earnings
and Investor Information
Dividends per share
Earnings per share
Denominator: Statement of Retained Earnings
and Investor Information
Dividends per share
Market price per share
Denominator: Statement of Retained Earnings
and Investor Information
30
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Hospitality Specific Ratios
 The numbers used to create these ratios are often found on
daily, weekly, monthly or yearly operating reports that
managers design to fit their operational needs.
 Ratios in this section are calculated for:
 Hotels
 Restaurants
© 2009 John Wiley & Sons
Hoboken, NJ 07030
31
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Hotel Ratios
 The hotel-specific ratios in this section are:
 Occupancy Percentage
 Average Daily Rate (ADR)
 Revenue Per Available Room (RevPAR)
 Revenue Per Available Customer (RevPAC)
 Cost Per Occupied Room (CPOR)
© 2009 John Wiley & Sons
Hoboken, NJ 07030
32
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Occupancy Percentage
 Hotel managers and owners are interested in the occupancy
percentage (percentage of rooms sold in relation to rooms
available for sale) because occupancy percentage is one
measure of a hotel’s effectiveness in selling rooms.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
33
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
go figure!
Using the information provided in Chapter 1, you know that the Blue Lagoon
Water Park Resort has 240 guestrooms and suites. Assuming all rooms are
available for sale and the resort operates 365 days in a year, the Blue Lagoon
would have
240 rooms X 365 days = 87,600 rooms available for sale per year
If the Blue Lagoon actually sold 70,080 rooms in 2010, then the occupancy
percentage would be calculated as follows:
Rooms Sold
Rooms Available for Sale
= Occupancy %
or
70,080
87,600
= 80%
This means that, on average, 192 out of 240 rooms (192/240 = 80%) were sold
each day in 2010.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
34
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Occupancy Percentage
 Variations on Room Occupancy
 Out of order (OOO) rooms, meaning that repairs,
renovation, or construction is being done and the rooms are
not sellable and must be subtracted
 Complimentary occupancy (percentage of rooms provided
on a complimentary or ‘comp’ basis - free of charge),
 Average occupancy per room (average number of guests
occupying each room)
 Multiple occupancy (percentage of rooms occupied by two
or more people)
© 2009 John Wiley & Sons
Hoboken, NJ 07030
35
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Occupancy Percentage
 Occupancy percentage can used to compare a hotel’s
performance to previous accounting periods, to forecasted or
budgeted results, to similar hotels, and to published industry
averages or standards.
 Industry averages and other hotel statistics are readily
available through companies such as Smith Travel Research
(STR). Smith Travel Research is a compiler and distributor of
hotel industry data.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
36
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Average Daily Rate (ADR)
 Hoteliers are interested in the average daily rate (ADR) they
achieve during an accounting period.
 ADR is the average amount for which a hotel sells its rooms.
 Most hotels offer their guests the choice of several different
room types.
 Each specific room type will likely sell at a different nightly
rate.
 When a hotel reports its total nightly revenue, however, its
overall average daily rate is computed.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
37
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
go figure!
Assuming that the total number of rooms sold at the Blue Lagoon Water Park
Resort for the year was 70,080 and total rooms revenue was $14,016,000, the
ADR is computed as follows:
Total Rooms Revenue
Total Number of Rooms Sold
= Average Daily Rate (ADR)
or
$14,016,000
70,080
= $200
This confirms the information provided in Chapter 1 that the Blue Lagoon Water
Park Resort has an ADR of $200 including room and park admission fees.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
38
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Revenue Per Available Room
(RevPAR)
 High occupancy percentages can be achieved by selling
rooms inexpensively, and high ADRs can be achieved at the
sacrifice of significantly lowered occupancy percentages.
 Hoteliers have developed a measure of performance that
combines these two ratios to compute revenue per available
room (RevPAR).
© 2009 John Wiley & Sons
Hoboken, NJ 07030
39
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
go figure!
Using the information about the Blue Lagoon Water Park Resort provided in the
previous two sections, RevPAR is computed as follows:
Occupancy% X ADR = RevPAR
or
80% X $200 = $160
Another way to calculate RevPAR is:
Total Rooms Revenue
Rooms Available for Sale
= Revenue Per Available Room (RevPAR)
or
$14,016,000
87,600
= $160
Thus, the Blue Lagoon has a RevPAR of $160.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
40
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
go figure!
For example, a regional manager who wants to compare the performance of two
hotels in her region on the basis of occupancy percentages and ADRs might
have the following information:
Hotel A has an occupancy% of 80% and an ADR of $120
Hotel B has an occupancy% of 60% and an ADR of $180
Which hotel is performing better? The only real meaningful comparison she
could make would be on the basis RevPAR:
Hotel A has a RevPAR of 80% X $120 = $ 96
Hotel B has a RevPAR of 60% X $180 = $108
Therefore, Hotel B would have a higher RevPAR and thus, better overall
performance based on occupancy % and ADR.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
41
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Revenue Per Available Customer
(RevPAC)
 Hotel managers are interested in the revenue per available
customer (RevPAC) (revenues generated by each customer)
because guests spend money on many products in a hotel in
addition to rooms.
 RevPAC is especially helpful when comparing two groups of
guests.
 Groups that generate a high RevPAC are preferable to groups
that generate a lower RevPAC.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
42
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
go figure!
The total revenue figure for the Blue Lagoon Water Park Resort provided in
Figure 6.1 was $25,201,800. Assuming all revenues reflect guest expenditures,
this amount represents all revenues generated by areas in the resort including
rooms, park admission, restaurants, lounges, snack bar, video arcade, retail
store, tanning/spa facility, and exercise facility (see Chapter 1). Also, assuming
an average of three guests (family) per room sold, the total number of guests for
the year would be 210,240 (3 guests X 70,080 rooms sold = 210,240 guests).
Using this information for the Blue Lagoon, RevPAC is computed as follows:
Total Revenue from Hotel Guests
Total Number of Guests
= RevPAC
or
$25,201,800
210,240
= $119.87
Thus, each guest (including children) on average is spending $119.87 in the
resort.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
43
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Cost Per Occupied Room (CPOR)
 Cost per occupied room (CPOR) is a ratio that compares
specific costs in relation to number of occupied rooms.
 CPOR is computed for guest amenity costs, housekeeping
costs, laundry costs, in-room entertainment costs, security
costs, and a variety of other costs.
 CPOR can be used to compare one type of cost in a hotel to
other hotels within a chain, a company, a region of the
country, or to any other standard deemed appropriate by the
hotel’s managers or owners.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
44
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
go figure!
Assuming housekeeping costs (excluding payroll) for the Blue Lagoon Water
Park Resort in 2010 were $1,016,640 and number of rooms sold (occupied) were
70,080, the CPOR for housekeeping costs is as follows:
Cost Under Examination
Rooms Occupied
= Cost per Occupied Room
or
$1,016,640
70,080
= $14.51
Thus, housekeeping costs per occupied room for the Blue Lagoon were $14.51.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
45
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Hospitality Ratios (Hotels)
Ratio Name
Definition
Source of Data
Formula
Occupancy Percentage
Occupancy % shows
percentage of rooms sold in
relation to rooms available for
sale
Numerator: Operating Reports
Rooms Sold
Rooms Available for Sale
Average daily rate shows
average amount for which a
hotel sells its rooms
Numerator: Operating Reports
RevPAR shows revenues
generated by each available
room
Numerator: Operating Reports
Average Daily Rate (ADR)
Revenue per Available
Room (RevPAR)
Denominator: Operating Reports
Total Rooms Revenue
Total Number of Rooms Sold
Denominator: Operating Reports
Denominator: Operating Reports
Occupancy % x ADR
or
Total Rooms Revenue
Rooms Available for Sale
Cost per Occupied Room
(CPOR)
© 2009 John Wiley & Sons
Hoboken, NJ 07030
Cost per occupied room
compares specific costs in
relation to number of
occupied rooms
Numerator: Operating Reports
Cost Under Examination
Rooms Occupied
Denominator: Operating Reports
46
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Restaurant Ratios
 The restaurant-specific ratios in this section are:
 Cost of Food Sold (Cost of Sales: Food)
 Cost of Beverage Sold (Cost of Sales: Beverage)
 Food Cost Percentage
 Beverage Cost Percentage
 Average Sales per Guest (Check Average)
 Seat Turnover
© 2009 John Wiley & Sons
Hoboken, NJ 07030
47
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Figure 6.6 Restaurant Income Statement
Joshua’s Restaurant
Income Statement
For the Year Ended December 31, 2010
SALES:
Food
Beverage
Total Sales
COST OF SALES:
Food
Beverage
Total Cost of Sales
GROSS PROFIT:
Food
Beverage
Total Gross Profit
2,058,376
482,830
2,541,206
767,443
96,566
864,009
1,290,933
386,264
1,677,197
OPERATING EXPENSES:
Salaries and Wages
Employee Benefits
Direct Operating Expenses
Music and Entertainment
Marketing
Utility Services
Repairs and Maintenance
Administrative and General
Occupancy
Depreciation
Total Operating Expenses
Operating Income
Interest
Income Before Income Taxes
Income Taxes
Net Income
714,079
111,813
132,143
7,624
63,530
88,942
35,577
71,154
120,000
55,907
1,400,769
276,428
84,889
191,539
76,616
114,923
Prepared using USAR
© 2009 John Wiley & Sons
Hoboken, NJ 07030
48
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Cost of Food Sold (Cost of Sales:
Food)
 Cost of food sold (cost of sales: food) is the dollar amount of
all food expenses incurred during the accounting period.
 Cost of goods sold is a general term for cost of any products
sold.
 For restaurants, cost of goods sold as referenced in the
inventory turnover section of this chapter refers to cost of
food sold and cost of beverage sold.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
49
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
go figure!
For Joshua’s Restaurant, the Cost of Food Sold (Cost of Sales: Food) would be
calculated as follows:
Beginning Inventory
+ Purchases
= Food Available for Sale
51,400
771,000
822,400
- Ending Inventory
= Cost of Food Consumed
53,750
768,650
- Value of Transfers Out
+ Value of Transfers In
- Employee Meals
= Cost of Food Sold
11,992
25,785
15,000
767,443
Thus, the cost of food sold for Joshua’s is $767,443.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
50
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Cost of Beverage Sold (Cost of Sales:
Beverage)
 Cost of beverage sold (cost of sales: beverage) is the dollar
amount of all beverage expenses incurred during the
accounting period.
 The cost of beverage sold is calculated in the same way as
cost of food sold except that the products are alcoholic
beverages (beer, wine, and spirits).
 Employee meals are not subtracted because employees are
not drinking alcoholic beverages.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
51
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
go figure!
For Joshua’s Restaurant, the Cost of Beverage Sold (Cost of Sales: Beverage)
would be calculated as follows:
Beginning Inventory
+ Purchases
= Beverage Available for Sale
- Ending Inventory
- Value of Transfers Out
+ Value of Transfers In
= Cost of Beverage Sold
11,520
112,589
124,109
13,750
25,785
11,992
96,566
Thus, the cost of beverage sold for Joshua’s is $96,566.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
52
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Food Cost Percentage
 A restaurant’s food cost percentage is the ratio of the
restaurant’s cost of food sold (cost of sales: food) and its food
revenue (sales).
go figure!
Using Joshua’s Restaurant in Figure 6.6, the calculation for food cost percentage
is:
Cost of Food Sold
Food Sales
= Food Cost %
or
$767,443
$2,058,376
=37.3%
Thus, the food cost % for Joshua’s is 37.3%.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
53
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Beverage Cost Percentage
 A restaurant’s beverage cost percentage is the ratio of the
restaurant’s cost of beverage sold (cost of sales: beverage)
and its beverage revenue (sales).
go figure!
Using Joshua’s Restaurant in Figure 6.6, the calculation for beverage cost
percentage is:
Cost of Beverages Sold
Beverage Sales
= Beverage Cost %
or
$96,566
$482,830
= 20.0%
Thus, the beverage cost % for Joshua’s is 20.0%.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
54
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Labor Cost Percentage
 Restaurateurs are very interested in the labor cost percentage,
which is the portion of total sales that was spent on labor
expenses.
 It is typically not in the best interest of restaurant operators to
reduce the total amount they spend on labor. In most
foodservice situations, managers want to serve more guests,
and that typically requires additional staff.
 Many managers feel it is more important to control labor
costs than product costs because, for many of them, labor and
labor-related costs comprise a larger portion of their operating
budgets than do the food and beverage products they sell.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
55
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
go figure!
Using Joshua’s Restaurant in Figure 6.6, the calculation for labor cost
percentage is:
Cost of Labor
Total Sales
= Labor Cost %
or
$825,892*
$2,541,206
= 32.5%
*Cost of labor is calculated by adding salaries and wages to employee
benefits or $714,079 + $111,813 = $825,892.
Thus, the labor cost % for Joshua’s is 32.5%.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
56
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Average Sales per Guest (Check
Average)
 Average sales per guest (check average) is the average
amount of money spent per customer during a given
accounting period.
 This measure of “sales per guest” is important because it
carries information needed to monitor menu item popularity,
estimate staffing requirements, and even determine
purchasing procedures.
 It also allows a financial analyst to measure a chain’s
effectiveness in increasing sales to its current guests, rather
than increasing sales simply by opening additional
restaurants.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
57
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Average Sales per Guest (Check Average)
 The check average ratio can be used to compare a restaurant’s
performance to previous accounting periods, to forecasted or
budgeted results, to similar restaurants, and to published
industry averages or standards.
 Industry averages and other restaurant statistics are readily
available through publications such as the Restaurant Industry
Operations Report published by the National Restaurant
Association.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
58
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
go figure!
Assuming Joshua’s Restaurant in Figure 6.6 served 203,300 guests during the
year, the calculation for average sales per guest is:
Total Sales
Number of Guests Served
= Average Sales per Guest
(Check Average)
or
$2,541,206
203,300
= $12.50
Thus, the average sales per guest for Joshua’s is $12.50, meaning that each
guest spent, on average, $12.50 when dining at his restaurant.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
59
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Seat Turnover
 Seat turnover measures the number of times seats change
from the current diner to the next diner in a given accounting
period.
go figure!
Assuming Joshua’s Restaurant in Figure 6.6 had 260 seats and served 203,300
guests (covers) during the year, the calculation for seat turnover is:
Covers Served
Number of Seats X Number of Operating Days in Period
= Seat Turnover
or
203,300
260 X 365
=
203,300
94,900
= 2.14 turns
Thus, the seat turnover for Joshua’s is 2.14 times, meaning that each seat
changed from the current diner to the next diner, on average, 2.14 times per day.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
60
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Restaurant Ratios
Ratio Name
Definition
Source of Data
Formula
Food Cost Percentage
Food Cost Percentage represents the
portion of food sales spent on food
expenses
Numerator: Operating Reports
Cost of Food Sold
Food Sales
Beverage Cost Percentage
represents the portion of Beverage
sales spent on Beverage expenses
Numerator: Operating Reports
Labor Cost Percentage represents
portion of total sales spent on labor
expenses
Numerator: Operating Reports
Beverage Cost Percentage
Labor Cost Percentage
Denominator: Operating Reports
Cost of Beverage Sold
Beverage Sales
Denominator: Operating Reports
Cost of Labor*
Total Sales
Denominator: Operating Reports
*Cost of labor = salaries +
wages + employee benefits
Average Sales Per Guest
(Check Average)
Seat Turnover
© 2009 John Wiley & Sons
Hoboken, NJ 07030
Average sales per guest is average
amount of money spent per customer
during a given accounting period
Numerator: Operating Reports
Seat turnover shows the number of
times seats change from a current
diner to another diner in given
accounting period
Numerator: Operating Reports
Denominator: Operating Reports
Denominator: Operating Reports
61
Total Sales
Number of Guests Served
Covers Served
Number of Seats x Number of
Operating Days in Period
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Comparative Analysis of Ratios
 Like many other types of financial data, a company’s
financial ratios are often compared to previous accounting
periods, to forecasted or budgeted results, or to published
industry averages or standards.
Figure 6.9 City-Wide and The Blue Lagoon Occupancy Percentage
City-Wide
Blue Lagoon
© 2009 John Wiley & Sons
Hoboken, NJ 07030
2008
81.0%
82.0%
Occupancy Percentage
2009
79.1%
80.4%
62
2010
77.0%
80.0%
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Ratio Analysis Limitations
 One weakness inherent in an over-dependency on financial
ratios is that ratios, by themselves, may be less meaningful
unless compared to those of previous accounting periods,
budgeted results, industry averages, or similar properties.
 Another limitation is that financial ratios do not measure a
company’s intellectual capital assets such as brand name,
potential for growth, and intellectual or human capital when
assessing a company’s true worth.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
63
Managerial Accounting for the Hospitality Industry
Dopson & Hayes
Review of Learning Outcomes
 State the purpose and value of calculating and using ratios to
analyze the health of a hospitality business.
 Distinguish between liquidity, solvency, activity, profitability,
investor, and hospitality-specific ratios.
 Compute and analyze the most common ratios used in the
hospitality industry.
© 2009 John Wiley & Sons
Hoboken, NJ 07030
64
Managerial Accounting for the Hospitality Industry
Dopson & Hayes