Chapter 2
Financial Statements For Decision
Making
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Objectives
After studying this topic you should be able to:
 Develop knowledge and understanding of a variety
of accounting statements;
 Critically evaluate the usefulness of such
information to managers, and other statement
users;
 Develop knowledge of alternative accounting
terminology used within financial reports; and
 Develop a working knowledge of the concepts of
profit and cash in the business context.
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
The difference between
profit & cash
Profit = the surplus of value between
sales revenue and associated costs
for the same period
Sales Revenue – Costs = Profit
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Example: difference
between cash and profit
Cultural Events is a small local events company, its operating
information for one month, April is:
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Sales for the period are £40,000, which includes £10,000
invoiced and yet to be paid by the customer;
Cost of sales, £12,000, which includes £6,000 still to be paid to
the supplier;
Expenses for the month are £20,000, but this includes £4,000
paid previously and £6,000 not to be paid until the next month;
At the start of the month the bank balance (cash) was £5,000
A cash payment of £15,000 is paid in April related to last
month’s expenses.
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Solution
Cultural Events
Profit
Cash
Opening cash
Sales Revenue
£40,000
- Cost of sales
£12,000
£35,000
= Gross Profit
£28,000 - Expenses for March
£15,000
- Expenses
£20,000 - Expenses for April
£10,000
Profit
+ cash from sales
£5,000
£8,000 Closing cash
£30,000
£10,000
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
External financial reporting
Standardisation over time has led to
International Financial Reporting Standards
(IFRS) being developed which are being
adopted in a number of countries.
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
The international
convergence of accounting
standards
Australia, European Union countries
(incl. France, Germany, Italy,
United Kingdom - UK), South Africa,
Turkey
Argentina, Mexico, Russia,
Use of IFRS since 2005, some countries for listed
companies only
Brazil
2008 or 2010, depending on type of company
Canada
2011, plus allowed for not-for-profit organisation
China
Broad convergence with national standards
India, Indonesia
Planned convergence
Japan
Allowed for some international companies since 2010,
further adoption under consideration
Republic of Korea
2011
Saudi Arabia
Required in banking sector, under consideration more
generally
United States (USA)
Allowed for foreign company users since 2007, aiming for
substantial convergence
2012
(data from IFRS 2012)
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Statement of
Comprehensive Income
Statement of Income for the year ended 31st December XXX2
Revenue
Cost of sales
Gross Profit
Other income
Distribution costs
Administrative expenses
Other expenses
Finance costs
Profit before tax
Income tax expense
Profit for the year
31st December XXX2
6,900
(710)
6,190
700
(80)
31st December XXX1
7,400
(680)
6,720
670
(72)
(3450)
(690)
(40)
2,630
(790)
1,840
(3,708)
(740)
(60)
2,810
(843)
1,967
(Note: data for format illustrative purposes only)
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Statement of Financial
Position terms (1)
Accounting Term
Alternative Term
Statement of Financial Balance Sheet
Position
Description
A statement that shows what a company owns and owes at
a given point in time
Assets
Something the company owns, or has use of
Non-current assets
Fixed assets
Current assets
Inventories
Stock
Trade receivables
Debtors &
Prepayments
Assets that usually have a useful life for the company longer
than 12 months e.g. Owned property, machinery, equipment
Assets that are short term, usually have a useful life for the
company shorter than 12 months e.g. Cash, Inventory,
trade receivables
The value of the stock of goods for resale e.g. Stock of food,
drink, merchandising, shop stock
Money outstanding from sales, customers to pay in the
future & things paid for but still to ‘use’ e.g. Customers with
credit terms still to pay. A prepayment could be paying a
year’s insurance at the start of the year
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Statement of Financial
Position terms (2)
Accounting Term
Alternative Term
Equity
Shareholders’ funds The owners’ value in the business e.g. Value
of shares, retained profits, reserves
Liabilities
Non-current
liabilities
Current
liabilities
Trade payables
Description
An obligation to be met in the future
Long-term liabilities Liabilities, usually over 1 year e.g. Bank
loans
Short-term liabilities, to be met within 12
months
Creditors & Accruals The amount you owe to your suppliers e.g.
Amounts you owe for stocks already
purchased, but yet to pay. Electricity that
you are invoiced for after consumption
would be an accrual
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Statement of Financial
Position (1)
Statement of Financial Position as at 31st December XXX2
31st December XXX2 31st December XXX1
ASSETS
Non-current assets
Property, plant and equipment
750
740
Intangible assets
100
100
850
840
Current assets
Inventories
85
80
Trade receivables
140
160
Cash and cash equivalents
300
270
525
510
Total assets
1375
1350
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Statement of Financial
Position (2)
Statement of Financial Position as at 31st December XXX2
31st December XXX2
EQUITIY AND LIABILITIES
Equity attributable to owners
Share capital
850
Retained earnings
180
Total equity
1030
Non-current liabilities
Long-term borrowings
Deferred tax
Total non-current liabilities
Current liabilities
Trade payables
Short-term borrowings
Current tax payable
Total current liabilities
Total liabilities
Total equity and liabilities
31st December XXX1
700
140
840
150
10
160
244
30
274
150
10
25
185
345
1375
194
12
30
236
510
1350
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Statement of Cash flows
Direct Method
Cash receipts from customers
xxx
Cash paid to suppliers
xxx
Cash paid to employees
xxx
Cash paid for other operating
expenses
Interest paid
xxx
Income taxes paid
xxx
Net cash from operating activities
xxx
xxx
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Statement of Cash flows
Indirect Method
Profit before interest and income taxes
xxx
Add back depreciation
xxx
Add back amortisation of goodwill
xxx
Increase in receivables
xxx
Decrease in inventories
xxx
Increase in trade payables
xxx
Interest expense
xxx
Less Interest accrued but not yet paid
xxx
Interest paid
xxx
Income taxes paid
xxx
Net cash from operating activities
xxx
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Uniform System of
Accounting for the Lodging
Industry (USALI)
Hospitality specific reporting framework
Developed in the 1920’s
Responsibility accounting format
Provides a complete management
accounting reporting system
 Allows external benchmarking
 Used in industry-wide studies
 Useful in management contract operations
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© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Example: USALI
Department Statement
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Example: USALI Summary
Statement of Income
* Income - in this American terminology ‘income’ relates to what in the UK would be termed ‘Profit’
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Example Room Statement
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Summary

Cash and profit refer to different elements of the accounts and should never
be used interchangeably, they are different.
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A number of different ‘GAAPs’ exist, international GAAP, using IFRS are used
more widely than other ‘national’ county specific GAAPs.
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External reporting statements can be utilised internally for management
accounting analysis purposes, but are too general and far reaching for
operational decision making.
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USALI is well utilised as a reporting framework within hospitality and is one
of the oldest sector specific internal reporting frameworks in the world.
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USALI serves many purposes for internal reporting and external
benchmarking for decision making.
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers