Hotel California
Student Coaching Slides
Some Important Names
Legal Eagles
 Rebecca Warren
 Babak Gordon
 Shirley Ramirez
 Bank of the West
 Mechanics National Bank
 Desert Mirage Accounting

Valuing The Hotel Property
Why is it important to know the value of the
hotel property?
 What methods are used to obtain this value?

Gross Margin
 Gross Margin or Gross Profit is sales revenue
minus cost of goods sold.
 This definition is for a retailer or
manufacturer, not a service company.
 Footnote 2 tells what is included in cost of
revenues, which is subtracted from the
revenues to yield gross margin.
Footnotes to the financial statements provide readers information that help them
better understand the accounting rules, assumptions and items in the
statements.
Cash Flow
 Income statements are prepared on the
accrual basis to measure earning activity, not
cash flow.
 Differences in accrual income and cash occur:
– From matching expenses against revenues regardless of the
timing of cash payments, such as depreciation, bad debts,
estimated warranties, etc.
– From following revenue and expense recognition rules rather
than computing the actual payments to suppliers and
receipts from customers.
– From cash payments/receipts for items that only impact
the balance sheet, e.g., dividends, capital contributions
loans, or equipment purchases.
Cash Flow-Continued
 In this case, you are provided
information about non-cash expenses on
the income statement.
 In addition, this is an income statement
for a sole-proprietorship (SP.) In this
company, the owner provided work that
others would have been paid to perform.
She took that money in the form of a
drawing account, not a salary.
Draw vs. Expense
 Corporations record all obligations for services
received as expenses.
 Expenses are deducted from revenues to yield
income.
 Drawing accounts in SPs are treated as
distributions of profits to owners. These are
not treated as expenses of operating.
 Critical Thinking:
If you are valuing a soleproprietorship and owners have rendered
services and have only received drawings in
return, what should you do, if anything?
Present Value
 Present value is a technique that considers the time
value of money.
 PV allows cash amounts expected to be paid or received
at different times to be brought to present day values
so they can be combined.
 If amounts differ over time calculate the present value
of a single sum, if amounts are equal each period,
calculate the present value of an annuity.
 Critical Thinking:
– What would go into the decision to use an 8% discount rate?
– Why is present value calculated on cash flow and not on income?
– Assume that you can receive $500,000, $515,000, and $600,000
over a 3 year period and the present value of those sums at 8%
is $1,495,370. Explain what that means in simple terms.
Expected Value
 Expected Value is a method of
calculating an average that places
weights on the items being averaged.
The weights represent the probability
of each item occurring.
 Experts believe that in valuations of
this type a 40% weight should be given
to the gross profit value and a 60%
weight should be placed on the present
value of cash flows.
Credibility of
Financial Statements
 To be credible, the financial statements must be
prepared in accordance with generally accepted
accounting principles (GAAP.)
 To assure yourself that this has occurred, you need a
signed opinion letter attached to the financial
statements.
 Three forms of letters might be attached:
– Compilation letter
– Review letter
– Audit opinion
 These involve differing degrees of work, but are signed
by CPAs. CPAs are tested on their knowledge and their
practice is regulated.
NEGLIGENCE
Duty of Care Owed by
Defendant to Plaintiff
Breach of the Duty of Care by
the Defendant
Causation
Damages
DUTY OF CARE
Foreseeable Plaintiff within
the Zone of Danger

 Duty Arising out of Contract
 Assumption of Duty
BREACH OF DUTY OF CARE
Standard of Care
a defendant owes the plaintiff a duty to act
as would an ordinary prudent person under
the same or similar circumstances
CAUSATION
Causal Connection: there must be a
causal connection between the negligent
conduct and the resulting injury.
But For Test: But for the
defendant’s negligence, the plaintiff would
not have sustained the loss.
Contract Formation
Offer
& Acceptance are
Required
The
Terms of Acceptance
Must Mirror the Terms of the
Offer
Writing Requirement

Contracts for the Sale of
Real Property:
Under the Statute of Frauds, Contacts
for the Sale of Real Property Must be in
Writing and Authenticated by the Person
against Whom Enforcement is Sought