CHAE Review
Financial Statements
Statements,
Capital Leases &
Forms of Business
HFTP
This is a complete review of the
two volume text book
book,
Certified Hospitality Accountant
Executive Study Guide
Guide,
as published by
The Educational Institute of AH&LA.
These materials represent
p
a significant
g
p
part
of the
CHAE examination
examination.
HFTP
These Review Notes for the CHAE
Examination
Were Prepared By:
Stephen M. LeBruto, Ed.D, CPA, CHAE
HFTP Professor of Hospitality Financial
Management and Technology
Associate Dean and Professor
Rosen College of Hospitality Management
University of Central Florida
Orlando, FL
HFTP
The Certified Hospitality Accountant
Executive CHAE Exam
There are a total of 200 multiple choice
questions divided into five sections:
• Basic Accounting
• Managerial Accounting
• Asset Management
• Operations
• Tax & Law
HFTP
S ti
Sections
off the
th CHAE E
Exam
I.
Basic Accounting
g (25%)
(
)
IV.
Accounting theory
Accounting flow
General journal entries
Statement preparation
II. Managerial Accounting (25%)
Ratio analysis
Cost-volume-profit analysis
Profit planning
Forecasting
Internal controls
III. Asset Management (18%)
III
Cash management and analysis
V.
Inventory control
Capital budgeting
Capitalized leases
Tax and Law ((18%))
Basic partnership & corporate
tax
Payroll/tip credit
Depreciation
Deferred tax
Sales taxes and property taxes
Basic innkeepers law
W
Wage
and
d hour
h
Credit laws
Basics of contracts
Bankruptcy
Antitrust
Operations (14%)
Industry terminology
Yield management
Purchasing cycles and controls
HFTP
Basics
HFTP
Organizations That Influence
Accounting
•
•
•
•
•
American Institute of Certified Public Accountants (AICPA)
Financial Accounting Standards Board (FASB)
Securities and Exchange Commission (SEC)
Internal Revenue Service (IRS)
Hospitality Financial and Technology Professionals (HFTP)
HFTP
Accounting
• The American Accounting Association defines
accounting as “the process of identifying
identifying,
measuring, and communicating economic
information to permit informed judgments and
decisions by users of the information.”
HFTP
Bookkeeping
• Clerical
• Routine
R ti
• Part of Accounting
Accounting is a Profession
•
•
•
•
•
•
Financial
Cost
Managerial
Tax
Auditing
Accounting Systems
HFTP
Branches of Accounting
• Financial Accounting – Revenues,
Revenues
expenses, assets & liabilities
• Cost Accounting – Record, classify,
allocate & report current & prospective
costs. Used mainly in manufacturing
• Managerial Accounting – Analyzes &
provides information to management to
enhance controls
HFTP
Branches of Accounting
• Tax Accounting – Prepare & file tax returns
• A
Auditing
diti – Reviews
R i
and
d evaluates
l t
documents, records and control systems
• Accounting Systems – Information
systems - CISA
HFTP
Fundamental Accounting Equation
•
•
•
•
•
•
Assets = Liabilities + Equity
Balance Sheet
Permanent or real accounts
Assets - Things owned
Liabilities - Obligations
Equity - Residual claims on assets
Expanded Fundamental Accounting Equation
•
•
•
•
•
Revenue and Expense accounts
Income Statement
Temporary or nominal accounts
Nominal - Exist in name
Netted and closed to equity
HFTP
Fundamental Equation
• Assets = Liabilities + Owners Equity
• Assets = Liabilities
+ Permanent OE
+ Temporary OE
• Assets = Liabilities
+ Permanent OE
+ Revenue
- Expenses
Accounts
•
•
•
Economic events are reflected in accounts
T-account - title, left side, right side (debit or credit)
Accounts have balances - either debit or credit (left side or
right side)
Asset Accounts
•
•
•
•
•
•
•
•
•
•
•
HFTP
Cash
Notes Receivable
Accounts Receivable
A
Accrued
d Interest
I t
t Receivable
R
i bl
Marketable Securities
Inventories of Merchandise
Office Supplies
Other Prepaid Expenses
Investments
Property and Equipment
Other assets (e.g. security deposits)
HFTP
Liability Accounts
•
•
•
•
•
•
•
Notes Payable
Accounts Payable
Taxes Charged to Guests and Withheld from Employees
Income Taxes Payable
Accrued Expenses
p
Unearned Income
Mortgage Payable
Owners’ Equity Accounts
•
•
•
•
•
•
Capital Accounts
Retained Earnings
Preferred Stock
Common Stock
Capital Surplus
Treasury Stock
Revenue Accounts
•
•
•
•
•
•
•
•
Room Sales
Food Sales
Beverage Sales
Gift Sh
Shop S
Sales
l
Revenue Accounts
Green Fees Pro Shop Sales
Banquet Sales
Interest and Dividend Income
Expense Accounts
•
•
•
•
•
•
•
•
Cost of Food Sold
Cost of Beverage Sold
Wage and Related Costs
Expense Accounts
Supplies
Rent
Utilities
Advertising
HFTP
HFTP
Recording Asset, Liability and Equity Changes
•
•
•
Purchasing a Hotel
Hotel. Debit Building and Land and Credit Mortgage
Payable and Cash
Borrowing Cash. Debit Cash and Credit Notes Payable
Purchasing Furniture. Debit Furniture and Credit Cash
Recording Revenue and Expense Changes
•
•
Sold a Room. Debit Cash and Credit Room Sales
Paid Wages. Debit Wage Expense and Credit Cash
Recording Changes in Owners’ Withdrawal Account
•
Withdrew Cash From the Business. Debit Owner’s Drawing
g Account and
Credit Cash
HFTP
E d Products
End
P d t
Financial Reports
• Balance Sheet – as of a point in time
• Income Statement – for a period of time
• Statement of Cash Flows – 3 sections
HFTP
Balance Sheet
HFTP
B l
Balance
Sh
Sheett Formats
F
t and
d Structure
St
t
• Account Format - Assets on left and Liabilities and
Equity on right
• Report Format - Assets first followed by Liabilities and
Equity
q y
• Current Assets - Converted to Cash or used in
operation in one year or normal operating cycle
• Listed in order of liquidity
– Cash (All Forms)
– Marketable Securities
– Receivables
– Inventories
– Prepaid
P
id Expenses
E
HFTP
Noncurrent Assets
• Noncurrent Receivables - not expected to be
collected
ll t d within
ithi one year
• Investments - securities, land not in use, and
affiliate advances not to be collected within one
year
p y and Equipment
q p
- Fixed Assets,
• Property
Capital Leases - Less accumulated
depreciation
• Smallwares
S ll
i now O
is
Operating
ti E
Equipment
i
t under
d
the 10th edition of USALI
HFTP
Property, Equipment, and Other Assets
Property and Equipment
•
•
•
•
•
•
Balance Sheet Items
p
Some are depreciated
Some are not depreciated
Used to be called “Fixed
Fixed Assets
Assets”
Hospitality Industry is “Fixed Asset Intensive”
Capital not revenue expenditures
HFTP
Property and Equipment Classifications
•
•
•
•
•
•
•
Land
Buildings
L
Leaseholds
h ld
Leasehold Improvements
Construction in Progress
Furnishings and Equipment
Special
Spec
a Consideration
Co s de at o o
of Ce
Certain
ta Property
ope ty a
and
d
Equipment
• Capital Leases
HFTP
Other Assets - Deferred Charges,
Security
y Deposits
p
• Preopening Expenses - New USALI
recommends to expense in current period
• Other assets
• Goodwill
G d ill
• Cash surrender value of life insurance
• Deferred charges
• Possibly deferred income taxes
HFTP
Current Liabilities
Obligations expected to be satisfied in one
year or normal operating cycle
• Current
C
t Li
Liability
bilit P
Presentation
t ti
– Payables
– Advance deposits
– Current maturities (Portion) of long term
debts
– Dividends payable
– Income Taxes payable
HFTP
Long Term Liabilities
•
•
•
•
•
•
Obligations beyond one year
Notes payable
Mortgages payable
Bonds payable
Capitalized lease obligations
Possibly deferred income taxes
HFTP
O ners’ Equity
Owners’
Eq it
•
•
•
•
•
•
•
•
•
•
•
•
•
Preferred Stock, Par @ $$$
Sh
Shares
A
Authorized
th i d
Shares Issued
Common Stock, Par @ $$$
Shares Authorized
Shares Issued
Treasury Stock
Additional Paid in Capital
Retained Earnings
O
Owners’
’E
Equity
it
Sole Proprietorship Capital
Partnership - Show Each Owner’s Capital
Withdrawal Accounts
HFTP
Footnotes
•
•
•
•
•
•
•
•
•
•
•
•
•
Significant Accounting Policies
Accounts and Notes Receivable
Inventories
Investments
P
Property
t and
d Equipment
E i
t
Current Liabilities
Long Term Debt
Employee Benefit Plans
Leases
Segments of Business
Supplemental Financial Information
Commitment/Contingent Liability
Income Taxes
HFTP
Balance Sheet Analysis
Anal sis
• Comparative Statements or Horizontal Analysis
– Compute absolute change
– Compute relative change
– Investigate significant differences
– Internal analysis
• Common Size Statements or Vertical Analysis
– Total assets equal 100%
– Total liabilities and Equity equals 100%
– Balance Sheet Analysis
– Each individual account is shown as a percentage
of the total
– Compare to industry, like businesses or self
HFTP
Comparative Balance Sheet
HFTP
Common Size Balance Sheet
HFTP
B l
Balance
Sheet
Sh t Analysis
A l i
Base year comparisons
– Series of Years
– Compared to a Base Year
Balance Sheet Limitations
• Does not reflect current values of Assets (Booked
according
g to Cost Principle)
p )
• Does not include some items of value such as
Personnel, Location, Customer Base, Goodwill
• Becomes quickly outdated
• Some account balances are estimates such as
Depreciation and Estimates for Uncollectibles
HFTP
Income Statement
HFTP
The Income Statement
•
•
•
•
Statement of Earnings
Profit and Loss Statement
Statement of Operations
Frequency - Daily, Weekly, Monthly, Quarterly,
Ann all
Annually
• Reports on a Period of Time
• Departmental Income Statements
• Uniform System of Accounts
HFTP
Elements of Income Statement
•
Revenue –
– Sale of Goods and Services
– Investment Income
– Rental Income
•
Expenses –
–
–
–
–
–
•
Outflows to Produce Goods
Cost of Goods Sold
Labor
Controllable Expenses
Noncontrollable Expenses
Other Gains and Losses –
– From Incidental Transactions
– Acts of Nature
•
Period Income or Loss –
– Add/Deduct To/From Equity
HFTP
Income Statement Anal
Analysis
sis
• Comparative Statements or Horizontal Analysis
– Compute absolute change
– Compute relative change
– Investigate significant differences
– Internal analysis
• Common Size Statements or Vertical Analysis
– Total Revenues equal 100%
– Each individual account is shown as a percentage
off Total
T t l Revenue
R
– Compare to industry, like businesses or self
HFTP
Horizontal Analysis Example
HFTP
Vertical Analysis Example
HFTP
Statement of Cash Flows
HFTP
St t
Statement
t off Cash
C h Fl
Flows
• Required Statement Since 1988 by the FASB
• Replaces the Statement of Changes in
Financial Position
• Focused on Cash Changes From Operating
Activities, Investing Activities Financing
Activities
• Cash
C hE
Equivalents
i l t =C
Cash
h
HFTP
Use and Purpose of The Statement
of Cash Flows
•
•
•
•
•
•
Assess ability to generate future cash flows
Assess ability to meet current obligations
Shows the difference between Net Income and Cash Generated
Sh
Shows
the
th effect
ff t off Cash
C h and
d Non-Cash
N
C h Financing
Fi
i
and
d
Investing Activities
Internal users - Management
– Assess Liquidity
– Assess Financial Flexibility
– Determine Dividend Policy
– Plan Investing
g and Financing
g
– Use and Purpose of The Statement of Cash Flows
External users - Investors and Creditors
– Assess Ability to Pay Bills
– Assess Ability to Pay Dividends
– Assess Need for Financing
HFTP
Determine Change in Cash
Account - The “Answer”
Summarize Operating Activities
– Cash in From Sale of Services
– Cash in From Interest and Dividends
– Cash Out for Expenses
p
and interest on debt
Summarize Investing Activities
– Cash in From Property Sales
– Cash in From Investment and Security Sales
– Cash Out for Loans and Purchases of Property and
Investments
Summarize Financing Activities
–
–
–
–
–
Cash in From Sale of Stock
Cash in From Issuing Debt
Cash Out for Paying
y g Debt - Principal
p
Cash Out to Pay Dividends – on own stock
Cash Out to Reacquire Capital Stock – Treasury Stock
HFTP
Determine Change in Cash
Account - The “Answer”
Schedule
S
h d l off Non-cash
N
h Investing
I
i
and
d
Financing Activities
– Exchange of Capital Stock for Property and Equipment
– Capital Lease Obligations Incurred
Present the Statement of Cash Flows
–
–
–
–
–
–
–
Cash Flows From Operating Activities
Cash Flows From Investing Activities
Cash Flows From Financing Activities
Net Increase (Decrease) in Cash
Cash At Beginning of Period
Cash At End of Period
S
Supplemental
l
t l Schedule
S h d l - Non
N
C
Cash
hT
Transactions
ti
HFTP
O
Operating
ti Activities
A ti iti - Direct
Di
t Method
M th d
• Accrual Accounting - Recognize expenses when incurred
and revenue when earned.
• Convert each item on the Income Statement from
accruall b
basis
i accounting
ti tto cash
hb
basis
i accounting
ti
• Ignore non-cash transactions
• Cash receipts from sales plus interest and dividends
received
• Cash disbursements for operating expenses
• FASB Prefers Direct Method, but Indirect Method is
used
d more in
i the
th hospitality
h
it lit industry
i d t
HFTP
Operating
p
g Activities
- Indirect Method
•
•
•
•
•
•
Used in hospitality operations
St t with
Start
ith nett income
i
Adjust for non-cash expenses such as depreciation (add)
Adjust for gains (deduct) or Losses (add) on sale of noncurrent assets or marketable securities
Adjust for changes in current accounts except cash and
dividends payable
Accounting for changes in current accounts using indirect
method
th d
– A Decrease in a Current Asset Is Added to Net Income
– An Increase in a Current Asset Is Deducted From Net
Income
– A Decrease in a Current Liability Is Deducted From Net
Income
– An Increase in a Current Liability Is Added to Net Income
HFTP
Net Cash Flows From Investing
Activities
• E
Examine
i Non-Current
N
C
tA
Assett accounts
t ffor changes
h
between the Balance Sheet dates
– Investments
– Property and Equipment
– Look at Journal Entries
• Read footnotes to Statements
• Examine Non-Current Liability and Owners’ Equity
accounts for changes between the Balance Sheet
dates
– Look at Journal Entries
– Read footnotes to Statements for Non-Cash transactions
– Analyze Dividends Payable account for cash payments
HFTP
Di id d Example
Dividend
E
l
•
•
•
•
•
Beginning dividend payable $100
Dividend declared $200
Ending dividend payable $120
How much dividend was paid?
p
$180 (beginning + declared – ending)
HFTP
Capital Leases
HFTP
Capital Leases
• Called “leased asset under capital lease”
• Recorded at present value of future lease payments
• Strict criteria as to whether a leased asset is a
capital lease (Balance Sheet) or an operating lease
(Income Statement)
• Operating
O
ti Lease
L
is
i an operating
ti expense
HFTP
Lease Accounting
•
•
•
An Agreement Conveying the Right to Use Resources for
Specified Purposes and Time
Lessor Owns the Property and Conveys Right to Use
Lessee Uses Property in Exchange for Periodic Payments
Advantages of Leases
•
•
•
•
•
•
•
Conserves Working Capital
Acquisition Requires Less Internal Processes
Easy to Change Equipment and Update
Tax Benefits - Pass Through Advantage of Lessors Tax Credits
in the Form of Lower Rent
Contracts Are Less Restrictive
Not Shown on Balance Sheet - Improves Ratios
May Acquire Without Capital Budgets
HFTP
Disad antages of Leasing
Disadvantages
•
•
•
Residual Value of Asset May Benefit Lessor
Cost May Be Higher Than Purchase
Lease Termination May Be Expensive
Provisions of Leases
•
•
•
•
•
•
•
•
•
Term
Purpose
Rental Payment
Renewal Options
Obligations For Property Taxes, Insurance and Maintenance
(Triple Net Leases)
Inspection of Books
Sublease
y Deposits
p
Security
Indemnity Provisions
Operating Leases
HFTP
• Short Duration
• Lessor Retains Responsibility for Executory Costs
(
(Property
Taxes, Insurance, Maintenance))
• Easily Canceled
• Expensed on Income Statement
Capital
p
Leases
•
•
•
•
Long Duration
Lessee Often Is Responsible for Executory Costs
Non-Cancelable
Capitalized on Balance Sheet
HFTP
FASB Capitalization Criteria
If the Lease Meets Any One of the Following
Criteria It Must Be Treated As a Capitalized
Criteria,
Lease - Not As an Operating Lease
– Title Transfer Provision
– Bargain Purchase Provision
– Economic Life Provision - 75% Rule
– Value Recovery Provision - 90% NPV
HFTP
Acco nting for Operating Leases
Accounting
•
•
•
•
Simple Rental Agreement
Debit Rent Expense and Credit Cash
Accrual Accounting Rules Apply If Rent Is Paid in Advance
If Pay in Advance Greater Than 12 Months - Treat As a Deferred
Charge on the Balance Sheet
Accounting for Capital Leases
•
•
•
•
Similar to the Purchase of a Fixed Asset
Recognize Asset and Applicable Liabilities
Asset Value Is the Net Present Value of Future Lease Payments
- Excluding Executory Payments
U L
Use
Lessee’s
’ Incremental
I
t l Borrowing
B
i
Rate
R t or Lessor’s
L
’ Implicit
I li it
Rate If Lower and Is Known
HFTP
Other Lease Information
• Leasehold Improvements - Capital
Improvements Made to Leased Space. Amortize
Cost Over the Shorter of Life of Improvements or
Life of Lease
• S
Sale
l and
dL
Leaseback
b k - Owner
O
Sells
S ll R
Reall E
Estate
t t
and Leases It Back From Investor. Raises
Capital - Defer and Amortize Profit Over Life of
Lease. Recognize Losses Immediately
HFTP
Forms Of Business
HFTP
Forms Of Business Organization
•
•
•
•
•
Sole Proprietorship
Partnership
Limited Partnership
“C” Corporation
p
“S” Corporation – best of both
worlds
• Limited Liability Company
• ** ttax advantage
d
t
HFTP
Sole Proprietorship
• Easiest to organize / dissolve
• Legally not a separate business – liability issues
• It is separate for accounting purposes
purposes, however
• Owner not paid a salary or wage - withdrawals
Partnerships
HFTP
• Two or more people joined together in a
non-corporate manner for conducting
business Can use a written or oral
business.
agreement
HFTP
Partnerships
• Advantages
– Greater financial
strength
t
th
– Does not pay taxes
– Shares liability
– Greater
managementt
strength
• Disadvantages
– Partners are taxed on
profits
fit regardless
dl
off
cash distribution
– Limits decision
making process
– Unlimited legal liability
HFTP
Li it d Partnerships
Limited
P t
hi
• Offers liability protection to limited partners
– General Partner(s) – responsible for debts of
the p
partnership
p – Must have at least 1
– Limited Partner(s) – may not actively
participate
p
p
in the day
y to day
y operations
p
of the
business
– Agreement must be written
– Limited partners liability is limited to the amount
of their investment
HFTP
C
Corporations
ti
• A legal entity created by a state or other political
authority
• Characteristics
– An exclusive name
– Continued existence independent of
stockholders
– Paid in capital represented by shares of stock
– Overall
O
ll control
t l vested
t d iin it
its di
directors
t
HFTP
C
Corporations
ti
• Ad
Advantages
t
• Disadvantages
Di d
t
– Shareholders liability limited
– Double taxation
to amount of investment
– Ownership control
– Owners are taxed on
distributed profits (dividends)
– Employee equity participation
(ESOP)
– Lower tax rates
– Corporation continues on in
perpetuity
HFTP
Corporation Fundamentals
•
•
•
•
•
•
•
Pays taxes on profits
Common stock
Par value
Additional Paid-In Capital in Excess of Par
Dividends
Retained earnings statement
Stock subscriptions
Preferred Stock
•
•
•
•
•
•
Preferred in terms of dividends
Preferred in event of liquidation
Cumulative
Callable
Non-Voting
Some are convertible
HFTP
Other Corporation Issues
• Cash dividends versus stock dividends
• Stock splits
p
• Treasury stock (contra equity account :
y stock, Credit Cash))
Debit Treasury
• Book value per share of common stock
HFTP
Other Forms Of Business Organization
• S-Corp
– Eliminates
double taxation
– Limited to 75
shareholders
– Only one class
of stock
– Shareholders
pay taxes
• Limited Liability
Company (LLC)
– May have unlimited
number of owners
– May have a single
owner
– Not restricted to one
class of stock
HFTP
CHAE Review
Financial Statements
Statements,
Capital Leases &
Forms of Business