Financial Accounting for the Hospitality Industry Video

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  • 0:00 Financial Accounting…
  • 0:48 Profit and Loss
  • 1:40 Balance Sheet
  • 3:32 Statement of Cash Flows
  • 4:02 Financial Ratios
  • 5:40 Lesson Summary
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Lesson Transcript
Instructor: James Blackburn

James has an MBA from Auburn University and a MA in Humanities from Cal State-Dominguez Hills He writes on leadership, business strategy and finance.

In this lesson, we'll review the basic financial statements used in the hospitality industry. We'll also cover a few key ratios used in analyzing the financial strength of a hospitality business.

Financial Accounting in Hospitality

Mike and Laura own and operate Pine Run Bed and Breakfast. This small, family-owned B&B has enjoyed 15 years of steady growth. One afternoon, an executive from a large hotel chain called Mike and Laura to inquire about purchasing Pine Run. He asked for their P&L, Balance Sheet and Cash Flow Statements. Mike and Laura were very careful when it came to finances, but they never had a reason to prepare the statements requested. Mike and Laura decided to call their accountant for advice. The accountant scheduled a meeting and pulled a variety of documents to share with the couple. The documents were from the annual report from another large hotel chain. Here's what Mike and Laura learned from their meeting.

Profit and Loss

The Profit and Loss Statement, printed as the Statement of Income, organizes revenue and expenses into a single document. This document provides potential investors with important financial information about the company. Revenue and expenses are organized in manner that allow investors to understand the relationships between revenue, expenses and profit.

Room, food and beverage costs and expenses are presented on different line items. This technique shows the contribution of each revenue source on revenue and expenses. Expenses also include administrative costs and maintenance costs. At its core, the document condenses thousands of financial transactions into a simple-to-read format tailored to the investment community. The Consolidated Statement of Income combines multiple financial statements into a single document.

Balance Sheet

The Balance Sheet provides a snapshot of the business's financial value at the end of the business period. The Balance Sheet is divided into assets, liabilities and owner's equity. Companies may vary in how they label each section, but the basic formula remains.

Assets - Liabilities = Owner's Equity

In a publicly traded corporation, such as Marriott, you will find the owner's equity section contains descriptions of stock. You will also notice additional line items that are dictated by their financial structure.

The assets section is divided into current assets and fixed assets. Current assets are funds easily converted to cash. They include cash, marketable securities, accounts receivables, inventory and prepaid expenses. Fixed assets are objects of value that are not easily converted to cash. They include land, buildings, equipment, furniture and tableware. Accumulated depreciation must be deducted from all fixed assets other than land.

The liabilities section is divided into current liabilities and long-term liabilities. Current liabilities are immediate obligations owed by the company. They include accounts payable, income tax payable, accrued expenses, deposits and the current portion of long term debt. Long-term liabilities include long-term debt, such as mortgage payables less the current portion included in current liabilities.

Owner's equity is the amount of assets attributed to the ownership after liabilities have been deducted. This section may include a single owner, partners or stockholders. It also includes retained earnings. Retained earnings are profits that are not distributed to the owners or stockholders, but instead reserved for reinvestment in the business.

Statement of Cash Flows

The Statement of Cash Flows captures the cash inflows and outflows during the business cycle. Here's another example provided by Marriott, which shows that cash flows are divided into operating activities, investing activities and financing activities. It describes the cash flow of the company. The basic formula used in the Statement of Cash Flows is:

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