Analyzing Results Using the Income Statement Chapter 9

1
Analyzing Results Using the Income Statement
Chapter 9

• Objectives
• - Prepare an income (profit and loss) statement.
• - Analyze sales and expenses using the PL
  statement.
• - Evaluate a facilitys profitability using the
  PL statement.

2
Introduction to Financial Analysis

• Managerial Accounting (cost accounting) - the
  process of documenting and analyzing sales,
  expenses, and profits.

3
Interest Groups?

• Government
• Records relating to taxes and employee wages
• New Suppliers
• Establish credit worthiness
• Operating Partners and Investors
• Updates on financial health of the business
• Owners, Stockholders, Investment Bankers, and
  Upper Management
• Day-to-day efficiency and effectiveness of
  management

4
Uniform System of Accounts

• Uniform System of Accounts
• Standardized sets of procedures used for
  categorizing revenue and expense in a defined
  industry.
• Typically available from the national
  associations involved with each hospitality
  segment.

5
Income Statement

• Uniform System of Accounts for Restaurants
• Also known as the USAR.
• Seeks to provide a consistent and clear manner in
  which restaurants record their sales, expenses,
  and overall profits.

6
Income Statement (P L)

• 3 Major Sections (most controllable to least
  controllable)
• Gross Profit Section
• Consists of food and beverage sales and costs.
• Controlled by the manager on a daily basis.
• Operating Expenses Section
• Consists of labor and other expenses.
• Controlled by the manager weekly or monthly.
• Nonoperating Expenses Section
• Consists of interest and taxes.
• Least controllable by the manager.

7
Gross Profit Section

• Food / beverage costs are divided by food /
  beverage sales.
• Food / beverage gross profit is divided by food /
  bev. sales.

8
Operating Expense Section

• All ratios are calculated as a percentage of
  total sales.

9
Nonoperating Expense Section

• Operating Income Total Gross Profit Total
  Operating Expense
• Net Income - Managers effectiveness at Cost
  Control. Industry averages range from 1 to over
  20.

10
Income Statement (USAR)

• Aggregate Statement - the sales, costs, and
  profits are summarized on the income statement.
• Supporting Schedules - the details of each line
  item of the income statement.

11
Analysis of Sales/Volume

• Determine sales for this accounting period.
• Calculate the following this periods sales
  minus last periods sales.
• Divide the difference in item 2 above by last
  periods sales to determine the percentage
  variance.

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Analysis of Sales/Volume
What is the percentage variance this year
compared with last years sales?
244,545
13.9
80,271
19.8
2,170,033
2,494,849
324,816
15
13
Other Factors Influencing Sales Analysis
Figure 9.6 Hot Dog! Sales Data
14
Analysis of Food Beverage Expense

• Inventory Turnover - number of times the total
  value of inventory has been purchased and
  replaced in an accounting period.
• Cost of Food Consumed Food Inventory Turnover
• Average Inventory Value
• Beginning Inventory Value Ending Inventory
  Value
• 2
• Average Inventory Value

15
Tonys Tavern had a beginning inventory of 1,190
and an ending inventory of 710 for fruits and
vegetables. If the cost of food consumed was
112,040, what was the operations food inventory
turnover? This means on average he purchased,
sold, and replaced his inventory every ___ days.

• Beginning of 1,190 Ending of 710 1,900
• 1,900 2 950 average inventory value
• 112,040 950 117.9 times
• 365 117.9 every 3 days

16
Analysis of Labor Expense

• Variable labor costs should increase with sales
  volume increases.
• Declining costs of labor could mean a reduction
  in the number of guests served.
• Salaries and Wages Expense
• Total Sales
• Salaries and Wages Expense

17
Analysis of Profits

• Profit Margin is also known as Return on sales
  (ROS).
• This percentage indicates the overall
  effectiveness of a managers ability to generate
  revenue and control costs.
• Some managers look at Operating Income instead
  of Profit Margin. Why?

18
Analysis of Profits

• Net Income Profit Margin (Return on Sales)
• Total Sales
• Net Income This Period Net Income Last Period
• Net Income Last Period
• Profit Variance