CHAPTER 4 FINANCIAL STATEMENTS & ANALYSIS FOR RESTAURANTS 1.

Uniform System of Accounts for Restaurants (USAR) The financial statements of a business consist of a balance sheet, a statement of income and retained earnings, and a statement of cash flows that shows the sources and uses of cash. Although all financial statements are important, the statement of income will probably be the most interest to the restaurant operator. The primary purposes of the Uniform system of Accounts for Restaurants is to give restaurant operators a common language to use in their accounting statements, so when they discuss their businesses with other operators, they will know that each is talking about the same thing when they mention food costs or direct operating expenses. At the same time, this common language must take the form that will give the majority of restaurant operators a clear picture of the major elements of their business, showing how each major item contributes to it. By its use, restaurant operators will have the benefit of the analytical interpretation and experience of accountants in the presentation of their own figures. As the USAR becomes more universally adopted, operators can make comparisons without having to make adjustments. An additional benefit of the USAR is that it gives third-party users of financial statements (such as lenders) the opportunity to compare a restaurant operators statements with industry averages. Such comparisons are greatly facilitated when industry averages and the operators statements share a common format. 2. The Statement of Income and Retained Earnings The income statement presentation under the USAR is flexible and can be readily adapted for the very small restaurant as well as for the large operation or chain. They extent to which the statement shows the detail of sales and expenses depends entirely upon the desires of the operator. A statement of income should, however, be sufficiently comprehensive to answer the questions that would normally arise in the conduct of the business. For this reason, the various elements of operation are summarized into their major logical groupings for the preparation of the basic statement, which may be amplified indefinitely. Although an attempt has been made in this text to list as fully as possible the items that will come under each main heading, there will always be, in the practical application of the system, some types of income or expense that are not specifically mentioned. In such cases, unlisted items should be entered in the group that contains transactions similar in nature. In some of the larger restaurants and in chain operations, the statement presentation may be complicated by the existence of a central commissary, bakery or executive office. In these instances, the apportionment of the costs of these central units to the restaurants involved is
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usually made by a method or formula which best suits those in charge of operations, and their bookkeeping is designed on this particular basis. It would thus be difficult, if not impossible, to devise any uniform method of distribution for these central units that would satisfy all, since many of the distributions depend on the experience and judgment of the individual official in charge. No attempt has been made in this text to present any classifications for these central units, and the USAR as outlined provides only for the ultimate distribution of their costs to the retail operation of the restaurants themselves. Instead, in the USAR presentation, costs which occur at an executive office or commissary, and which are not allocated, are summarized in the category corporate overhead. SALES Food sales This category includes revenue derived from the sale of food in the restaurant. Food sales also include the sale of coffee, tea, milk and fruit juices, which usually are served as part of a meal. If there is no service of liquor, beer or wines, the soft drink sales also would be included in this category. Knowledge of food sales statistics can be helpful and here, two such statistics are presented. The first statistic is the average check per customer; the food sales are divided by the number of customers served. Meal Period Breakfast Lunch Dinner Total Food Sales $500.00 $1,200.00 $1,100.00 $2,800.00 Customers Served 200 260 100 560 Average Check $2.50 $4.62 $11.00 $5.00

divided by divided by divided by

= = =

If there were 100 seats in this restaurant, the average daily turnover per seat would be as follows: Meal Period Breakfast Lunch Dinner Total Customers Served 200 260 100 560 Average Turnover Per Seat 2.00 (= 200 / 100) 2.60 (= 260 / 100) 1.00 (= 100 / 100) 5.60 (= 560 / 100)

Beverage Sales The sale of beverages, which would include all alcoholic beverages and soft drinks, is shown separately on the statement of income. These sales would not include coffee, tea, milk or fruit juices, which are considered food items since they are normally served with meals. Because the
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Statement of Income and Retained Earnings Name of Restaurant Company For the Period ended (Insert Date)
Amounts Sales Food Beverage Total Sales Cost of Sales Food Beverage Total Cost of Sales Gross Profit Food Beverage Total Gross Profit Operating Expenses Salaries and Wages Employee Benefits Occupancy Costs Direct Operating Expenses Music and Entertainment Marketing Utility Services Depreciation General and Administrative Expenses Repairs and Maintenance Other Income Total Operating Expenses Operating Income Interest Income Before Income Taxes Income Taxes Net Income Retained Earnings, Beginning of the Period Less: Dividends Retained Earnings, End of Period $697,000 153,000 850,000 Percentages 82% 18 100

245,500 52,000 297,500

35 34 35

451,500 101,000 552,500

65 66 65

255,000 34,000 59,000 51,000 1,000 17,000 25,500 16,500 44,200 16,500 (2,500) 517,400 35,100 4,250 30,850 4,500 26,350 175,450 (10,000) $191,800 3

30 4 7 6 0.1 2 3 2 5 2 (0.3) 61 4 0.5 4 0.5 3%

percentage of gross profit varies considerably for the different types of beverage sales, it may be helpful to operators to divide the beverage sales into several major groups, such as cocktails, liquors, wines, beers, non-alcoholic drinks and bottle sales. Beverage sales may also be summarized by meal periods or by dining rooms and types of service. COST OF SALES Cost of Food Sold Beginning Inventory +Food Purchases Ending Inventory Cost of Food Consumed Employees Meals Cost of Food Sold

$ 5,000 $19,000 $ 6,000 $18,000 $ 2,000 $16,000

The statement of income indicates that the food-cost figure, used in computing the gross profit, is the net cost after deducting employees meals. Actually, the separation of the food cost between the cost of food served to guests and that served to employees is made in order to indicate more clearly the direct relation of menu prices to costs. Cost of employees meals is included in Employee Benefits account under Operating Expenses section. Cost of Beverage Sold Beginning Inventory +Beverage Purchases Ending Inventory Cost of Beverage Sold

$ 3,000 $10,000 $ 2,000 $11,000

GROSS PROFIT Gross Profit on Food Sales is calculated by subtracting Cost of Food Sold from Food Sales. Gross Profit on Beverage Sales is calculated by subtracting Cost of Beverage Sold from Beverage Sales. OPERATING EXPENSES Salaries and Wages This category includes the regular salaries and wages, extra wages, overtime, vacation pay and any commission or bonus payments made to employees. The entire restaurant payroll generally is included under this category. In the case of single proprietors and partnerships, the payment to the owners in recognition of their management is part of net income and does not appear as part of the payroll.

Employee Benefits This category includes payroll taxes including federal retirement tax (FICA) and unemployment taxes, insurance including pension plan payments, and cost of employee meals. What is Prime Cost? Prime cost is cost of sales (food cost and beverage cost) plus all payroll related costs, including salaries and wages, and employee benefits. Prime cost usually runs 60% to 65% of total sales in a full service restaurant and 55% to 60% of sales in a quick service restaurant. These are volatile costs that should be well controlled for a restaurant to be profitable. Occupancy Costs These expenses include rent, property taxes and property insurance, real estate taxes, etc. which are considered fixed charges. Direct Operating Expenses Expenses directly involved in providing service to the customer, such as uniforms, laundry, linen, china, and learning and paper supplies, are considered operating expenses. Also included are utensils, kitchen fuel, menus and drink lists, flowers and decorations, contract cleaning, auto or truck expense, parking, and licenses and permits. Music and Entertainment This account includes costs for orchestras and musicians, professional entertainers, piano rental and tuning, booking agents fees, meals served to musicians and entertainers, etc. Marketing This group of expenses includes selling and promotion expenses, such as direct mail and entertainment costs in promotion of business (including gratis meals to customers). Also, the cost of advertising through newspapers, magazines or trade journals, outdoor signs, and radio and television is included. Public relations and publicity (including fees and commissions to advertising or promotional agencies) and royalties are found in this category. Utility Services This account is composed of the costs of all fuel except that charged to direct operating expenses in the account kitchen fuel. Water, ice and refrigeration supplies, and the removal of waste are also included. The cost of oils, boiler compound, fuses, grease and other supplies, plus any small tools used in the operation or maintenance of the mechanical and electrical equipment, should also be charged to this account. Depreciation The building, furniture and equipment, leasehold and leasehold improvements, which represent a large part of the investment in the business, have an economic life. They will ultimately be disposed of or replaced because they have outlived their usefulness. The costs charged against operations in the statement of income represent the pro-rated recovery of the cost of these items, which is called depreciation.

General and Administrative Expenses This group of expenses is commonly considered as overhead and includes items that are necessary to the operation of the business rather than those connected directly with the service and comfort of the customer. This account should be charged with the cost of all printed matter not devoted to advertising and promotion, such as accounting forms, account books, restaurant checks, office supplies, cash register and other checking supplies, letterheads, bills and envelopes. All postage, except amounts applicable to advertising, should be charged here. The cost of telephone equipment rental, local and long-distance calls should be charged to this account, with the exception of calls chargeable to marketing. Other items charged to this account are data processing costs, dues and subscriptions and insurance costs (other than those include as employee benefits or fire and extended coverage on the premises and contents). Commissions on credit card charges collection fees, cash shortages, professional dues and protective services are also considered general and administrative expenses. Also, corporate overhead is included in this account that consists of costs or fees charged or allocated by the central office or a management organization of a chain operation for executive supervision and management. Repairs and Maintenance The following items are repairs and maintenance expenses: painting and decorating; plastering; upholstering; mending curtains; and maintenance contracts on elevators, signs and office machinery. Repairs to dining room furniture, refrigeration, air conditioning, buildings, floors, plumbing and heating are charged to this category as well. Repairs to dishwashing and sanitation equipment, kitchen equipment and office equipment are also included here. Other Income All of the restaurant operating income, other than food and beverage sales, are included in this category. A gift and merchandise shop can be a profitable operation in many cases. Also, banquet room rentals and vending machine commissions are included in this category. This category reduces Total Operating Expenses. Operating Income = Total Gross Profit Total Operating Expenses Income Before Income Taxes = Operating Income Interest Expense Net Income = Income Before Income Taxes Income Taxes Retained Earnings (End of Period) = Retained Earnings (Beginning of Period) + Net Income Dividends

[Exercise] Secret Land has 100 seats and serves Italian food without alcoholic beverage service. The restaurants average checks per customer are $9.50 for lunch and $18.00 for dinner, respectively, for 2012. The average turnover per seat by meal period for 2012 was as follows: Monday-Friday Saturday Sunday Lunch 1.9 1.4 1.3 Dinner 0.75 1.35 0.55

Operating information is given as follows: The beginning and ending inventories of food were $25,000 and $28,000, respectively. Food of $380,000 was purchased during 2012. Cost of employees meals was $14,000 during the year. Beverage sales was 30% of total sales which consist of only food and beverage sales. Cost of beverages was 35% of beverage sales. Salaries and wages were 30% of total sales. The amount of employee benefits is 10% of salaries and wages, excluding employees meals. Costs of rent, property taxes and insurance were $64,000. Direct operating expense was 5% of total sales. Advertising fee was 1% of total sales. Royalty fee was 1.5% of total sales. Electricity, water, and removal of waste bills were for $25,000 Costs of fuel was $15,400 Depreciation expense was $32,000 General and administrative expense was 5% of total sales. Repairs and maintenance was 2% of total sales. Gift shop sales were $80,800 Interest expense was $42,500 Beginning balance of retained earnings was $317,500 $75,000 was paid as dividends at the end of 2012. Income tax rate is 35%. Required: Given the above information, prepare the summary statement of income and retained earnings for Secret Land for 2012. Assume there are 52 weeks a year. What is prime cost? Round up to the nearest dollar in all of you calculations.

[Exercise] Solutions Food Sales Mon-Fri (Lunch) = 100seats*1.9*5days*52weeks*$9.50 = $469,300 Sat (Lunch) = 100seats*1.4*1day*52weeks*$9.50 = $69,160 Sun (Lunch) = 100seats*1.3*1day*52weeks*$9.50 = $64,220 Total (Lunch) = $602,680 Mon-Fri (Dinner) = 100seats*0.75*5days*52weeks*$18 = $351,000 Sat (Dinner) = 100seats*1.35*1day*52weeks*$18 = $126,360 Sun (Dinner) = 100seats*0.55*1day*52weeks*$18 = $51,480 Total (Dinner) = $528,840 Total Food Sales = $1,131,520 Beverage Sales
If 30% of Total Sales is Beverage Sales, 70% of Total Sales should be Food Sales (= $1,131,520). 0.7*Total Sales = $1,131,520 (Divide both sides by 0.7) Total Sales = ($1,131,520/0.7) Total Sales = $1,616,457 (round up to the nearest dollar) Then, Beverage Sales is 30% of Total Sales = $1,616,457*0.3 = $484,937 (round up to the nearest dollar) Cost of Food Sold = $25,000 (Beginning Inventory) + $380,000 (Food Purchases) - $28,000 (Ending Inventory) - $14,000 (Employees Meals) = $363,000 Cost of Beverage Sold = $484,937*35% = $169,728 Gross Profit of Food = $1,131,520 - $363,000 = $768,520 Gross Profit of Beverage = $484,937 - $169,728 = $315,209 Total Gross Profit = $768,520 + $315,209 = $1,083,729 Salaries and Wages = $1,616,457*30% = $484,937 Employee Benefits = ($484,937*10%) + $14,000 (Employees Meals) = $48,494 + $14,000 = $62,494 Occupancy Costs (rent, property taxes and insurance) = $64,000 Direct Operating Expense = $1,616,457*5% = $80,823 Marketing = $1,616,457*1% (Advertising) + $1,616,457*1.5% (Royalties) = $16,165 + $24,247 = $40,412 Utility Services = $25,000 (Electricity, Water and Removal of Waste) + $15,400 (Fuel) = $40,400

Depreciation = $32,000 General and Administrative = $1,616,457*5% = $80,823 Repairs and Maintenance = $1,616,457*2% = $32,329 Other Income = $80,800 (Gift Shop Sales) Total Operating Expenses = $837,418 Operating Income = $1,083,729 - $837,418 = $246,311 Income Before Income Taxes = $246,311 - $42,500 (Interest) = $203,811 Income Taxes (35%) = $203,811*.35 = $71,334 Net Income = $132,477 Ending Balance of Retained Earnings = $317,500 (Beginning) + $132,477 (Net Income) - $75,000

(Dividends) = $374,977
Prime Cost = $363,000 (Cost of Food Sold) + $169,728 (Cost of Beverage Sold) + $484,937 (Salaries and Wages) + $62,494 (Employee Benefits) = $1,080,159

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