MANAGEMENT II

CHAPTER 4: BALANCE SHEET

 TABLE OF CONTENTS

1. Time period assumption

2. Fiscal year
3. Purposes of the BS
4. BS Formats
5. Content of the BS
+ Current and noncurrent assets
+ Current and noncurrent liabilities
+ Owners’ equity
 REFERENCES

[2] Hales J, Accounting & Financial Analysis in the Hospitality

Industry, Taylor & Francis (Chapter 5)
 TIME PERIOD ASSUMPTION

The time period assumption assumes that the economic life

of a business is divided into artificial time periods.

Generally a
Alternative terminology
• month, The time period assumption
• quarter, or is also called the periodicity
• year. assumption.
 FISCAL AND CALENDAR YEAR

❖ Fiscal Year = Accounting period that is one year in

length
❖ Calendar Year = January 1 to December 31
❖ Most large companies must prepare both quarterly
and annual financial statements.
 CONCEPT OF A BALANCE SHEET

▪ measures the financial status, value,

and net worth of a business as of a
specific date.
▪ like a snapshot in time.
▪ shows the amounts or balances in
each account as of a specific date.
▪ Its format comes from the
fundamentals of the accounting
equation.
Assets = Liabilities + Owner Equity
 PURPOSES OF A BALANCE SHEET

▪ Reflects financial position on a given date.

▪ Shows balances between a company’s assets and the
claims to its assets.
▪ Reveals the liquidity of an operation.
▪ Useful for conveying information to creditors and
investors.
Example 1
 FORMAT OF A BALANCE SHEET
❖ All balance sheets follow the same format:
+ in two columns (B/S Account): assets are on the left,
liabilities are on the right, and net worth is beneath
liabilities.
+ in one column (B/S Report): assets are listed first,
followed by liabilities and owner’s equity.
❖ Companies must use a comparative balance sheet to
publicize their financial information. A comparative
balance sheet is a side-by-side comparison of the current
and previous accounting period's entire balance sheet
report.
❖ Use the USALI balance sheet
FORMAT OF A BALANCE SHEET
 FORMAT OF A BALANCE SHEET

USALI Balance Sheet

USALI: Uniform System of
Accounts for the Lodging
Industry
 ASSETS

• Cash and Cash Equivalents

• Short-term Investment
• Receivables
Assets Current Assets
• Inventories
items to be
resources of a • Operating Equipment
converted to cash or
business that • Prepaid Expenses
used in operations
can be applied • Others
within one year.
to covering
liabilities. • Noncurrent Receivables
• Long-term Investments
(Noncurrent assets)
• Tangible Fixed Assets
assets with a useful life (PP&E)
of over one year and Accumulated Depreciation
the hotel's investing (negative number)
activities • Other Long-term Assets
 Current Assets
Cash and Cash Equivalents 01
• Cash on hand; cash in bank
• Cash equivalents: short-term, highly
liquid investments
Trade Receivables
03
amounts owed by customers for goods
or services sold on credit.
• include A/R and Notes Receivable.
• presented at net realizable value,
using Allowance for Doubtful Debts.
Operating Equipment
05
• Includes linen, china, glassware,
silver, and uniforms.
• presented at net realizable value,
using Allowance for Doubtful Debts.
Short-term Investments 02
(or Marketable Securities)
• traded in a public market and whose
value can be readily determined.
• stocks and bonds.
Inventory
04
• merchandise held for resale, such
as food and beverage inventory.
• supplies unused if significant.
Prepaid Expenses 06
• operating costs that have been
paid in advance.
Other Current Assets
• such as Advances, Short- 07
term Mortgage, Collateral,
and deposits, etc.
 Noncurrent Assets
1. Noncurrent Receivables
•A/R and notes receivable that are not
expected to be collected within one
year from the BS date.
3. Property and Equipment
• includes land and buildings,
furnishings and equipment, lease, and
construction in progress.
• reported PP&E at costs and book value
(historical cost minus accumulated
depreciation).
2. Long-term Investments
•Investment in Joint-venture and
Associates, Bond and Stock, etc.
4. Other Long-term assets
•Intangible assets include trademarks,
customer lists, and goodwill.
•Deferred tax assets: created when the
amount of taxes payable exceeds the
amount of income tax expense
recognized.
•Other: costs to organize the hospitality
operation, security deposits, and
unamortized franchise costs
 POLL QUESTION 1

Which of the following does not belong under current

assets?
A. cash, receivables, inventories
B. cash, operating equipment, goodwill
C. inventories, prepaid expenses, receivables
D. short-term investments, inventories, operating
equipment
 Example 1
Answer the following questions to identify the current assets:
a. What is the amount of the operation’s total current assets?
b. What is the first current asset account listed and why is it listed first?
c. What is the last current asset account listed and why is it listed last?
Investments $373,256 Paid in Capital $486,486
Other Current Liabilities 73,954 Accumulated Depreciation 203,144
Building 627,998 Food Inventory 31,818
Accounts Payable 213,659 Common Stock 133,421
Long-Term Debt 395,315 Prepaid Expenses 15,000
Cash 85,986 Retained Earnings 477,500
Furnishings and Equipment 308,334 Land 309,080
Beverage Inventory 15,125 Supplies Inventory 3,850
Notes Payable 47,858 Allowance for Doubtful Debt 4,000
Marketable Securities 196,154 Accounts Receivable 23,721
 Example 1 SOLUTION
a. What is the amount of the operation’s total current assets?

b. What is the first current asset account listed and why is it listed first?

c. What is the last CA account listed and why is it listed last?

 LIABILITIES
• Accounts Payable
• Notes Payable
• Current Maturities of
Long-term Debt
Current Liabilities
• Unearned Revenues
obligations that will be • Accrued Expenses
satisfied within one year. • Income Taxes Payable
Liabilities
• Others
arranged on the
balance sheet in
order of how soon • LT Bank Borrowings
Long-term Liabilities
they must be repaid. • Notes Payable
debts repaid more than
• Mortgages Payable
one year from the date
• Bonds Payable
of the balance sheet • Lines of Credit
• Deferred Income Taxes
 Current Liabilities
1 Accounts Payable
amounts the firm owes to suppliers for
goods or services purchased on credit;
Current Portion of LT Debt
3 the principal portion of LT
debts due within one year.
Accrued Expenses
(Accrued Liabilities) 5 Income taxes payable
▪ amount incurred but unpaid;
▪ result from the accrual method of
accounting, under which expenses are
recognized as incurred.
Notes payable 2
▪ a form of promissory notes owed to
creditors and lenders;
▪ maturities are within one year.
4 Unearned Revenue
▪ or Deferred Revenue/Customer Advances
▪ cash collected in advance of providing
goods and services;
amounts due to taxing
6
authorities within one year.
Other Current Liabilities
7 ▪ Dividends Payable;
▪ Payable to Employees,
etc.
 Long-term Liabilities
1 Bank borrowings
Bank loans that have the maturities over
one year from the BS date
3 Mortgage Payable
A form of bank loan used to purchase a
property that serves as collateral for
the loan until it is paid off.
Lines of Credit
5 a form of bank loan that allows
hotels to access money as they
need it up to a certain limit.
Notes payable 2
▪ A form of promissory notes owed
to creditors and lenders;
▪ maturities are over one year.
4 Bonds Payable
generated when a company issues
bonds to generate cash
Deferred Income Taxes
6 created when the amount of
income tax expense recognized
is greater than taxes payable
OWNER’S EQUITY
Stockholders’ Equity
refers to owner (shareholder)
financing of a company.
• Share Capital
• Share Premium (Additional
paid-in-capital)
• Treasury Stock
• Retained Earnings
• Non-controlling interest
 Shareholders’ Equity
Share Capital
also known as issued capital;
amount contributed by shareholders;
5) Retained Earnings
▪ accumulated profits earned, reinvested, or
retained by a hotel.
▪ increase if profits are earned.
▪ decrease when dividends are declared to
shareholders.
▪ can become negative, creating a deficit.
6) Non-controlling interest
▪ or Minority Interest
▪ the minority shareholders' pro rata share
of the net assets (equity) of a subsidiary
that is not wholly owned by the parent.
1) Common Stock
▪ or Ordinary Stock
▪ Presented at par value
2) Preferred stock
▪ preference over common shares with
regard to dividends and the distribution
of assets in case of liquidation.
3) Additional Paid-in Capital
▪ or Share Premium
▪ amount paid by shareholders in excess of
the par value of each share.
4) Treasury stock
▪ stock reacquired by the issuing firm but
not yet retired.
▪ reduces stockholders' equity..
 Example 2
Aidan Norton owns Aidan’s Lodge in a rural Midwestern town. His
accountant is out with the flu, and Aidan needs information on the
company’s liabilities and equity. Help Aidan to answer the following
questions:
1) What are the current, long-term, and total liabilities?
2) What is the owner’s equity?
Investments $1,275,000 Paid in Capital $3,000,000
Other Current Liabilities 1,590,000 Accumulated Depreciation 1,185,000
Building 3,250,000 Inventories 380,000
Accounts Payable 1,460,000 Common Stock 750,000
Long-Term Debt 1,800,000 Retained Earnings 2,865,000
Cash 587,500 Land 1,957,500
Furnishings and Equipment 1,850,000 Net Receivables 2,675,000
Notes Payable 335,000 Other Assets 170,000
Marketable Securities 840,000
 Example 2 SOLUTION
1) What are the current, long-term, and total liabilities?

2) What is the owner’s equity?

 Working Capital

Working Capital = Current Assets - Current Liabilities

• dollar amount provided for the daily operations of a business.

• invested in current assets, primarily in cash,

accounts receivable, and inventory.

• involves the use of the current liabilities of a business, primarily in accounts

payable, wages payable, and taxes payable.

❖ Working Capital > 0: ❖ Working Capital < 0: If current assets

enough short-term assets do not exceed its current liabilities,
to cover its short-term then companies may run into trouble
debt. paying back creditors in the short
term.
Liquidity
 POLL QUESTION 2

The Cardinals Club has the following accounts. What

is the club’s net working capital?
A. $48,600
B. $49,500
C. $58,200
D. $60,400
 Example 3
Prepare the balance sheet for Damitio Inn, using its account balances on
December 31, 20X3 below:
Cash 10,000 Deferred income taxes, CA 50,000
Accounts receivable 150,000 Organization costs (unamortized) 50,000
Allowance for doubtful accounts 10,000 Accounts payable 50,000
Food inventory 50,000 Wages payable 20,000
Prepaid insurance 12,000 Income taxes payable 30,000
Investments (long-term) 100,000 Current maturities of LT debt 80,000
Land 300,000 Long-term debt 9,920,000
Building 14,000,000 Deferred income taxes (LT liability) 150,000
Equipment 800,000 Common stock 500,000
Accumulated dep - building 2,500,000 Paid-in capital in excess of par 1,000,000
Accumulated dep. - equipment 200,000 Retained earnings 1,062,000
Example 3 SOLUTION
Balance Sheet Analysis

The analysis of a balance sheet may include the

following:
▪ Horizontal analysis (comparative statements)
▪ Vertical analysis (common-size statements)
▪ Base-year comparisons
▪ Ratio analysis (will be covered in detail in Chapter 5)
 Balance Sheet Analysis

Horizontal or
Comparative Analysis
▪ compares two balance
sheets: the current and
the previous period.
▪ Absolute changes show
the change in dollars
between two periods.
▪ The percentage change
is found by dividing the
absolute change by the
amount for the
previous period.
 POLL QUESTION 3

The Italian Pasta had the following accounts in their

current liabilities for the past two years. What is the
comparative analysis of the accounts payable
account?
A. $9,000, 27.27%
B. -$9,000, 27.27%
C. $9,000, -21.43%
D. -$9,000, 21.43%
 Balance Sheet Analysis

Vertical or Common-
size Analysis
▪ Each item is a percent
of total assets.
▪ Highlights
composition and
identifies what’s
important.
 POLL QUESTION 4

The total current assets for Pedro’s Pizza are

$263,500 and the total assets are $756,400. In
addition, the following current asset accounts are
detailed below. What is the common-size percentage
for the food inventory account?
A. 2.35%
B. 3.83%
C. 6.83%
D. 11.01%
 Balance Sheet Analysis

Base-year comparisons
▪ shows each year relative to a base year.
▪ highlights items changed unexpectedly or have unexpectedly
remained unchanged.
 POLL QUESTION 5

Using the base year comparison approach, what will be the

comparison percentages for the accounts payable account across
20x3, 20x2, and 20x1 with 20x1 as the base year?
A. 91.76%,116.67%, 100%
B. 120%, 90%, 100%
C. 94.44%, 97.77%, 100%
D. 114.24%, 56.12%, 100%
End of Chapter 4