Hospitality Financial Accounting 9780471270553, 0471270555

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Hospitality Financial Accounting Jerry J. Weygandt

Ph.D., C.P.A. Arthur Andersen Alumni Professor of Accounting University of Wisconsin

Donald E. Kieso

Ph.D., C.P.A.

KPMG Peat Marwick Emeritus Professor of Accounting Northern Illinois University

Paul D. Kimmel

Ph.D., C.P.A. Associate Professor of Accounting University of Wisconsin—Milwaukee

Agnes L. DeFranco

Ed.D., C.H.E., C.H.A.E.

Associate Professor of Hospitality University of Houston

JOHN WILEY & SONS, INC.

Hospitality Financial Accounting

Hospitality Financial Accounting Jerry J. Weygandt

Ph.D., C.P.A. Arthur Andersen Alumni Professor of Accounting University of Wisconsin

Donald E. Kieso

Ph.D., C.P.A.

KPMG Peat Marwick Emeritus Professor of Accounting Northern Illinois University

Paul D. Kimmel

Ph.D., C.P.A. Associate Professor of Accounting University of Wisconsin—Milwaukee

Agnes L. DeFranco

Ed.D., C.H.E., C.H.A.E.

Associate Professor of Hospitality University of Houston

JOHN WILEY & SONS, INC.

The specimen financial statements (the Appendix) are printed with permission of Hilton Hotels Corporation. The information and trademarks offered herein are the property of Hilton Hotels Corporation.

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is a registered trademark of Hilton Hotels Corporation. All rights reserved. Used with permission. ⬁ This book is printed on acid-free paper. 䊊 Copyright © 2005 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008. Limit of Liability/Disclaimer of Warranty: While publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Hospitality financial accounting / Jerry J. Weygandt ... [et al.] p. cm. Includes bibliographical references and index. ISBN 0-471-27055-5 (cloth) 1. Hospitality industry—Accounting I. Weygandt, Jerry J. HF5686.H75H66 2003 657⬘.836—dc21

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With this text, we seek to create a book about the hospitality business that makes the subject clear and fascinating to beginning students. That is our passion: to provide a link between hospitality financial accounting principles, student learning, and the real world.

STUDENT EMPOWERMENT AND SUCCESS In our effort to create an effective text, we surveyed the market and talked personally to instructors. We heard again and again that the biggest challenges students face are to become motivated to learn how to study and to manage their tasks. We were gratified to learn that our general accounting texts have helped empower students to meet these challenges and have been rated highest in customer satisfaction by both instructors and students. We have responded to these challenges by making the pedagogical framework of Hospitality Financial Accounting strong and the presentation clear. We want to give hospitality students the tools and the motivation they need to succeed in subsequent accounting courses and in their future hospitality careers.

GOALS AND FEATURES OF THIS EDITION This first edition of Hospitality Financial Accounting provides an opportunity to offer to the hospitality discipline a textbook that has set high standards for quality. Reviewers of Hospitality Financial Accounting comment positively on the writing style, the use of real-world examples, pedagogical features, and the fact that the textbook is not only about accounting but about business as well. The primary purpose in creating a financial accounting textbook specifically for hospitality students was to maintain these successful features and improve on them. • We’ve carefully evaluated all topics regarding their suitability for and relevance to the beginning hospitality accounting course. Topics beyond the scope of the first hospitality accounting course are not included. Features and topics relevant to today’s Internet and e-business environment are included. • A student’s textbook should be as pedagogically effective as possible. The Navigator, our guide to the learning process in the book, has been well received and has proven effective for students seeking to improve their study skills. Action Plans, which accompany mini-demonstrations (“Do It”) and Demonstration Problems in each chapter, help students develop their problem-solving skills. • The book involves the student in the learning process and ensures that the student understands the why as well as the how. The message is consistent with the Accounting Education Change Commission recommendations, which encourage an emphasis on communication skills, critical thinking and decision-making skills, ethics, international accounting, and real-world emphasis. • This book includes user-oriented material. Our reasons were twofold: (1) to accomplish the objectives of the Accounting Education Change Commission, and (2) to demonstrate the relevance of accounting to hospitality students. Most of the user material is in the Exercises section

of the end-of-chapter material. These learning activities are designed to develop many skills that will be of use to students in other courses and in life after college, including financial statement analysis skills and the ability to use the Internet. In addition, to give students the opportunity to follow an extended real-world example, we have integrated references to the Hilton Hotels financial statements throughout the book, including Review It questions, ratio presentations, and end-of-chapter assignments.

HIGHLIGHTS IN EACH CHAPTER CHAPTER 1 Hospitality Accounting in Action • Feature Story on Conrad Hilton and related “A Look Back” exercise with solution • Complete definitions of financial and managerial accounting • An Accounting in Action (AIA) e-Business Insight on the impact of Internet use in the hospitality industry CHAPTER 2 Accounting Principles • Feature Story on revenue and expense recognition and reporting • Detailed coverage of the Uniform System of Accounts and Financial Reporting • AIA Business Insights on expense reporting for casinos and profit margin expectations in hospitality businesses CHAPTER 3 The Recording Process • Information on electronic data processing in the preparation of managerial reports CHAPTER 4 Adjusting the Accounts • Discussion of accrual-basis versus cash-basis accounting at the beginning of the chapter • An AIA e-Business Insight on revenue from a Web-site ad space CHAPTER 5 Completion of the Accounting Cycle • Feature Story on Rhino’s Foods, Inc. about educating employees on the financial health of the company as a motivational tool • An AIA e-Business Insight on the monthly billing of a private club CHAPTER 6 Subsidiary Ledgers and Special Journals • Feature Story on the different managerial opportunities in the hospitality industry • Detailed discussion of the various journals in accounting CHAPTER 7 Accounting for Merchandising Operations in Hospitality • Feature Story on how foodservice companies set prices while maintaining a profitable margin • Emphasis on a simplified coverage of the perpetual inventory system • Information on how to use a worksheet CHAPTER 8 The Statement of Cash Flows • Feature Story “Cash Is King” emphasizing the importance of cash to the success of a hospitality company

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• Detailed discussion of the direct and indirect methods of the statement of cash flows

CHAPTER 9 Payroll • Feature Story on the importance of service in the hospitality industry and the impact of labor cost wages to the success of a company • A Technology in Action focuses on payroll fraud and how to avoid it • Important information on the Fair Labor Standards Act • Complete coverage on Tipped Employees and Tips Credit, an important accounting function for service-based industries CHAPTER 10 Inventories, Cost Calculations, and Internal Controls • Detailed analysis of food and beverage cost calculations and inventories in foodservice operations • An illustration of the effects of inventory errors on two years’ income statements • A Technology in Action on the importance of controls in saving money CHAPTER 11 Accounting for Receivables and Payables • A discussion of credit policies and the importance of the use of credit in the hospitality industry CHAPTER 12 Long-Term and Intangible Assets • Feature Story highlighting Homestead Resort and its preparation for the 2002 Winter Olympics • Full coverage of the four depreciation methods • Discussion of MACRS CHAPTER 13 Sole Proprietorships, Partnerships, and Corporations • Full discussion of the formation of sole proprietorships, partnerships, and corporations, including S-corporations APPENDIX Specimen Financial Statements • Hilton Hotels Corporation

PEDAGOGICAL FRAMEWORK Hospitality Financial Accounting provides tools to help students learn accounting concepts and procedures and apply them to the real world. It places increased emphasis on the processes students undergo as they learn.

Learning How to Use the Text • A Student Owner’s Manual begins the text to help students understand the value of the text’s learning aids and how to use them. • Chapter 1 contains notes that explain each learning aid the first time it appears. • Finally, The Navigator pulls all the learning aids together into a learning system designed to guide students through each chapter and help them succeed in learning the material. It consists of (1) a checklist at the beginning of the chapter, which outlines text features and study skills they will need, and (2) a series of check boxes that prompt students to use the learning aids in the chapter and set priorities as they study. At the end of the chapter, students are

T H E N AV I GAT OR

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• Understand Concepts for Review

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• Read Feature Story

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• Scan Study Objectives

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• Read Preview

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• Read text and answer Before You Go On p. 40 ❑ p. 47 ❑ p. 64 ❑ • Work Demonstration Problem

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• Review Summary of Study Objectives

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• Complete Assignments

❑

reminded to return to The Navigator to check off their completed work. An example of The Navigator is above.

Understanding the Context • Concepts for Review, listed at the beginning of each chapter, identify concepts that will apply in the chapter to come. In this way, students see the relevance to the current chapter of concepts covered earlier. • The Feature Story helps students picture how the chapter topic relates to the real world of accounting and business. It serves as a running example in the chapter and is the topic of a series of review questions call A Look Back at Our Feature Story, toward the end of the chapter. • Study Objectives form a learning framework throughout the text, with each objective repeated in the margin at the appropriate place in the main body of the chapter and again in the Summary. Further, end-of-chapter assignment materials are linked to the Study Objectives. • A chapter Preview links the chapter-opening Feature Story to the major topics of the chapter. First, an introductory paragraph explains how the Feature Story relates to the topic to be discussed, and then a graphic outline of the chapter provides a “visual road map” useful for seeing the big picture, as well as the connections between subtopics.

Learning the Material • Financial statements appear regularly throughout the book. Often, numbers or categories are highlighted in colored type to draw attention to key information. • Key ratios, using data from Hilton Hotels Corporation 2001 Annual Report, are examined in appropriate spots throughout the text. Integration of ratios enables students to see in a single presentation two important pieces of information about financial data: how they are presented in financial statements and how users of financial information analyze them.

To the Instructor

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• The Summary of Study Objectives relates the study objectives to the key points of the chapter. It gives students key journal entries throughout the text. This feature reinanother opportunity to review, as well as to see how all the forces the students’ understanding of the impacts of an ackey topics within the chapter are related. counting transaction on the financial statements. Key terms and concepts are printed in blue where they are • The Glossary defines all the key terms and concepts introduced in the chapter. first explained in the text and are defined again in the endof-chapter glossary. Helpful Hints boxes help clarify concepts being discussed. Developing Skills Through Practice Accounting in Action boxes give students insight into how • Exercises build students’ confidence and test their basic skills. Some take a little longer to complete and present real companies use accounting in practice. The AIA boxes, more of a challenge. Several exercises stress the applicasome of which are highlighted with striking photographs, tion of the concepts presented in the chapter. Each exercover business, ethics, and international issues. Of particcise is keyed to one or more study objective. ular interest are the e-Business Insight boxes reporting on how business technology is expanding the service provided Expanding and Applying Knowledge by accountants. Technology in Action boxes show how users of accounting One or two exercises in each chapter offer a wealth of resources to help instructors and students pull together the information use computers. Color illustrations visually reinforce important concepts of learning for the chapter. These exercises offer projects for those instructors who want to broaden the learning experithe text. Infographics, a special type of illustration, help students vi- ence by bringing in more real-world decision-making and critsualize and apply accounting concepts to the real world. ical-thinking activities. The exercises are described below: They provide entertaining and memorable visual re- • A Financial Reporting Problem directs students to study various aspects of the financial statements in Hilton’s 2001 minders of key concepts. Annual Report, which is excerpted in the Appendix at the Marginal Alternative Terminology notes present synonyend of the text. mous terms, since terminology may differ in the business • Exploring the Web exercises guide students to Internet world. Web sites where they can find and analyze information to Before You Go On sections occur at the end of each key the chapter topic. topic and often consist of two parts: * Review It questions serve as a learning check by asking • The Group Decision Case helps build decision-making skills by analyzing accounting information in a less-structured sitstudents to stop and answer questions about the mateuation. These cases require evaluation of a manager’s decirial covered. Review It questions marked with the Hilton sion or lead to a decision among alternative courses of acicon (see right) send students to find information in the tion. As group activities, they promote teamwork. Hilton Hotels 2001 Annual Report (excerpted in the Ap• Ethics Cases describe typical ethical dilemmas and ask stupendix at the end of the text). These exerdents to analyze situations, identify the stakeholders and cises help cement students’ understanding Image rights of how topics covered in the chapter are re- not available the ethical issues involved, and decide on appropriate courses of action. ported in real-world financial statements. Answers appear at the end of the chapter. * A mini-demonstration problem, in a section called Do It, gives immediate practice of the material just covered SUPPLEMENTARY MATERIALS AND and is keyed to homework exercises. An Action Plan TEACHING AIDS lists the steps necessary to complete the task, and a So- Hospitality Financial Accounting features a full line of teachlution is provided to help students understand the rea- ing and learning resources developed and revised to help you soning involved in reaching an answer. create a more dynamic and innovative learning environment. * The last Before You Go On exercise in the chapter takes Student success is a major theme of the supplements packstudents back for a critical look at the chapter-opening age. These resources—including print and Internet-based maFeature Story. terials—also take an active learning approach to help build Marginal International Notes introduce international is- students’ skills and analytical abilities. sues and problems in accounting. • Web site at www.wiley.com/college. Recognizing that the Marginal Ethics Notes help sensitize students to the realInternet is a valuable resource for students and instructors, world ethical dilemmas of accounting and business. we have developed a Web site at www.wiley.com/college to

• The Accounting Equation appears in the margin next to

• • •

• • •

• •

• •

provide a variety of additional resources.

Putting It Together • Demonstration Problems give students the opportunity to refer to a detailed solution to a representative problem as they do homework assignments. Action Plans list strategies to assist students in understanding similar types of problems.

Instructor’s Resources For the instructor, we have designed a support package to help you maximize your teaching effectiveness. Instructor’s Manual. The Instructor’s Manual is a comprehensive resource guide designed to assist professors in prepar-

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ing lectures and assignments, including sample syllabi for the hospitality financial accounting course, evaluating homework assignments, and preparing quizzes and exams. (Also available at www.wiley.com/college.) Each chapter contains the following information: • Chapter Review and Lecture Outline: Chapter reviews cover the significant topics and points contained in each chapter. Teaching tips and references to text materials are in the enhanced lecture outlines. Further, a twenty-minute quiz in the form of ten true/false and five multiple-choice questions (with solutions) is provided. • Solutions: These are detailed solutions to all exercises in the textbook. Suggested answers to the questions found on the Web site are also included. Each chapter includes a table to identify the difficulty level and estimated completion time of each exercise. • Test Bank: The test bank allows instructors to tailor examinations according to study objectives and content. Each chapter includes exercises as well as multiple-choice, matching, and true/false questions. PowerPoint Presentation Material. The PowerPoint lecture aid contains a combination of key concepts, illustrations, and problems from the textbook for use in the classroom. Easily customizable for classroom use, the presentations are designed according to the organization of the material in the textbook to reinforce hospitality financial accounting principles visually and graphically. (Available at www.wiley.com/college.)

Student Active Learning Aids In addition to innovative pedagogy included in the text, we offer a number of valuable learning aids for students. These

are intended to enhance true understanding so that students will be able to apply hospitality financial accounting concepts. Working Papers. Working Papers are accounting forms for all end-of-chapter exercises. A convenient resource for organizing and completing homework assignments, they demonstrate how to correctly set up solution formats and are directly tied to textbook assignments. Excel Working Papers. Available on CD-ROM, these Excelformatted forms can be used for end-of-chapter exercises. The Excel Working Papers provide students with the option of printing forms and completing them manually, or entering data electronically and then printing out a completed form. By entering data electronically, students can paste homework to a new file and e-mail the worksheet to their instructor. Self-Study Questions. These online practice tests enable students to check their understanding of important concepts. Located at www.wiley.com/college, the self-study questions are keyed to the study objectives and students can go back and review sections of the chapter in which they find they need further work. The quizzes are graded to give students immediate feedback. Questions. These questions, located at www.wiley.com/college, provide a full online review of chapter content and help students prepare for class discussions and testing situations. Students answer the questions online and then their work is e-mailed directly to their instructor. Instructors can find the answers to these questions in the Instructor’s Manual and with the online instructor resources.

A C K N O W L E D G M E N T S During the course of development of Hospitality Financial Accounting I benefited greatly from manuscript reviewers. The constructive suggestions and innovative ideas of the reviewers and the creativity and accuracy of the ancillary author are greatly appreciated.

Reviewers I thank these reviewers of Hospitality Financial Accounting for their excellent suggestions in shaping the content of this text and its proposal: Richard F. Ghiselli, Purdue University Yang H. Huo, Roosevelt University Ronald L. Jordan, University of Houston Lee M. Kreul, Purdue University Stephen M. Lebruto, University of Central Florida Patricia McCaughey, Endicott College Kevin W. Poirier, Johnson & Wales University Richard Savich, California State Polytechnic University, Pomona Don St. Hilaire, California State Polytechnic University, Pomona Darrell Van Loenen, University of Wisconsin–Stout In addition, the reviewers and focus group participants of the original Financial Accounting, Fourth Edition, provided excellent feedback to help us write this text: Sheila Ammons, Austin Community College David Carr, Austin Community College Andy Chen, Northeast Illinois University Edward J. Corcoran, Community College of Philadelphia

Jeff Edwards, Portland Community College Doug Laufer, Metropolitan State College of Denver James Lukawitz, University of Memphis Janice Mardon, Green River Community College John Marts, University of North Carolina–Wilmington Kathy S. Moffeit, Southwest Texas State University Carla Rich, Pensacola Junior College Patricia Robinson, Johnson & Wales University

Ancillary Author The input of the ancillary author in her thoroughness and accuracy has created a valuable package of materials to support this text: Tanya Venegas, University of Houston

Publications We would like to thank the Hilton Hotels Corporation for permitting the use of its 2001 Annual Report.

A Final Note of Thanks I would also like to convey my sincere thank-you to Jerry Weygandt, Don Kieso, and Paul Kimmel, the authors of the original text. They have graciously given me their trust and the most wonderful opportunity to adapt their book for use in the hospitality industry. Last but not least, thanks to Julie Kerr, a wonderful friend and editor, who makes this project a pleasure. Agnes DeFranco University of Houston Houston, Texas

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B R I E F TO 1 2 3 4 5 6 7 8 9 10 11 12 13

C O N T E N T S

THE INSTRUCTOR v Hospitality Accounting in Action 1 Accounting Principles 34 The Recording Process 74 Adjusting the Accounts 110 Completion of the Accounting Cycle 142 Subsidiary Ledgers and Special Journals 174 Accounting for Merchandising Operations in Hospitality 198 The Statement of Cash Flows 224 Payroll 272 Inventories, Cost Calculations, and Internal Controls 298 Accounting for Receivables and Payables 350 Long-Term and Intangible Assets 382 Sole Proprietorships, Partnerships, and Corporations 412

APPENDIX Specimen Financial Statements: Hilton Hotels Corporation 457

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D E T A I L E D

C O N T E N T S Matching Principle (Expense Recognition) Full Disclosure Principle 44 Cost Principle 44

CHAPTER 1

HOSPITALITY ACCOUNTING IN ACTION

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E AT U R E S T O R Y:

From a Bank to a Hotel

What Is Accounting?

1

Financial Statements

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The Uniform System of Accounts and Financial Reporting 55 Lodging Industry 56 Foodservice Industry 56 Club Industry 56 Gaming Industry 56

14

Accounting and Financial Management in Hospitality 57

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Hotel Operations 57 Hotel Accounting Department Organization 60 Foodservice Operations 62 Club Operations 63

Income Statement 21 Retained Earnings Statement 21 Balance Sheet 23 Statement of Cash Flows 23 APPENDIX

Profession

The Accounting 27

Public Accounting 28 Private Accounting 28 Not-for-Profit Accounting

CHAPTER 3 28

THE RECORDING PROCESS

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E AT U R E S T O R Y:

CHAPTER 2

World

ACCOUNTING PRINCIPLES

34

F

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E AT U R E S T O R Y:

Certainly Worth Investigating!

The Conceptual Framework of Accounting 36 Objectives of Financial Reporting 37 Qualitative Characteristics of Accounting Information 38 Elements of Financial Statements 39 Operating Guidelines 40

Assumptions

40

Monetary Unit Assumption 41 Economic Entity Assumption 41 Time Period Assumption 41 Going Concern Assumption 41

Principles

41

Revenue Recognition Principle xviii

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Classified Balance Sheet 47 Classified Income Statement 48 Analyzing Financial Statements 50 Financial Statement Presentation—An International Perspective 54

7

Ethics—A Fundamental Business Concept Generally Accepted Accounting Principles Assumptions 9 Basic Accounting Equation 11 Transaction Analysis 15 Summary of Transactions

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Statement Presentation and Analysis

Who Uses Accounting Data 3 Brief History of Accounting 5 Distinguishing Between Bookkeeping and Accounting 6 Accounting and You 6

The Building Blocks of Accounting

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Materiality 46 Conservatism 46 Summary of Conceptual Framework

1

2

Using the Building Blocks

Constraints in Accounting

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42

74

No Such Thing As a Perfect

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The Account

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Debits and Credits 77 Debit and Credit Procedures 77 Stockholders’ Equity Relationships 80 Expansion of the Basic Equation 81

Steps in the Recording Process The Journal The Ledger

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83 85

The Recording Process Illustrated The Trial Balance 97 Limitations of a Trial Balance Locating Errors 98 Use of Dollar Signs 99

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Electronic Data Processing

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Comparative Advantages of Manual versus Computerized Systems 99 A Look into the Future 100

Detailed Contents

CHAPTER 6

CHAPTER 4

110 SUBSUDIARY LEDGERS AND SPECIAL JOURNALS

ADJUSTING THE ACCOUNTS

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E AT U R E S T O R Y:

Timing Is Everything

Timing Issues

111

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E AT U R E S T O R Y:

112

Selecting an Accounting Time Period Fiscal and Calendar Years 113 Accrual- vs. Cash-Basis Accounting Recognizing Revenues and Expenses

The Basics of Adjusting Entries

Folks

113

The Adjusted Trial Balance and Financial Statements 130

Prepaid Expenses 133 Unearned Revenues 134 Summary of Additional Adjustment Relationships 135

Journalizing Credit Sales 180 Posting the Sales Journal 180 Proving the Ledgers 182 Advantages of the Sales Journal

Cash Receipts Journal

Purchases Journal

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Journalizing Credit Purchases of Merchandise 187 Posting the Purchases Journal 187 Expanding the Purchases Journal 188

Cash Payments Journal

COMPLETION OF THE ACCOUNTING CYCLE Everyone Likes to Win

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Summary of the Accounting Cycle Correcting Entries—An Avoidable Step 158 Classified Balance Sheet 161 Standard Classifications 161 Classified Balance Sheet, Illustrated

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Effects of Special Journals on General Journal 190

CHAPTER 7

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Preparing Closing Entries 151 Closing Entries, Illustrated 152 Posting of Closing Entries 153 Preparing a Post-Closing Trial Balance

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Journalizing Cash Payments Transactions Posting the Cash Payments Journal 190

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Steps in Preparing a Work Sheet 145 Preparing Financial Statements from a Work Sheet 147 Preparing Adjusting Entries from a Work Sheet 150

Closing the Books

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Journalizing Cash Receipts Transactions Posting the Cash Receipts Journal 185 Proving the Ledgers 185

CHAPTER 5

Using a Work Sheet

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Expanding the Journal—Special Journals 179 Sales Journal 180

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Alternative Treatment of Prepaid Expenses and Unearned Revenues 132

E AT U R E S T O R Y:

Different Roads for Different

175

Nature and Purpose of Subsidiary Ledgers Example 177 Advantages of Subsidiary Ledgers 178

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Preparing the Adjusted Trial Balance Preparing Financial Statements 131

174

Expanding the Ledger—Subsidiary Ledgers 176

113 114

Types of Adjusting Entries 116 Adjusting Entries for Prepayments 116 Adjusting Entries for Accruals 123 Summary of Basic Relationships 128

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ACCOUNTING FOR MERCHANDISING OPERATIONS IN HOSPITALITY 198 155

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E AT U R E S T O R Y:

Pricing for Profitable Margins

Merchandising Operations Operating Cycles Inventory Systems

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201 202

Recording Purchases of Merchandise 165

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Purchase Returns and Allowances Freight Costs 206 Purchase Discounts 206

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203

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Detailed Contents

Recording Sales of Merchandise Sales Returns and Allowances Sales Discounts 210

Completing the Accounting Cycle Adjusting Entries 211 Closing Entries 212 Summary of Merchandising Entries

Work Sheet for a Merchandiser Using a Work Sheet

Internal Control of Payroll

208 211

Determining the Payroll

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Recording the Payroll

E AT U R E S T O R Y:

Cash Is King

The Income Statement

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225

Employer Payroll Taxes

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The Statement of Cash Flows: Purpose and Format 233

Section 1: Indirect Method for Statement of Cash Flows 240 First Year of Operations—2004 240 Second Year of Operations—2005 244

CHAPTER 9

272 Payroll: The Important Cost in the 273

Payroll Defined

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E AT U R E S T O R Y:

Jaw

Minding the Money in Moose

299

Inventory Basics

301

Classifying Inventory 301 Determining Inventory Quantities 301 Inventory Accounting Systems 303

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Recording Transactions 304 Recording Purchases of Merchandise 304 Recording Sales of Merchandise 306 Cost of Goods Sold 306 Determining Cost of Goods Purchased 306 Transfers In and Out 308 Food Cost Calculations 309 Beverage Cost Calculations 310 Income Statement Presentation 310

First Year of Operations—2004 251 Second Year of Operations—2005 258

E AT U R E S T O R Y:

INVENTORIES, COST CALCULATIONS, AND INTERNAL CONTROLS 298

Periodic Inventory System

Section 2: Direct Method for Statement of Cash Flows 251

F

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CHAPTER 10

Purpose of the Statement of Cash Flows 233 Meaning of Cash Flows 234 Classification of Cash Flows 234 Significant Noncash Activities 235 Format of the Statement of Cash Flows 236 Usefulness of the Statement of Cash Flows 237 Preparing the Statement of Cash Flows 238 Indirect and Direct Methods 238

Service Industry

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FICA Taxes 288 Federal Unemployment Taxes 289 State Unemployment Taxes 289 Recording Employer Payroll Taxes 289 Filing and Remitting Payroll Taxes 290

Multiple-Step Income Statement 226 Single-Step Income Statement 230 Departmental Income Statement 230 Consolidated Income Statement 231 Classified Balance Sheet 232

PAYROLL

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Maintaining Payroll Department Records Recognizing Payroll Expenses and Liabilities 283 Recording Payment of the Payroll 284 Tipped Employees 285 Tip Reporting 285

CHAPTER 8

F

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Gross Earnings 278 Payroll Deductions 279 Net Pay 281

213

FINANCIAL STATEMENTS

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Hiring Employees 275 Timekeeping 275 Preparing the Payroll 276 Paying the Payroll 276 Fair Labor Standards Act 277

209

Inventory Costing Under a Periodic Inventory System 311 Using Actual Physical Flow Costing— Specific Identification 312 Using Assumed Cost Flow Methods—FIFO, LIFO, and Average Cost 312

Detailed Contents

Unearned Revenues 374 Current Maturities of Long-Term Debt

Financial Statement Effects of Cost Flow Methods 316 Using Inventory Cost Flow Methods Consistently 318

Inventory Errors

Statement Presentation and Analysis

CHAPTER 12

321

Presentation 321 Analysis 321

Internal Control

LONG-TERM AND INTANGIBLE ASSETS

F

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334

Making Bank Deposits 334 Writing Checks 334 Bank Statements 336 Reconciling the Bank Account

Intangible Assets 337

ACCOUNTING FOR RECEIVABLES AND PAYABLES E AT U R E S T O R Y:

Show Me the Money

Accounts Receivable

351

352

Types of Receivables 352 Recognizing Accounts Receivable 353 Valuing Accounts Receivable 354 Disposing of Accounts Receivable 361

Credit Policies

Notes Receivable

365

Determining the Maturity Date 366 Computing Interest 367 Recognizing Notes Receivable 368 Valuing Notes Receivable 368 Disposing of Notes Receivable 368

What Is a Current Liability? Notes Payable 371 Sales Tax Payable 372 Payroll and Payroll Taxes Payable

371 373

404

CHAPTER 13

350

SOLE PROPRIETORSHIPS, PARTNERSHIPS, AND CORPORATIONS

412

F

E AT U R E S T O R Y: “Two All Beef Patties, Special Sauce, Lettuce, Cheese, Pickles, Onions on a Sesame Seed Bun” 413

Sole Proprietorships Partnerships 415

364

The Credit Department 364 The Credit Policy Prior, During, and Post Event 364 City Ledger of a Hotel 365

385

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Patents 403 Copyright 404 Trademarks and Trade Names Franchises and Licenses 404 Goodwill 405

CHAPTER 11

F

384

Determining the Cost of Long-Term Assets Land 385 Land Improvements 386 Buildings 386 Equipment 386 Depreciation 388 Revising Periodic Depreciation 396 Expenditures During Useful Life 397 Long-Term Asset Disposals 397

323 327

Internal Control over Cash Receipts Internal Control over Cash Disbursements 332

382

E AT U R E S T O R Y: Olympic Retrofit of the Homestead Resort in Midway, Utah—February 2002 383

Long-Term Assets

322

Principles of Internal Control Limitations of Internal Control

Use of a Bank

375

319

Income Statement Effects 319 Balance Sheet Effects 321

Cash Controls

xxi

414

Association of Individuals 415 Mutual Agency 415 Limited Life 416 Unlimited Liability 416 Co-Ownership of Property 416 Advantages and Disadvantages of a Partnership 416 The Partnership Agreement 417 Formation of a Partnership 417 Division of Net Income or Net Loss 418 Partnership Financial Statements 421

The Corporate Form of Organization and Stock Transactions 422

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Detailed Contents

Characteristics of a Corporation 422 Forming a Corporation 426 Corporate Capital 426 Accounting for Common Stock Issues Accounting for Treasury Stock 434 Preferred Stock 438 Dividend Preferences 439 Cumulative Dividend 439

Dividends

431

447

Retained Earnings Restrictions 448 Prior Period Adjustments 449 Retained Earnings Statement 449

APPENDIX

SPECIMEN FINANCIAL STATEMENTS: HILTON HOTELS CORPORATION 457

440

Cash Dividends 440 Stock Dividends 443 Entries for Stock Dividends Effects of Stock Dividends Stock Splits 445

Retained Earnings

444 445

Photo Credits Index 481

479

HOSPITALITY ACCOUNTING IN ACTION

THE NAVIGATOR

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• Understand Concepts for Review

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• Read Feature Story

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• Scan Study Objectives

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• Read Preview

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• Read text and answer Before You Go On p. 7 ❑ p. 13 ❑ p. 20 ❑ p. 24

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• Work Demonstration Problem

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• Review Summary of Study Objectives

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• Complete Assignments

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1 The Navigator is a learning system designed to prompt you to use the learning aids in the chapter and set priorities as you study.

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ONCEPTS FOR REVIEW

Before studying this chapter, you should know or, if necessary, review: a. How to use the study aids in this book. (Student Owner’s Manual, pages x–xvi) b. The nature of the special student supplements that accompany this textbook. (Student Owner’s Manual, page viii)

Concepts for Review highlight concepts from your earlier reading that you need to understand before starting the new chapter.

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THE NAVIGATOR

The Feature Story helps you picture how the chapter topic relates to the real world of accounting and business. You will find references to the story throughout the chapter.

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E A T U R E

S T O R Y

From a Bank to a Hotel The child of a Norwegian immigrant father and a German-American mother, Conrad N. Hilton had a strong belief in the American Dream. His philosophy and strength were derived from his faith in God, his belief in the brotherhood of man, his patriotic confidence in his country, and his conviction that there is a natural law that obliges all humankind to help those who are suffering, distressed, or destitute. Hilton arrived in Cisco, Texas, in 1919 intending to buy a local bank. Instead he bought the Mobley Hotel, believing that he could utilize some of the hotel-keeping experience he had gained with his family in New Mexico. He constructed his first hotel, the Dallas Hilton, which opened on August 2, 1925. Hilton successfully adapted to the economy of the American Great Depression in the 1930s. He expanded his empire by purchasing other hotels throughout the United States, including the Sir Francis Drake in San Francisco; The Plaza in New York; the Waldorf-Astoria Hotel in New York;

the Stevens, currently known as the Chicago Hilton & Towers; and the Palmer House in Chicago. Internationally, Hilton developed his business by building hotels in such exotic locales as San Juan, Madrid, Istanbul, Havana, Berlin, and Cairo. Although things do not always go as planned, and a bank instead became a hotel empire, lack of planning is often a recipe for disaster. Hilton did not become one of the largest hotel companies in the world without careful planning. Hilton Hotels’ managers are constantly working to increase revenues and minimize costs. Careful consideration must be given to many types of decisions: what new products to provide, where to build the next hotel, how to finance current operations and expansion, where to locate, and whether to buy or lease properties. The information needed for these decisions is provided by the company’s accounting system. In addition,

S

the company must report its results to the investors and creditors who provide it with the funds it needs to operate. A company communicates its past performances and its plans for the future in its annual report. A copy of the Hilton Hotels Corporation’s 2001 Annual Report accompanies this text. In this book, you will learn how the accounting information in the annual report was determined, as well as how to use such information to make business decisions of all sorts. Source: www.hrm. uh.edu/organizations/ hallofhonor/ cnhbiolong.pdf

T U D Y

After studying this chapter, you should be able to 1. 2. 3. 4. 5. 6. 7. 8.

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THE NAVIGATOR

O B J E C T I V E S Study Objectives give you a framework for learning the specific concepts covered in the chapter.

Explain what accounting is. Identify the users and uses of accounting. Understand why ethics is a fundamental business concept. Explain the meaning of generally accepted accounting principles and the cost principle. Explain the meaning of the monetary unit assumption and the economic entity assumption. State the basic accounting equation, and explain the meaning of assets, liabilities, and stockholders’ equity. ✓THE Analyze the effects of business transactions on the basic accounting equation. NAVIGATOR Understand what the four financial statements are and how they are prepared. 1

P R E V I E W

O F

C H A P T E R

1

The opening story about Hilton Hotels Corporation highlights the importance of having good financial information to make effective business decisions. Whatever one’s pursuits or occupation, the need for financial information is inescapable. You cannot earn a living, spend money, buy on credit, make an investment, or pay taxes without receiving, using, or providing financial information. Good decision making depends on good information. The purpose of this chapter is to show you that accounting is the system used to provide useful financial information. The content and organization of Chapter 1 are as follows.

ACCOUNTING IN ACTION

The Building Blocks of Accounting

What Is Accounting? Who uses accounting data Brief history of accounting Bookkeeping and accounting Accounting and you

Ethics—a fundamental business concept Generally accepted accounting principles Assumptions Basic accounting equation

Using the Building Blocks Transaction analysis Summary of transactions

Financial Statements Income statement Retained earnings statement Balance sheet Statement of cash flows

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THE NAVIGATOR

The Preview describes and outlines the major topics and subtopics you will see in the chapter.

WH AT STUDY OBJECTIVE 1 Explain what accounting is.

Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. Let’s take a closer look at these three activities. 1.

Essential terms are printed in blue when they first appear, and are defined in the end-ofchapter glossary.

2.

3.

2

IS ACCOUNTING?

Identifying economic events involves selecting the economic activities relevant to a particular organization. The sale of goods and services by the Hilton Hotels Corporation, the providing of services by Disney, the payment of wages by The Club Corporation of America, and the collection of ticket and broadcast money and the payment of expenses by major league sports teams are examples of economic events. Once identified, economic events are recorded to provide a history of the organization’s financial activities. Recording consists of keeping a systematic, chronological diary of events, measured in dollars and cents. In recording, economic events are also classified and summarized. The identifying and recording activities are of little use unless the information is communicated to interested users. Financial information is communicated through accounting reports, the most common of which are called financial statements. To make the reported financial information meaningful, account-

What Is Accounting?

ants report the recorded data in a standardized way. Information resulting from similar transactions is accumulated and totaled. For example, all sales transactions of the Hilton Hotels Corporation are accumulated over a certain period of time and reported as one amount in the company’s financial statements. Such data are said to be reported in the aggregate. By presenting the recorded data in the aggregate, the accounting process simplifies a multitude of transactions and makes a series of activities understandable and meaningful.

3

References throughout the chapter tie the accounting concepts you are learning to the story that opened the chapter.

A vital element in communicating economic events is the accountant’s ability to analyze and interpret the reported information. Analysis involves the use of ratios, percentages, graphs, and charts to highlight significant financial trends and relationships. Interpretation involves explaining the uses, meaning, and limitations of reported data. The Appendix at the end of this textbook illustrates the financial statements and accompanying notes and graphs from the Hilton Hotels Corporation. We refer to these statements at various places throughout the text. At this point, they probably strike you as complex and confusing. By the end of this course, you’ll be surprised at your ability to understand and interpret them. The accounting process is summarized in Illustration 1-1. Illustration 1-1 Accounting process

Communication Identification

BEST CATERERS

Recording BEST CATERERS

Prepare accounting reports FOOD

Select economic events (transactions)

Record, classify, and summarize

S RER t TE por CA Re ST al BE nnu A

Analyze and interpret for users

Accounting should consider the needs of the users of financial information. Therefore, you should know who these users are and something about their information needs.

WHO USES ACCOUNTING DATA Because it communicates financial information, accounting is often called the language of business. The information that a user of financial information needs depends on the kinds of decisions that the user makes. The differences in the decisions divide the users of financial information into two broad groups: internal users and external users.

STUDY OBJECTIVE 2 Identify the users and uses of accounting.

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CHAPTER 1 Hospitality Accounting in Action

Internal Users Internal users of accounting information are managers who plan, organize, and run a business. These include foodservice managers, housekeeping supervisors, rooms division managers, and others. In running a business, managers must answer many important questions, as shown in Illustration 1-2.

Illustration 1-2 Questions asked by internal users

Questions Asked by Internal Users

GUMBALL MACHINE

BILL COLLECTOR

Is cash sufficient to pay bills?

FRONT FRONT

DESK DESK

What is the cost of manufacturing each unit of product?

CONCIERGE CAFE ACME CORP.

Can we afford to give employee pay raises this year?

SERVICES INC.

HOTEL

Which product line is the most profitable?

To answer these and other questions, users need detailed information on a timely basis. For internal users, accounting provides internal reports. Examples are financial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year. In addition, summarized financial information is presented in the form of financial statements.

External Users

HELPFUL HINT The IRS requires businesses to retain records that can be audited. Also, the Foreign Corrupt Practices Act requires public companies to keep records.

There are several types of external users of accounting information. Investors (owners) use accounting information to make decisions to buy, hold, or sell stock. Creditors such as suppliers and bankers use accounting information to evaluate the risks of granting credit or lending money. Some questions that may be asked by investors and creditors about a company are shown in Illustration 1-3. The information needs and questions of other external users vary considerably. Taxing authorities, such as the Internal Revenue Service, want to know whether the company complies with the tax laws. Regulatory agencies, such as the Securities and Exchange Commission and the Federal Trade Commission, want to know whether the company is operating within prescribed rules. Customers are interested in whether a company will continue to honor product warranties and support its product lines. Labor unions want to know whether the owners can pay increased wages and benefits. Economic planners use accounting information to forecast economic activity.

What Is Accounting?

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Illustration 1-3 Questions asked by external users

Questions Asked by External Users Hotels Hotels

Yea! HOTE L

HOTE L

Is the company earning satisfactory income?

How does the company compare in size and profitability with competitors?

What do we do if they catch us?

Will the company be able to pay its debts as they come due?

ACCOUNTING IN ACTION

International Insight

In 1999, the number of berths (built-in beds on a cruise ship) provided by the cruise line industry in the North American market was more than 154,000 units. However, a cruise line is not simply a floating hotel. With all the amenities it has to offer, including spas, 24-hour foodservice, tennis courts, and casinos, cruises are closely scrutinized by the National Transportation Safety Board, Federal Maritime Commission, and the U.S. Coast Guard. The growth of this industry has resulted in increased regulations and greater capacity of new ships. This has created additional issues for the accounting personnel in the cruise line industry and the public accounting firms that service them. For example, ships need to be dry-docked for maintenance. If the next dry dock is estimated to be $2 million and is scheduled to be done in twenty months, then the accounting personnel should accrue $100,000 per month on the books. Therefore, the full $2 million will be recognized as a prepaid asset to be recorded at the time of dry docking. SOURCE: Mitchell R. Less and Scott A. Mager (1999), “A Cruise Ship Is Not Just a Floating Hotel,” Bottomline, 14(3), 15–20.

BRIEF HISTORY OF ACCOUNTING The origins of accounting are generally attributed to the work of Luca Pacioli, an Italian Renaissance mathematician. Pacioli was a close friend and tutor to Leonardo da Vinci and a contemporary of Christopher Columbus. In his text Summa de Arithmetica, Geometria, Proportione et Proportionalite, Pacioli described a system to ensure that financial information was recorded efficiently and accurately. With the advent of the Industrial Age in the nineteenth century and, later, the emergence of large corporations, a separation of the owners from the managers of businesses took place. As a result, the need to report the financial sta-

Accounting in Action examples illustrate important and interesting accounting situations in business.

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CHAPTER 1 Hospitality Accounting in Action

E-Business Insights provide examples of how e-business technology has influenced accounting and financial reporting.

tus of the enterprise became more important, to ensure that managers acted in accord with owners’ wishes. Also, transactions between businesses became more complex, making it necessary to improve approaches for reporting financial information. Our economy has now evolved into a post-industrial age—the information age — in which many “products” are information services. The computer has been the driver of the information age.

ACCOUNTING IN ACTION

^

Business Insight

The surge of Internet usage has affected the hotel industry tremendously—so much so that there are new revenue and expense items that hotels did not have before. On one hand, revenues earned by hotels now include a fee that could either be charged separately or built into the room cost for the use of the Internet, business center usage, and banquet facilities, which are associated with convention services and presentations. Other revenues also include rental and installation of equipment, computers, ethernet cards, hubs, patch cables, and even the set-up of miniLAN systems. Expenses, on the other hand, include the cost of leasing lines, Internet provider fees, telephone charges, equipment leases, and wages and salary of hotel and contract personnel, to name a few. SOURCE: Henry A. Weeks, “Internet Revenue and Expense,” Bottomline, 15(4) (2000),

73–74.

DISTINGUISHING BETWEEN BOOKKEEPING AND ACCOUNTING Many individuals mistakenly consider bookkeeping and accounting to be the same. This confusion is understandable because the accounting process includes the bookkeeping function. However, accounting also includes much more. Bookkeeping usually involves only the recording of economic events. It is therefore just one part of the accounting process. In total, accounting involves the entire process of identifying, recording, and communicating economic events. Accounting may be further divided into financial accounting and managerial accounting. Financial accounting is the field of accounting that provides economic and financial information for investors, creditors, and other external users. Managerial accounting provides economic and financial information for managers and other internal users. Financial accounting is covered in this textbook.

ACCOUNTING AND YOU One question frequently asked by students of accounting is, “How will the study of accounting help me?” It should help you a great deal, because a working knowledge of accounting is desirable for virtually every field of endeavor. Some examples of how accounting is used in other careers include: General management: Imagine running a theme park, a major resort, a school, a foodservice facility, a McDonald’s franchise. All general managers need to understand accounting data in order to make wise business decisions. Marketing: A marketing specialist develops strategies to help the sales force be successful. But making a sale is meaningless unless it is a profitable sale. Marketing people must be sensitive to costs and benefits, which accounting helps them quantify and understand.

The Building Blocks of Accounting

7

Finance: Do you want to be a controller, a chief financial officer, a food and beverage controller, a purchasing analyst? These fields rely heavily on accounting. In all of them you will regularly examine and analyze financial statements. In fact, it is difficult to get a good job in a finance function without two or three courses in accounting. Real estate: Have you ever considered hotel properties as real estate? When you decide to buy or sell properties, you will need to understand finance and real estate. Many hospitality programs, especially at the Master’s degree level, offer courses in real estate. Can the buyer afford to make the payments to the bank? Does the cash flow from an industrial property justify the purchase price? What are the tax benefits of the purchase? All these are questions that need answers. Accounting is useful even for occupations you might think completely unrelated. If you become a doctor, a lawyer, a social worker, a teacher, an engineer, an architect, or an entrepreneur—you name it—a working knowledge of accounting is relevant. You will need to understand financial reports in any enterprise you are associated with.

ACCOUNTING IN ACTION

Business Insight

Help Wanted: Forensic CPAs Tom Taylor’s job at the FBI has changed. He used to pack a .357 magnum; now he wields a no. 2 pencil and a notebook computer. Taylor, age 37, for two years an FBI agent, is a forensic accountant, somebody who sniffs through company books to ferret out white-collar crime. Demand for this service has surged in the past few years. In one recent year, a recruiter for San Diego’s Robert Half International, a headhunting firm, had requests for more than 1,000 such snoops. Qualifications: A CPA with FBI, IRS, or similar government experience. Interestingly, despite its macho image, the FBI has long hired mostly accountants and lawyers as agents.

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B E F O R E

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Before You Go On questions at the end of major text sections offer an opportunity to stop and reexamine the key points you have studied.

O N . . .

REVIEW IT

1. What is accounting? 2. What is meant by analysis and interpretation? 3. Who uses accounting information? Identify specific internal and external users of ac-

counting information. 4. To whom are the origins of accounting generally attributed? 5. What is the difference between bookkeeping and accounting? 6. How can you use your accounting knowledge?

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THE NAVIGATOR

BUILDING BLOCKS OF ACCOUNTING

Every profession develops a body of theory consisting of principles, assumptions, and standards. Accounting is no exception. Just as a doctor follows certain standards in treating a patient’s illness, an accountant follows certain standards in re-

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CHAPTER 1 Hospitality Accounting in Action

porting financial information. For these standards to work, a fundamental business concept is followed—ethical behavior.

ETHICS—A FUNDAMENTAL BUSINESS CONCEPT

STUDY OBJECTIVE 3

Wherever you make your career—whether in accounting, marketing, hotel or foodservice management, finance, or elsewhere—your actions will affect other people and organizations. The standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair, are ethics. Imagine trying to carry on a business or invest money if you could not depend on the individuals you deal with to be honest. If managers, customers, investors, co-workers, and creditors all consistently lied, effective communication and economic activity would be impossible. Information would have no credibility. Fortunately, most individuals in business are ethical. Their actions are both legal and responsible, and they consider the organization’s interests in their decision making. However, sometimes public officials and business executives act unethically. For example, the Enron board waived Enron’s code of ethics where an executive created questionable partnerships; a trader with Salomon Brothers improperly overbid in auctions of U.S. Treasury bonds; World Com continued acquiring companies including MCI, MFS, and UUNET, until the 75 acquisitions were unable to function well together. To sensitize you to ethical situations and to give you practice at solving ethical dilemmas, we have included in the book three types of ethics materials in certain chapters: (1) marginal notes that provide helpful hints for developing ethical sensitivity, (2) Ethics in Accounting boxes that highlight ethics situations and issues, and (3) at the end of the chapter, an ethics case simulating a business situation. In the process of analyzing these ethics cases and your own ethical experiences, you should apply the three steps outlined in Illustration 1-4.

Understand why ethics is a fundamental business concept.

Illustration 1-4 Steps in analyzing ethics cases

Solving an Ethical Dilemma

#1

ALT

#2

ALT

1. Recognize an ethical situation and the ethical issues involved. Use your personal ethics to identify ethical situations and issues. Some businesses and professional organizations provide written codes of ethics for guidance in some business situations.

2. Identify and analyze the principal elements in the situation. Identify the stakeholders— persons or groups who may be harmed or benefited. Ask the question: What are the responsibilities and obligations of the parties involved?

3. Identify the alternatives, and weigh the impact of each alternative on various stakeholders. Select the most ethical alternative, considering all the consequences. Sometimes there will be one right answer. Other situations involve more than one right solution; these situations require an evaluation of each