Solutions Manual Accounting Essentials for Hospitality Managers [4 ed.] 9781032024325

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Solu�ons Manual For Accoun�ng Essen�als for Hospitality Managers, 4e Chris Guilding, Kate Mingjie Ji (All Chapters, 100% Original Verified, A+ Grade)

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Solutions Manual for Accounting Essentials for Hospitality Managers, 4e by Chris Guilding, Kate Mingjie Ji (All Chapters)

CHAPTER 1 Introduction Problem 1.1: Solution a) Functional interdependency exists when the performance of one functional area is affected by the performance of a separate functional area. For example, in a hotel complex that is dominated by a casino, the success of the rooms and food and beverage departments will be affected by the success of the casino operations in attracting clients to the complex. b) Functional interdependency is an important issue for the designers of a hotel’s system of accountability because care should be taken to hold a manager accountable for only those aspects of the hotel’s performance that he or she can influence. For example, the heads of rooms and food and beverage departments should not be held accountable for a decrease in their room sales if it is caused by reduced casino activity.

Problem 1.2: Solution a) The four main dimensions of sales volatility in the hotel industry are: 1. economic cycle induced sales volatility, 2. seasonal sales volatility, 3. weekly sales volatility, 4. intra-day sales volatility. b) The implications that these dimensions of sales volatility carry for hotel accounting systems are as follows: 1. Economic cycle induced volatility: Hotel sales’ high susceptibility to general economic conditions highlights the importance of hotels carefully forecasting economic cycles as part of the annual budgeting process. 2. Seasonal sales volatility: Three accounting implications arise: • Seasonal sales volatility can be so severe to warrant temporary closure for some resort properties. This possibility of having to make a closure decision signifies that

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cost and revenue data should be recorded in a manner that will enable a well informed financial analysis of the pros and cons of closing. • Seasonal sales volatility can also pose particular cash management issues. During the middle and tail-end of the busy seasons, surplus cash balances are likely to result, while in the off-season and the build up to the busy season, deficit cash balances are likely to result. Careful cash budgeting will therefore need to be conducted. • Seasonal sales volatility will also affect price discounting decisions. To ensure such decisions are well informed, careful forecasting as part of the annual budgetary process, will have to be conducted. 3. Weekly sales volatility: Accurate forecasting of weekly sales volatility will inform management’s decision making with respect to the amount and timing of room rate discounting, staffing needs as well as restaurant purchasing needs. 4. Intra-day sales volatility: Intra-day demand volatility has led to widely-used pricing strategies such as “early bird specials” in restaurants and “happy hours” in bars. Records concerning demand at different times of the day will have to be maintained in order to inform such hotel pricing issues.

Problem 1.3: Solution Examples of business decisions requiring the use of financial accounting data include: (a) A bank manager deciding whether to lend money to a company. (b) A shareholder deciding whether to sell her shares due to a fear that the company she has invested in might go bankrupt. (c) A potential shareholder thinking about purchasing shares in a company and interested in determining if the company is profitable. Examples of business decisions requiring the use of management accounting data include: (a) Determining whether accounts are being collected on time. (b) Determining whether the business will have sufficient cash over the next year to avoid the need to arrange a line of credit. (c) Determining whether a drinks vending machine or a confectionary vending machine should be installed in a hotel’s foyer area. (d) Determining what room rate to charge to achieve a target level of profit. (e) Determining whether a seasonal hotel should be closed down during the quiet season. (f) Determining whether a restaurant manager is performing well.

Problem 1.4: Solution a) High product perishability signifies that an item cannot be held in inventory for sale at a later time. Food items have a limited life in inventory because of their rapid physical deterioration. Room nights and conference facilities cannot be placed in inventory because they relate to a particular time period that expires.

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b) The absolute perishability of rooms, conference and banquet facilities and the relative perishability of food underlines the importance of accurate hotel demand forecasting as part of the budgeting process. Generally, the most important aspect of forecasting is room occupancy, as room sales drive sales levels of other hotel services. Accurate restaurant forecasting provides the basis for maintaining a full menu of options while also minimising the cost of food wastage.

Problem 1.5: Solution Fixed costs are costs that do not vary as a function of sales activity levels. Hotels involve considerable investment in fixed assets such as buildings on prime land as well as extensive furnishings, fittings and equipment. This investment generates high rent and depreciation costs, which together with significant salary costs, result in a high fixed cost structure for hotels.

Problem 1.6: Solution a) Major hotel activities include room housekeeping, restaurant food preparation and service as well as bar service. Despite the advent of the machine and computer age, the physical aspect of all of these activities has changed little over the last fifty years, as they continue to have a high labour component. b) High labour intensive activities in hotels signifies the importance of performance measures that focus on labour productivity. Such performance indices include restaurant covers per employee hour worked and restaurant sales per employee hour worked. Monitoring differences between actual labour cost and budgeted labour cost represents another dimension of labour cost management. An appropriate analysis of the difference between budgeted and actual labour cost enables a distinction to be drawn between labour rate and labour efficiency factors.

Problem 1.7: Solution Financial accounting concerns the preparation of financial reports for external users such as shareholders, banks and government authorities. In order for these financial reports to be meaningful, it is important that they are produced in a standardised way and are seen to be reliable. Management accounting concerns the provision of financial information to internal management. This information is designed to help managers in their decision making and control of businesses. Financial information sought by hotel managers includes determining the cost of providing a meal to inform the menu pricing decision, determining how many delegates need to attend a conference in order to achieve break even, and determining what level of profit is made by each selling unit of a hotel to inform any rationalisation decision to drop a unit. The provision of all these types of financial information falls within the scope of management accounting. 3

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Problem 1.8: Solution The main accounting information users are: • Managers within the company being accounted for. Managers use accounting information in planning and controlling business activities. • Outside parties such as shareholders, potential shareholders, creditors and government agencies. These parties use accounting information to make investing, lending, taxing and regulatory decisions.

Problem 1.9: Solution Accounting reports represent the main source of information that the investing community uses when attempting to make wise equity investments. A lack of confidence in accounting systems is bound to translate into a reluctance to invest in companies. This will inhibit the ability of economically viable companies to expand, which in turn will carry negative implications for employment, availability of goods and services, and our standard of living. It is critically important that a reliable financial accounting system that engenders trust and encourages corporate development is established, otherwise economic activity suffers.

Problem 1.10: Solution Any of the elements referred to in Box 1.3 could be used as an answer to this question.

Problem 1.11: Solution Amongst the advantages deriving from the USALI are the following: • it can save on accounting system design costs as it represents a “blueprint” accounting system that can be adopted by any business in the hotel industry, • the system can be viewed as “state of the art” as it benefits from the accumulated experience of the parties that have contributed to the system’s development over many years, • by promoting consistent account classification schemes as well as formatting of reports, it facilitates comparison across hotels, • it represents a common point of reference for hotels within the same hotel group.

Problem 1.12: Solution 3 main organizational forms and their main differences Characteristics Number of owners

Sole proprietorship One

Partnership Two or more

Company Generally many

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Business size

Small

Generally small

Key decision makers

Owner

Partners

Larger and can be very large Board of directors

Owner liability

Unlimited

Unlimited

Limited

Organisation life

Limited

Limited

On-going

Problem 1.13: Solution At the outset of a business, ‘capital raised’ refers to the long term funds invested in the business.

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CHAPTER 15 Other Managerial Finance Issues Problem 15.1: Solution Three reasons accounting for EPS being a deficient financial goal for companies are: • The issue of EPS timing (early high EPS returns are preferable to late high EPS returns). • The failure of EPS to capture cash flows. A period of high EPS may be a period of low company cash flow. • EPS fails to recognize risk. A company may take on a risky project that increases its EPS, however the resulting increased risk profile for the company may well cause a decline it its share price.

Problem 15.2: Solution a. The residual dividend theory holds that a company should use all its available long term capital investing in positive net present value (NPV) projects, until no further positive NPV project opportunities remain. Following this line of thinking, once a company has invested in all available positive NPV projects, any remaining excess long term capital (ie, residual funds) should be distributed as a dividend to its shareholders. Applying this approach will result in considerable volatility in the dividends paid to shareholders. The information effect dividend theory holds that a decision to pay dividends to shareholders carries a positive impact on share price. This is because the decision to pay a dividend can be seen as a signal that flags a company’s intent to pay higher dividends in years to come. Conversely, a decrease in dividends is believed to provide a negative signal, as it suggests that dividends might decrease in years to come. This thinking results in many companies pursuing a policy of only raising dividends levels if they are confident that the increased dividend level can be maintained in years to come. b. The findings of empirical research suggest that in practice companies tend to adhere to the information effect theory when setting their dividend policy c. The clientele effect tell us that whatever policy a company is adopting with respect to paying dividends, it should continue to apply this policy. This is because investors who have bought shares in a company must have been attracted to it, based on the dividend payment policy it is pursuing.

Problem 15.3: Solution Triple bottom line reporting focuses on:

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• • •

financial performance reporting, social performance reporting, and environmental performance reporting.

Problem 15.4: Solution Relationship number 1 2 3 4 5

Principal Company’s shareholders Food & Beverage Manager Patient Share investor Voters in electorate

Agent Board of directors Restaurant Manager Doctor Stock broker Member of Parliament

Problem 15.5: Solution BlissfullEscape Share value = D1 (PVIF10%, 1yr) + D2 (PVIF10%, 2yr) + Share sale price (PVIF10%, 3yr) = $2 (PVIF10%, 1yr) + $2 (PVIF10%, 2yr) + $25 (PVIF10%, 3yr) = $2 (0.905) + $2 (0.820) + $25 (0.744) = $1.81 + $1.64 + $18.60 = $22.05 As you own 100 shares, today’s total investment value = $2,205

Problem 15.6: Solution Share value = $6 ÷ 0.12 = $50.

Problem 15.7: Solution a) Project A Hotel operator incentive fee = .03 X $250,000 = $7,500 Hotel operator base fee = .10 X $100,000 = $10,000 Total operator fee = $7,500 + $10,000 = $17,500 Project B Hotel operator incentive fee = .03 X $400,000 = $12,000 Hotel operator base fee = .10 X $160,000 = $16,000 Total operator fee = $12,000 + $16,000 = $28,000 The hotel operator would prefer project B as it provides $10,500 more in fees.

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b) Project A Annual ROI = $100,000 ÷ $500,000 X 100 = 20% Project B Annual ROI = $160,000 ÷ $2,000,000 X 100 = 8% Based on ROI analysis, the owner would prefer project A as it provides the higher ROI.

Problem 15.8: Solution While 25% appears to represent a good share price return over two years, we would need to examine how similar companies have performed in the same time period. We would not say it’s a good return if Utopia’s competitors have achieved a 40% return over the same time period. From the data provided, we can determine that Utopia has a price earnings ratio of 20 (€40 ÷ 2). This is high compared to Utopia’s competitors. A high price earnings ratio can be due to: • The investing community expecting an increase in Utopia’s EPS in the future. This would result in increased demand for the share which, in turn, would increase the share price (past earnings are only of interest to the investor to the extent that they provide an indication of expected future earnings), • The investing community perceiving relatively low risk in the Utopia company. As investors are averse to risk, reduced levels of risk will result in increasing demand for the share which, in turn, results in an increased share price.

Problem 15.9: Solution a. As Hotel A has a DOL of 2, if its room nights sold doubled (increase of 100%) we would expect its EBIT to increase by twice as much, ie by 200%. b. Hotel B has the higher risk with respect to its operating cost structure as it has the higher DOL. c. To reduce its DOL, management in hotel B will need to replace some of its fixed operating costs with variable costs. Possible options include, if its has a restaurant with a high amount of associated fixed costs it could lease out the restaurant to a specialist restaurateur company. If doing this to reduce DOL it would need to ensure that the responsibility of paying fixed costs associated with the restaurant are transferred to the restaurateur. The hotel could also to replace any equipment (fixed cost intensive) with labour hours provided by casual staff (variable costs).

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Problem 15.10: Solution a) Swanky Hotel DOL = 45,000 (160 – 15) ÷ 45,000 (160 – 15) – 540,000 = 6,525,000 ÷ 6,525,000 – 540,000 = 6,525,000 ÷ 5,985,000 = 1.09 DFL = 5,985,000 ÷ 5,985,000 – 280,000 = 5,985,000 ÷ 5,705,000 = 1.05 DTL = 1.09 X 1.05 = 1.1445 Swish Hotel DOL = 40,000 (155 – 10) ÷ 40,000 (155 – 10) – 1,040,000 = 5,800,000 ÷ 5,800,000 – 1,040,000 = 5,800,000 ÷ 4,670,000 = 1.24 DFL = 4,670,000 ÷ 4,670,000 – 400,000 = 4,670,000 ÷ 4,270,000 = 1.094 DTL = 1.24 X 1.094 = 1.36 b) Both the DOL and DFL indices in the Swish Hotel are greater. Combined, these signify that DTL is also greater in the Swish Hotel. At all levels of this leverage analysis, the Swish Hotel has greater risk.

Problem 15.11: Solution a. DTL = DOL X DFL. The two hotels have the same DTL index of 10. b. It is generally held that it is easier to retire debt that it is to substitute variable operating costs for fixed operating costs. As the Tiger hotel has a relatively low DFL of 1.25 and the Lion hotel has a comparatively high DFL at 4, it appears it will be easier for the Lion hotel to take steps to halve its DTL. Further, the Lion hotel can achieve the target of reducing DTL by 50% by reducing its DFL from 4 to 2. Even if the Tiger hotel removed all of its debt and reduced its DFL from 1.25 to 1, it still would not have achieved the 50% reduction in DTL that is sought.

Problem 15.12: Solution a) Financing option 1 (debt) £

Financing option 2 (equity) £

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Projected return on assets: 20% of $3.5 m. Less interest on debt a Profit before Tax Less 40% Tax Profit after Tax % Return on owners investment b

700,000 98,000 602,000 240,800 361,200

700,000 63,000 637,000 254,800 382,200

17.2%

14.7%

a: For financing option 1: 7% of $1,400,000; for financing option 2: 7% of $900,000. b: For financing option 1: $361,200  $2,100,000 X 100; for financing option 2: $382,200  $2,600,000 X 100. b) FrozenIce should take the debt funding option as it results in a higher return on equity (17.2%) that the equity funding option (14.7%).

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