Copyright 2006 Pearson Education Canada Inc. 13-1

Copyright 2006 Pearson Education Canada Inc. 13-1


Outline Objectives of Financial Statement Presentation Financial Analysis

Trend Analysis, Vertical and Horizontal Analysis, Ratio Analysis, Liquidity Analysis, Solvency and Leverage Analysis

Profitability Operating Performance Analysis Cash Flow Analysis Auditor’s Opinion Notes to the Financial Statements Limitations of Financial Statements


OBJECTIVES OF FINANCIAL STATEMENT PRESENTATION

Provides useful information For credit and investment decisions In assessing cash flow prospects about

business’ economic resources, including claims to those resources and changes in them


Financial Analysis Trend Analysis Vertical and

Horizontal Analysis

Ratio Analysis Cash Flow

Analysis.


Trend Analysis

Used to predict earnings by forecasting future revenues and expenses

Past experience is projected into the future, taking into consideration known or planned changes.


Vertical and Horizontal Analysis Vertical Common‑Size Analysis Compares

all figures on the statement with a base figure selected from the same statement

Horizontal Common-Size Analysis Compares all figures on one financial statement with the same account selected from a base year


Ratio AnalysisIndicates the strengths and weaknesses

of a hospitality firm by calculating basic relationships Liquidity Solvency and Leverage Profitability Operating Performance


Liquidity Analysis

Liquidity ratios measure the hospitality firm's ability to meet its short‑term obligations as they become due

Current ratio-provides a rough measure of liquidity

Quick Ratio- Measures the extent to which cash and-near cash items (short‑term investments and

receivables) cover current liabilities Accounts Receivable Turnover-shows the number of

times that accounts receivable is converted into cash during the period


Solvency and Leverage Analysis

Viewed as an indicator of the company's

ability to meet its long‑term obligations as

they mature

Debt to equity ratio - an expression of the creditors' financing in relation to the owners’ financing

Interest Coverage - measures the ability of the company to meet its annual interest costs


ProfitabilityProfitability AnalysisCenters on the measurement of a hospitality firm'sability to generate earnings from the availableresources Return on Equity- a fundamental measure of profitability from the

standpoint of current and prospective investors

Return on Assets - a measure of the return obtained on all the company's assets without consideration of the method used to finance them

Profit Margin - expresses the net income per dollar of sale

Operating Efficiency Ratio - expresses the ability of a hotel firm to operate profitably by relating income before fixed charges to revenues


ProfitabilityMeasures for Investors

Earnings Per Share - reflect management's success in achieving earnings for the owners

Price-Earnings ratio - serves as a reflection of how much the investing public is willing to pay for the company's prospective earnings

Dividend Yield - relates the current price of the company's common stock to the annual dividend as a measure of current return on investment


Operating Performance Analysis

Activity and operating ratios measure the effective utilization of the hospitality firm's assets while relating business success to the company's ability to generate revenues and control expenses

Inventory Turnovers - show how rapidly goods (e.g., food and beverages) are being sold and replaced during the period

Cost Percentages- measure the relative efficiency of the operations

Annual Occupancy Percentage - measures the use of facilities through the generation of revenues from the sale of space.

Average Daily Rate - serves as an indication of the rate structure and/or salesmanship ability


Cash Flow AnalysisCash flow analysis encompasses the review of major sources

and uses of cash reported on the Statement of Cash Flow

Sources of cash Internal- Operations

External- Issuance of preferred and common stock

Sale of non-operating assets/ Debt issuances

Uses of Cash Expansion

Repayment of debt

Dividend/ Purchase of treasury stock


Examination of Supplemental Information

AUDITOR’S OPINION

NOTES TO THE FINANCIAL STATEMENTS


Auditor’s Opinion

Main purpose of the independent audit is to provide external parties with a reasonable degree of assurance as to the validity of the information contained in the financial statements.

The CA's opinion letter includes A scope paragraph Opinion paragraph

Unqualified (or clean) Opinion Qualified Opinion

Disclaimer of Opinion Adverse Opinion


Notes to the Financial Statements

Considered an integral part of the financial statements.

Summary of Significant Accounting Principles Commitments and Contingencies Segment Reporting Pension Plans Long‑Term Debt Obligations Subsequent Events Other Disclosures


Limitations of Financial Statements

Conventional financial statements are prepared under a constant dollar.

Facts and conditions not specifically reflected on the financial statements could have a major impact on the future of a hospitality firm.

Only those facts that can be expressed in monetary terms are included in the financial statements.

Judgmental factors pertaining to diverse accounting treatments of inventory, depreciation, capitalizing vs. expensing expenditures, and the like make meaningful comparisons of hospitality firms doubtful.

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Copyright 2006 Pearson Education Canada Inc. 13-1