HFT 3431HFT 3431

Chapter 1Chapter 1

Introduction to Managerial Introduction to Managerial AccountingAccounting

The Accounting ProfessionThe Accounting Profession

• FinancialFinancial

• CostCost

• ManagerialManagerial

• TaxTax

• AuditingAuditing

• GovernmentalGovernmental

Users of Financial Users of Financial InformationInformation

• OwnersOwners

• CreditorsCreditors

• ManagersManagers

• GovernmentsGovernments

• InvestorsInvestors

Financial vs. Managerial Financial vs. Managerial AccountingAccounting

• Financial accounting is historicalFinancial accounting is historical

• Managerial accounting focuses on Managerial accounting focuses on analysis, information, enhanced analysis, information, enhanced controls and planningcontrols and planning

Managerial AccountingManagerial Accounting

• Management is choosing from alternative Management is choosing from alternative courses of actioncourses of action

• Managerial accounting is concerned with Managerial accounting is concerned with serving internal decision makersserving internal decision makers

• Managerial accounting links with cost Managerial accounting links with cost accountingaccounting

• Provides financial statement analysis and Provides financial statement analysis and interpretationinterpretation

• Financial accounting is concerned with Financial accounting is concerned with serving external decision makersserving external decision makers

End Products Used from End Products Used from Financial AccountingFinancial Accounting

• Balance Sheet (Ch 2)Balance Sheet (Ch 2)

• Income Statement (Ch 3)Income Statement (Ch 3)

• Statement of Cash Flows (Ch 4)Statement of Cash Flows (Ch 4)

The Hospitality BusinessThe Hospitality Business

• Hotels, motels, motor innsHotels, motels, motor inns

• All types of food serviceAll types of food service

• Theme parksTheme parks

• Transportation servicesTransportation services

• EntertainmentEntertainment

• Recreational facilitiesRecreational facilities

• Convention servicesConvention services

The Hospitality BusinessThe Hospitality Business

• Seasonal businessSeasonal business

• Fluctuating demandFluctuating demand

• Short conversion time – food & beverageShort conversion time – food & beverage

• Selling spaceSelling space– Perishable productPerishable product– It’s now or neverIt’s now or never

• Labor intensiveLabor intensive

• Intensive fixed asset requirementIntensive fixed asset requirement

Accounting ReviewAccounting Review

• Uniform System of AccountsUniform System of Accounts

• Generally Accepted Accounting Generally Accepted Accounting Principles (GAAP)Principles (GAAP)

• International Financial Reporting International Financial Reporting System (Near future)System (Near future)

Principles of AccountingPrinciples of Accounting

• CostCost• Business EntityBusiness Entity• Continuity of the Business UnitContinuity of the Business Unit• Unit of MeasurementUnit of Measurement• Objective EvidenceObjective Evidence• Full DisclosureFull Disclosure• ConsistencyConsistency• MatchingMatching• ConservatismConservatism• MaterialityMateriality

Cost PrincipleCost Principle

States that when a States that when a transaction is recorded, the transaction is recorded, the transaction price (cost) transaction price (cost) establishes the accounting establishes the accounting valuevalue

Business EntityBusiness Entity

Statements are based on the Statements are based on the concept that each business concept that each business maintains its own accounts, & maintains its own accounts, & that these accounts are that these accounts are separate from other interests separate from other interests of the ownersof the owners

Continuity of the Business Continuity of the Business UnitUnit

The assumption that the The assumption that the business will continue business will continue indefinitelyindefinitely

Unit of MeasurementUnit of Measurement

•All transactions are All transactions are expressed in monetary termsexpressed in monetary terms

Objective EvidenceObjective Evidence

Accounting records are Accounting records are based on objective evidence based on objective evidence ( invoices, checks, cash ( invoices, checks, cash register receipts)register receipts)

Full DisclosureFull Disclosure

Financial statements must Financial statements must provide all information provide all information pertinent to interpretation of pertinent to interpretation of the financial statementsthe financial statements

ConsistencyConsistency

The same accounting The same accounting method from time period to method from time period to time periodtime period

MatchingMatching

Match revenues with Match revenues with expensesexpensesCash versus accrualCash versus accrual

ConservatismConservatism

Recognize expenses as soon Recognize expenses as soon as possible, but delay as possible, but delay recognition of revenues recognition of revenues until they are sureuntil they are sure

MaterialityMateriality

Events or information must Events or information must be accounted for if they be accounted for if they make a difference to the make a difference to the financial statementsfinancial statements

Cash vs. Accrual AccountingCash vs. Accrual Accounting

• Cash basis accountingCash basis accounting– Recognize revenue when cash received, Recognize revenue when cash received,

expense when cash disbursedexpense when cash disbursed

• Accrual basis accountingAccrual basis accounting– Recognize revenue when earnedRecognize revenue when earned– Recognize expense when incurredRecognize expense when incurred

Fundamentals of Fundamentals of AccountingAccounting

• Balance Sheet Balance Sheet Assets (Things Owned)Assets (Things Owned)

= Liabilities ( Obligations )= Liabilities ( Obligations )+ Equity ( Residual Claims on Assets )+ Equity ( Residual Claims on Assets )

Fundamentals of Fundamentals of AccountingAccounting

• Income StatementIncome StatementRevenuesRevenues

- Expenses- Expenses= Net Income (Loss)= Net Income (Loss)

Temporary Accounts are Netted and Closed to Equity Temporary Accounts are Netted and Closed to Equity (retained earnings)(retained earnings)

Fundamental EquationFundamental Equation

• Assets = Liabilities + Owners EquityAssets = Liabilities + Owners Equity• Assets = LiabilitiesAssets = Liabilities

+ Permanent OE+ Permanent OE + Temporary OE+ Temporary OE

• Assets = LiabilitiesAssets = Liabilities + Permanent OE+ Permanent OE

+ Revenue+ Revenue - Expenses- Expenses

AssetsAssets

• Resources owned by a businessResources owned by a business– Common characteristic – the capacity to Common characteristic – the capacity to

provide future benefit or serviceprovide future benefit or service– Use for the purpose production, Use for the purpose production,

consumption and exchange of goods or consumption and exchange of goods or servicesservices

– Future economic benefits results in cash Future economic benefits results in cash inflowsinflows

LiabilitiesLiabilities

• Claims against assetsClaims against assets

• CreditorsCreditors

• Existing debts and obligationsExisting debts and obligations– Accounts payableAccounts payable– Notes payableNotes payable– Wages payableWages payable– Sales, Real Estate and Income Taxes Sales, Real Estate and Income Taxes

payablepayable

EquityEquity

• Claims of the owners on the assetsClaims of the owners on the assets

• CorporationsCorporations– Paid in capitalPaid in capital– Retained earningsRetained earnings– RevenuesRevenues– ExpensesExpenses– DividendsDividends

•Revenues > Expenses = Net IncomeRevenues > Expenses = Net Income

•Revenues < Expenses = (Net Loss)Revenues < Expenses = (Net Loss)

TransactionsTransactions

• Transactions defined: economic events of the Transactions defined: economic events of the enterprise recordedenterprise recorded

• Each transaction may be internal or externalEach transaction may be internal or external

• Each transaction must identify the specific Each transaction must identify the specific items affected and the net change on each itemitems affected and the net change on each item

• Each transaction has a dual effect on the Each transaction has a dual effect on the accounting equationaccounting equation

• The two sides of the accounting equation must The two sides of the accounting equation must always equalalways equal

Effects of Transactions on Effects of Transactions on the Accounting Equationthe Accounting Equation• Increase in an assetIncrease in an asset

– Decrease in another assetDecrease in another asset– Increase in a liabilityIncrease in a liability– Increase in owners equityIncrease in owners equity

• Increase in a liabilityIncrease in a liability– Increase in an assetIncrease in an asset– Decrease in another liabilityDecrease in another liability– Decrease in owners equityDecrease in owners equity

• Increase in owners equityIncrease in owners equity– Increase in an assetIncrease in an asset– Decrease in liabilityDecrease in liability

Types of AccountsTypes of Accounts

• Asset Accounts – Normal Balance = Asset Accounts – Normal Balance = DebitDebit

• Liability Accounts – Normal Balance = Liability Accounts – Normal Balance = CreditCredit

• Equity AccountsEquity Accounts– Permanent Equity – Normal Balance – CreditPermanent Equity – Normal Balance – Credit– Temporary Owners EquityTemporary Owners Equity

•Revenue – Normal Balance = CreditRevenue – Normal Balance = Credit

•Expense – Normal Balance = DebitExpense – Normal Balance = Debit

Debit vs CreditDebit vs Credit

• Assets and Expenses have a normal balance of a Assets and Expenses have a normal balance of a DebitDebit– To increase the balance DebitTo increase the balance Debit– To decrease the balance CreditTo decrease the balance Credit

• Liabilities, Permanent OE and Revenues have a Liabilities, Permanent OE and Revenues have a normal balance of a Creditnormal balance of a Credit– To increase the balance CreditTo increase the balance Credit– To decrease the balance DebitTo decrease the balance Debit

Forms of Business Forms of Business OrganizationsOrganizations

• Sole ProprietorshipSole Proprietorship

• PartnershipsPartnerships

• Limited Limited PartnershipsPartnerships

• Limited Liability Limited Liability Companies (LLC)Companies (LLC)

• CorporationsCorporations

Sole ProprietorshipSole Proprietorship

• Easiest to organize / dissolveEasiest to organize / dissolve• Legally not a separate business – liability issuesLegally not a separate business – liability issues• It is separate for accounting purposes, howeverIt is separate for accounting purposes, however• Owner not paid a salary or wage - withdrawalsOwner not paid a salary or wage - withdrawals

PartnershipsPartnerships

• Two or more people joined together in a Two or more people joined together in a non-corporate manner for conducting non-corporate manner for conducting business. Can use a written or oral business. Can use a written or oral agreement agreement

PartnershipsPartnerships

• AdvantagesAdvantages– Greater financial Greater financial

strengthstrength– Does not pay taxesDoes not pay taxes– Shares liabilityShares liability– Greater Greater

management management strengthstrength

• DisadvantagesDisadvantages– Partners are taxed Partners are taxed

on profits on profits regardless of cash regardless of cash distributiondistribution

– Limits decision Limits decision making processmaking process

– Unlimited legal Unlimited legal liabilityliability

Limited PartnershipsLimited Partnerships

• Offers liability protection to limited Offers liability protection to limited partnerspartners– General Partner(s) – responsible for debts of General Partner(s) – responsible for debts of

the partnershipthe partnership– Limited Partner(s) – may not actively Limited Partner(s) – may not actively

participate in the day to day operations of the participate in the day to day operations of the businessbusiness

– Agreement must be writtenAgreement must be written– Limited partners liability is limited to the Limited partners liability is limited to the

amount of their investmentamount of their investment

CorporationsCorporations

• A legal entity created A legal entity created by a state or other by a state or other political authoritypolitical authority

• CharacteristicsCharacteristics– An exclusive nameAn exclusive name– Continued existence Continued existence

independent of independent of stockholdersstockholders

– Paid in capital Paid in capital represented by shares represented by shares of stockof stock

– Overall control vested Overall control vested in its directorsin its directors

CorporationsCorporations

• AdvantagesAdvantages– Shareholders liability Shareholders liability

limited to amount of limited to amount of investmentinvestment

– Owners are taxed on Owners are taxed on distributed profits distributed profits (dividends)(dividends)

– Employee equity Employee equity participation (ESOP)participation (ESOP)

– Lower tax ratesLower tax rates– Corporation continues Corporation continues

on in perpetuityon in perpetuity

• DisadvantagesDisadvantages– Double taxationDouble taxation– Ownership controlOwnership control

Other Forms Of Business Other Forms Of Business OrganizationOrganization

• S-CorpS-Corp– Eliminates double Eliminates double

taxationtaxation– Limited to 75 Limited to 75

shareholdersshareholders– Only one class of Only one class of

stockstock– Shareholders pay Shareholders pay

taxestaxes

• Limited Liability Limited Liability Company (LLC)Company (LLC)– May have unlimited May have unlimited

number of ownersnumber of owners– May have a single May have a single

ownerowner– Not restricted to Not restricted to

one class of stockone class of stock

Elements of EthicsElements of Ethics

• Use of Company AssetsUse of Company Assets

• Anti-Trust LawsAnti-Trust Laws

• Relations With CompetitorsRelations With Competitors

• Relations With SuppliersRelations With Suppliers

• Relations With CustomersRelations With Customers

Ethics and Hospitality Ethics and Hospitality AccountingAccounting

• Is the Decision Legal?Is the Decision Legal?

• Is the Decision Fair?Is the Decision Fair?

• Does the Decision Hurt Anyone?Does the Decision Hurt Anyone?

• Have I Been Honest With Those Have I Been Honest With Those Affected?Affected?

Ethics and Hospitality Ethics and Hospitality AccountingAccounting

• Can I Live With My Decision?Can I Live With My Decision?

• Am I Willing to Publicize My Decision?Am I Willing to Publicize My Decision?

• What If Everyone Did What I Did?What If Everyone Did What I Did?

HomeworkHomework

• Problems 1,2,3,5Problems 1,2,3,5