HB 302 1st Edition Exam 2 Study Guide Chapter 4 Statement of Cash Flows What does the SCF show The effects of cash on a business s operating investing and financing activities for the accounting period Operating activities in the SCF reflect what Cash Flows as they relate to revenues and expenses Investing activities relate to what Changes in marketable securities and noncurrent assets Financing activities relate to what Changes in dividends payable current maturities of long term debt common stock and equity accounts What must the net sum of the three main activities operating investing and financing be equal to They must equal the change in the cash amount shown on the two successive balance sheets What are the 4 main purposes of the SCF 1 Assess the organization s ability to generate positive future net cash flows 2 Assess the firm s ability to meet its obligations 3 Assess the difference between the enterprise s net income and cash receipts and disbursements 4 Assess the affect of both cash and noncash investing and financing during the accounting period Who are the 3 main users of the SCF Management internal investors and creditors external What does management use the SCF for Assess Firm s Liquidity Financial Flexibility and Dividend Policy What do investors and creditors use the SCF for Assess firm s ability to pay bills pay out dividends their need for financial financing including borrowed debt and selling capital stock The SCF classifies cash receipts and disbursements in what activities Operating Investing Activities and Financing Activities What are the two main methods of preparing the SCF Direct and Indirect What is the difference between the above two approaches The difference is only reflected in the operating section in the SCF The indirect method starts with net income and includes various adjustments made to determine net income which did not affect cash Other adjustments for the indirect method are changes in current accounts in relation to operations The direct method shows the direct sources of cash such as cash receipts from sales and direct uses of cash such as disbursements for payroll What method do most hospitality firms use and why Most HB firms use the indirect approach because it is easier to prepare What is the four step approach to preparing the SCF 1 Determine the net cash flows from operating activities 2 Determine the net cash flows from investing activities 3 Determine the net cash flows from financing activities 4 Present the cash flows by activity on the SCF What are the general rules for accounting for changes in current accounts in determining net cash flows provided by operating expenses 1 A decrease in a current asset is added to net income 2 An increase in a current asset is deducted from net income 3 A decrease in a current liability is deducted from net income 4 An increase in a current liability is added to net income During analysis of the statement of cash flows what two other items are examined as well Income Statement and Balance Sheet Chapter 5 Ratio Analysis What is ratio analysis and what is it used for Ratio Analysis is the comparison of related facts and figures used by dividing one figure by another It is used to evaluate financial conditions and to indicate different aspects of a financial situation What are the three standards used to evaluate ratios Ratio s from a past period industry averages and budgeted ratios What are ratios best compared against Planned Ratio Goals What are some ways in which management uses ratios Monitor performance effectiveness of operations how well goals are being achieved What are some ways in which creditors use ratios Evaluate solvency assess riskiness of future loans How do investors or potential investors use ratios Evaluate performance of an organization to determine if it is worth investing in What are some different ways in which ratios are expressed Percentages Per unit Turnover Coverage What are the five common ratio groupings and their functions 1 2 3 4 5 Liquidity Ability to meet Short term Obligations Solvency Ability to meet Long term Obligations debt Activity Use of Property Assets Profitability Return on Sales Investments Operating Analysis of Operations Liquidity Ratios Measures Ability to Meet Current Obligations Current ratio Current Assets Current Liabilities Acid test ratio Cash Short term investments Notes receivable Accounts receivable Current Liabilities Operating cash flows to current liabilities ratio Operating Cash Flows Average Current Liabilities Average Collection Period 365 Accounts Receivable Turnover Working Capital Turnover Ratio Current Asseets Current Liabilites Revenue Activity Ratios Measures management s effectiveness in using its resources Food Beverage Inventory Turnover Cost of Food or Bev Used Average Food or Bev Inventory Property and Equipment Turnover Total Revenue Average Property and Equipment Average Property and Equipment Total Property and Equipment at beginning and end of year 2 Asset Turnover Ratio Total Revenues Average Total Assets Average Total Assets Total Assets at Beginning and End of Year 2 Paid Occupancy Paid Rooms Occupied Available Rooms Available Rooms Rooms available per day x 365 days Average Occupancy Per Room Number of Guests Number of Rooms Occupied By Guests Multiple Occupancy Rooms Occupied By Two or More People Rooms Occupied By Guests Seat Turnover Covers Served in 20X2 Number of Seats x Number of Days Open Profit Margin Net Income Total Revenue Operating Efficiency ratio Gross Operating Profit Total Revenue Gross Operating Profit Per Available Room GOPAR Gross Operating Profit of Rooms Available Return on Assets ROA Profit Margin x Asset Turnover Gross Return on Assets EBIT net operating income Average Total Assets Return on Owners Equity ROE ROA x Avg Total Assets Avg Total Owners Equity Return on Common Stockholders Equity Net Income Preferred Dividends Average Common Stockholders Equity Earnings Per Share Net Income Avg Common Shares Outstanding Price Earnings Ratio Market Price Per Share Earnings Per Share Operating Ratios Average Daily Rate ADR Rooms Revenue of Rooms Sold Revenue Per Available Room RevPar Rooms Revenue Available Rooms OR Paid Occupancy ADR Revenue Per Available Cutomer RevPac Total Revenue From Hotel Guests Total Number of Guests Average Food Service Check Total Food Revenue of Food Covers Food Cost Cost of Food Sold Food Sales Beverage Cost Cost of Beverages Sold Beverage Sales Labor Cost Labor