HB 302 1st EditionExam # 2 Study GuideChapter 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 PolicyWhat do investors and creditors use the SCF for? Assess firm’s ability to pay bills, pay out dividends, theirneed for financial financing, including borrowed debt and selling capital stock. The SCF classifies cash receipts and disbursements in what activities? Operating, Investing Activities, andFinancing 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 indirectmethod 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 income3. A decrease in a current liability is deducted from net income4. 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 AnalysisWhat 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 loansHow 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, CoverageWhat are the five common ratio groupings and their functions?1. Liquidity- Ability to meet Short-term Obligations2. Solvency- Ability to meet Long-term Obligations (debt) 3. Activity – Use of Property Assets4. Profitability - Return on Sales / Investments5. 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 LiabilitiesOperating 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 RevenueOperating Efficiency ratio = Gross Operating Profit / Total Revenue Gross Operating Profit Per Available Room (GOPAR) = Gross Operating Profit / # of Rooms AvailableReturn on Assets (ROA) = Profit Margin x Asset TurnoverGross 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’ EquityEarnings Per Share = Net Income / Avg. Common Shares Outstanding Price / Earnings Ratio = Market Price Per Share / Earnings Per Share Operating RatiosAverage Daily Rate (ADR) = Rooms Revenue / # of Rooms Sold Revenue Per Available Room (RevPar) = Rooms Revenue / Available