Chapter 13: Management of Financial Resources Flashcards
7 Groups of Users of Financial Statements
- Owners
- Boards of directors
- Managers
- Creditors
- Employees
- Governmental agencies
- Financial analysts
Auditing
An area of accounting concerned with an independent review of accounting records. An audit involves examination of records that support financial reports and formulation of an opinion regarding the fairness and reliability of these reports.
Cost Accounting
Involves the determination and control of cost. It focuses on assembling and interpreting cost data for use by management in controlling current operations and planning for the future.
Financial Accounting
Concerned with the reporting of transactions for an organization and the periodic preparation of various reports from these records.
Managerial Accounting
Uses historical and estimated financial data to assist management in daily operations and in planning future operations.
Business Entity Concept
Assumes that a business enterprise is separate from the person or persons who supply its assets, and the financial records of each are distinct. Without this distinction, determining the organization’s true performance and current status would be impossible.
The Fundamental Equation
Assets = Liabilities + Owner’s Equity. This is the fundamental accounting equation. For accounting records to be in balance, each increase in assets must be accompanied by a corresponding decrease in another asset or an increase in liabilities or owner’s equity.
Going-Concern Concept
Implies that the value of a company’s assets is its ability to generate revenue rather than the value the assets would bring in liquidation.
Money as a Unit of Measure
Money is the basis for business transactions and is the unit of measure commonly referred to as revenues. To lend uniformity to financial data, all business transactions are recorded as dollar amounts, Using this concept, only information that can be stated in monetary terms is included on a company’s financial statement.
Cost Principle
Involves recording transactions or valuing assets in terms of dollars at the time of the transaction. Cost is the amount measured in dollars expended for goods or services.
Cash Basis of Accounting
Recognizes a transaction at the time of cash inflow or outflow.
The Accrual Basis
Used in most organizations, recognizes revenues when earned (regardless of when the actual cash is received) and expenses when incurred (regardless of when cash is dispersed).
Matching Revenues and Expenses
The matching concept involves matching revenues with all applicable expenses during the accounting period in which they occur. For example, a restaurant owner may purchase food in one accounting period and sell it in the following period. If the matching concept is not used, the cost of the food would be recorded in the accounting period prior to when the sale was recorded, thereby overstating cost in the first period and profit in the next. This matching concept is the basis for the accrual basis of accounting.
Depreciation
Depreciation, an aspect of accrual accounting, is a systematic means by which costs associated with the acquisition and installation of a fixed asset are allocated over the estimated useful life of the asset. Because some assets frequently decline in value faster during the first few years, accelerated depreciation methods may be used, which give larger amounts of depreciation in the early years and less amounts in the later years.
Adequate Disclosure
Financial statements and their accompanying footnotes or other explanatory materials should contain full information on all data believed essential to a reader’s understanding of the financial statement. Such disclosures might include accounting methods used, changes in accounting methods, and any unusual or nonrecurring issues pertinent to accurate interpretation of the financial statement.
Consistency Principle
The consistency principle states that once an organization chooses an accounting method, it should be used from one period to another to make financial data comparable. Without consistent methods, financial statements could be interpreted incorrectly.
Materiality Principle
The materiality principle means that events or information must be accounted for if they “make a difference” to the user of financial statements. Generally, an item is considered as material if its inclusion or omission would change or influence the judgment of a reasonable person.
Conservatism
Conservatism refers to the concept of moderation in recording transactions and assigning values. Historically, accountants have tended to be conservative, favoring the method or procedure that yielded the lesser amount of net income or of asset value.
Balance Sheet
Statement of assets, liabilities or debts, and capital or owner’s equity at a given time or at the end of the accounting period. Considered a static statement because it presents the financial position at a specific date or time.
Income Statement
Financial report that presents the net income or profit of an organization for the accounting period. Considered a flow or dynamic statement because operating results over time are presented.
Assets
Resources of a company. Categorized as current or fixed.
Liabilities
Debts of a company. Categorized as current and long term.
Uniform Systems of Accounts
Is standard methods of accounting and presenting financial statements. The uniform systems of accounts within a particular industry provide for the uniform classification, organization, and presentation or revenues, expenses, assets, liabilities, and equity. They include a standardized format for financial statements, which permits comparability of financial data within an industry.
Current Assets
Include cash and all assets that will be converted into cash in a short period of time, generally 1 year. Other current assets include accounts receivable, inventory, prepaid expenses, and entrance fees receivable.
Fixed Assets
Assets of a permanent nature, most of which are acquired to generate revenues for the business. Fixed assets are not intended for sale and include land, buildings, furniture, fixtures, and equipment, in addition to small equipment such as china, glassware, and silver.
Current Liabilities
Represent those that must be paid within a period of 1 year, including such items as accounts payable for merchandise, accrued expenses, and annual mortgage payment.
Accrued Expenses
Are due but not paid at the end of the accounting period, such as salaries, wages, and interest.
Fixed or Long Term Liabilities
Obligations that will not be paid within the current year. An example of a long-term liability is a mortgage for building and land; annual mortgage payments due during the current year are current liabilities and reduce the long-term mortgage liability.
Owner’s Equity
Money value of a company in excess of its debts that is held by the owners. This section of the balance sheet represents that portion of the business that is the ownership interest, along with earnings retained i the business from operations.
Internal Standards of Comparisons
Include a review of performance in relation to similar operations or comparisons with industry performance.
External Standards of Comparisons
Include a review of performance in relation to similar operations or comparisons with industry performance.
Ratio Analysis
Is an analysis of financial data in terms of relationships and facilitates interpretation and understanding.
Ratio
A mathematical expression of the relationship between two items that may be expressed in several ways.
Liquidity Ratio
Indicates the organization’s ability to meet current obligations; in other words, its ability to pay bills when due.
Current Ratio
The relationship between current assets to current liabilities.
Quick Ratio
Another comparison of current assets and current liabilities, but it yields a more accurate measure of bill-paying capability. Current liabilities are measured against cash and other assets readily convertible to cash, such as accounts receivable and marketable securities.
Solvency Ratio
Used to examine an establishment’s ability to meet its long-term financial obligations and its financial leverage. The basic solvency ratio is the relationship between total assets and total liabilities.
Activity Ratio
Designed to examine how effectively an organization is using its assets. This ratio is usually expressed as either a percentage or a turnover.
Inventory Turnover Ratio
One of the most widely used activity ratios, shows the number of times the inventory is used up and replenished during a period. A high ratio indicates that a limited inventory, which is used quickly, is being maintained by a foodservice organization, and a low ratio indicates that larger amounts of money are tied up in inventories.
Percentage of Occupancy
Another activity ratio important in many segments of the industry. These percentages indicate the relationship between the number of beds available and the number being used by the clientele of the operation.
Profitability Ratios
Measure the ability of an organization to generate profit in relation to sales or the investment in assets, Profit or net income is an absolute term expressed as a monetary amount of income remaining after all expenses have been deducted from income or revenue; profitability is a relative measure of the profit-making ability of an organization.
Profit Margin
Is the most commonly used measure of operating profitability; it uses information from the income statement to assess overall financial efficiency.
Return on Equity
Measures the adequacy of profits in providing a return on owners’ investments.
Return on Assets
A measure of management’s ability to generate a return on the assets employed in generating revenue.
Operating Ratios
Primarily concerned with analysis of the success of the operation in generating revenues and in controlling expenses.
Average Customer Check
A measurement of generation of sales dollars; it is calculated by dividing total sales by the number of customer checks.
Common-Size Statements
Financial statement in which data are expressed as percentages for comparing results from one accounting period to another.
Break-Even Analysis
Technique for assessing financial data to determine the point at which profit is not being made and losses are not being incurred. It is a tool for projecting income, expense, and profit under several assumed conditions. It can assist the foodservice manager in understanding the interrelationships among volume, cost, and profits, but it requires that the operational costs of an organization be known and that they can be segmented into fixed and variable classifications.
Fixed Costs
Costs that do not vary with changes in the volume of sales.
Trend Analysis
A comparison of results over several periods of time; changes may be noted in either absolute amounts or percentages. It also is used to forecast future revenues or levels of activity.
Variable Costs
Costs that change in direct proportion to the volume of sales. As the volume of sales increases, a proportionately higher amount of these costs is incurred, as with direct materials or food cost.
Semivariable Costs
Costs that cannot be clearly classified as either entirely fixed or entirely variable because a portion of the total cost will remain fixed regardless of changes in sales, volume, and a portion will vary directly with changes in sales volumes. Semivariable costs are often labor, maintenance, and utilities.
Contribution Margin
Proportion of sales that can contribute to fixed costs and profits after variable costs have been covered.
Cost-Volume-Profit (CVP) Analysis
Using this formula, a manager can determine the volume required for a given level of profit.
Budget
Plan for operating a business expressed in financial terms or a plan to control expenses and profit in relation to sales. Budgeting is the process of budget planning, preparation, control, reporting, utilization, and related procedures.
Budget Control
Involves the use of budgets and performance reports throughout the planned period to coordinate, evaluate, and control operations in accordance with the goals specified in the budget plan.
Opearating Budget
Sales or revenue portion of the budget that shows the overall structure of the operation and enables staff to visualized its place in it. Various internal and external influences must be considered in constructing the sales budget, which includes as estimate of revenues expected during the budget period.
Capital Budget
Improvements, expansions, and replacements in building,, equipment, and land are the major capital expenditures in a capital budget. These major capital investments may be for purposes of expanding or improving facilities.
Cash Budget
A detailed estimate of anticipated cash receipts and disbursements throughout the budget period.
Pro Forma Statement
Statement the projects expected income and expenditures. A composite of the sales and expenditure budgets and includes a projection of profit.
Fixed Budget
One that is prepared at one level of sales or revenues.
Flexible Budget
Adjusted to various levels of operation or sales, it is useful for operations with varying sales or revenues throughout the year.
Payback Period
An easy-to-compute indicator of the time it will take an organization to recover the money invested in a particular project or piece of equipment by the expected annual income of cash savings. Criticized because it does not consider the time value of money.
Time Value of Money
Money has a differing value over time; having $1 today is worth more than receiving $1 in the future.
Net Present Value (NPV) Method
Method that determines the present values of expected future cash inflows and outflows related to a capital expenditure.
Initial Investment
For a capital expenditure is the dollar amount of money that the organization will need to spend to renovate a space and/pr purchase a piece of equipment.
Expected Income or Cost Savings
For a capital expenditure is the dollar amount that a foodservice director expects to have earned )income) or saved each year as a result of this capital expenditure.
Cost of Capital
For a capital expenditure is the minimum return a company expects on an investment.
Factor Pricing Method
Also known as the mark-up method, the difference between cost and selling price.
Markup
Difference between cost and selling price.
Prime Cost
Pricing method which includes raw food cost and direct labor cost.
Actual Cost
Pricing method using actual costs plus profit to determine the selling price of the menu items.
Pricing Psychology
Psychological aspects of pricing affect customer perceptions, which then influence the purchase decision.
