LU3: Analysis of the Income Statement

Question 1

The Income Statement

Answer 1

Profit and loss statement/operating statement/statement of operations
- Reports on the operating results of a company, that is, it shows whether the company had a porift or loss from its operations. It is historical, showing what has happened during a period of time. -> provides critical information for the company’s investors and creditors because it concludes the profitability of the company. -> has an impact on the balance sheet, as the profit or loss will eventually appear on either the retained earnings or capital account, depending on the type of company.

Question 2

Income statements accounts

Answer 2

Revenue

Expense

Question 3

Revenue Classification

Answer 3

• The largest account in the revenue classification is Sales, which represents the amounts billed to guests for the sales of goods and services,
• Sales are recognized and recorded in the accounting records whenever the services are provided.
• Sales tax and servers tip increase accordingly when a sale is made.

Question 4

Sales Tax

Answer 4

Represent a liability which is taken off the revenue from sales.

Question 5

Servers’ tip

Answer 5

Guests might include tip on their payments which is deducted from the sales revenue.

Question 6

Expense Classification

Answer 6

Accounts that represent day-to-day expenses incurred in operating the business, depreciation expenses of assets, and costs of asset that are consumed in operating the business

Question 7

Cost of Sales Expense/Cost of good sold

Answer 7

• cost of inventory products used in the selling process
• food and beverage costs are listed seperately
• employee meals are not included in cost of sales

Question 8

Food cost

Answer 8

Cost of the raw materials to make a sale to guests

Question 9

Gross profit

Answer 9

The profit made on the raw materials; in this case food sales - cost of sales

Question 9

Gross profit

Answer 9

The profit made on the raw materials; in this case food sales - cost of sales

Question 10

Inventory systems

Answer 10

Inventory represents the products not used, and cost of sales represents the products used to produce guest sales.
Two systems; perpetual inventory system or periodic inventory system

Question 11

Perpetual Inventory System

Answer 11

• records on the inventory are constantly being updated
• everytime inventory is purchased for storeroom, the inventory record is increased; whenever issues are made to the kitchen fromt he storeroom, inventory is decreased
  advantages;
• provides inventory status information, no urgent need to count the inventory to determine if a reorder is necessary
• ensures internal control as the records specify exact quantities of products that should be available in the storeroom
• allows a hospitality business to completely count its inventory any time during the month

Question 12

Perpetual Inventory System Accounts

Answer 12

Inventory
Cost of Sales
Employee Meals Expense

Question 13

Inventory account

Answer 13

• seperate accounts for food and beverage items and merchandise in the gift shop
• a current asset account the balance should agree with the total of all perpetual inventory record in the storeroom

Question 14

Storeroom purchases

Answer 14

goods delivered to the storeroom for late use -> increase in the inventory account

Question 15

Direct purchase

Answer 15

goods deliverd directly to the kitchen to be used straight away -> increases the cost of sales expense

Question 16

Cost of sales account

Answer 16

Issues from the inventory decrease the inventory account and increase the COS account

Question 17

Employee meals expense account

Answer 17

Account used to record the cost of employee meals

Question 18

Cost of good available during a month

Answer 18

Includes the beginning inventory and purchases during the month

Question 19

Periodic inventory system

Answer 19

• no perpetual inventory cards are maintaned in the storeroom operations for example inventory ins and outs are not monitored
• advantages; way less expensive than the perpetual system
• disadvantages; internal control suffers greatly; required continious checking of the actual quantities on hand and usages so that proper reorders are executed

Question 20

Periodic Bookkeeping Accounts

Answer 20

• Inventory
• Purchase
• Employee Meals Expense
• Employee Meals credit

-> no COS account!

Question 21

Inventory

Answer 21

No issues are prepared, therefore the inventory account for issues from the storeroom cannot be updated, therefore the accounts balance will always reflect the beginning inventory balance

Question 22

Purchases

Answer 22

Both storeroom and direct purchases are recorded under “purchases”

Question 23

Employee meals expense

Answer 23

• same as in the perpetual inventory system

- if the meals are partly paid by the employees, the net cost will be recorded

Question 24

Employee meals credit

Answer 24

Represents employee meals for all departments, used to eliminate the cost of employee meals from food used to arrive at food prepared for guests.

Question 25

Periodic Inventory Accounting

Answer 25

Inventory represents the products not used

Question 26

Other business expenses

Answer 26

Operating expenses, such as payroll, payroll taxes, employee meals, advertising, supplies, kitchen fuel, utilities, telephone

Question 27

Fixed expenses

Answer 27

Not an active part of operations, but incurred regardless of the level of business
Include rent, property taxes, property insurance, interest, depreciation and amortizaiton

Question 28

Depreciation

Answer 28

• allocates the purchase cost of a tangible long-lived asset over its estimated useful life
• when an asset is bought, it cost is recorded to a balance sheet account
• this asset will eventually lose its value, however this “depreciation of an asset” is divided over time

Question 29

Book Value

Answer 29

orginal cost - accumulated depreciation