Lambton College

School of Business, Hospitality and Creative Design

CUSTOM COURSEWARE










Compiled By: Brett Golds
TABLE OF CONTENTS

UNIT #1
Overview of Financial Accounting and Reporting.. 1 - 30
Financial Statement Analysis 31 - 41



UNIT #1



OVERVIEW OF FINANCIAL
ACCOUNDING AND REPORTING

OVERVIEW OF FINANCIAL ACCOUNTING
AND REPORTING

What is Accounting?
Accounting is the process of recoding, classifying, summarizing, and interpreting financial
transactions of an economic entity. Accounting also includes communicating this financial
information to interested users for the purpose of making economic decisions. Refer to exhibit A
on page 14 for a chart-form depiction of this general definition.
This definition can be broken down into its components to gain a clearer picture of what
accounting entails.
Financial Transactions include buying and selling goods and services, acquiring
equipment, using supplies and receiving and paying cash. A business may engage in
anywhere from hundreds to tens of thousands of transactions during a month or year. Once
these transactions have been recorded in the accounting records (also referred to as the
books), they are usually classified and summarized into groups that have common
characteristics. For example, all wage payments are grouped together, as are all sales
transactions. This enables the business to obtain needed information about wages, sales, and
other transactions that occur over a given period of time.
Economic Entity represents a business organization that engages in financial transactions (i.e.
the selling of products (food and beverages) or providing a service (accommodations)) with
the goal of earning a profit. Note, however, that not all economic entities are profit-oriented
business operations; others include charities, government agencies, and municipalities to
name a few.
Communication of financial information is necessary to provide interested users with the
information that they need for decision-making purposes. This financial information is
communicated to users by way of:
(a) Financial Statements which report how well (or how badly) the business has performed
during a given period and how healthy the business is. These financial statements provide
users with information about the past that will improve their ability to make informed
decisions about the future. Financial statements are discussed in detail on pages 8 to 13.

(b) Other Special Purpose Reports such as budgets, cost reports, sales reports, and any
other financial report deemed useful for making decisions.
The means by which financial information is communicated depends on who the interest user is
and on what information is required by the user.

Users of Financial Information consist of people who are interested in the financial
information reported about a business enterprise. Interested users can be grouped into two
major types:
(a) External Users are those who are outside the organization that are not directly involved
in operating the business. Major types of external users and the decisions they make
include:
(i) Banks and Supplies use information to evaluate the credit worthiness of the
business in deciding to provide loans or extend credit. These users are also
referred to as creditors.
(ii) Shareholders (Owners) and Potential Investors use information to evaluate the
financial health and performance of the business. This helps existing
shareholders with decisions regarding whether or not to continue holding their
investment in the business or to sell their ownership shares and invest elsewhere.
With respect to potential investors, this financial information helps them to
decide if they should invest in the business and become shareholders.
(iii) Government use information to ensure tax compliance by the business.
(b) Internal Users are those who are inside the organization that are directly involved in
managing and operating some part of the business. Internal users consist of management
of all functional areas who use information to assist in making short-term (day-to-day)
and long-term operating, planning, and controlling decisions to improve business
operations, profitability, and ensuring survival of the business into the future. These
include foodservice managers, housekeeping supervisors, rooms division managers, and
others

Major Branches of Accounting
From our broad definition of accounting, we can divide the function of accounting into two
major categories:
(a) Financial Accounting often times referred to as score-keeping activities. This
involves the recording of business transactions and the preparation of this financial
information primarily for external users. This financial information is communicated by
way of the financial statements.

(b) Managerial Accounting involves the preparation and analysis of financial information
for internal users (management) to assist them in their managerial activities. This
includes operational planning and control as well as providing support for analysis,
decision-making and problem solving. This information is communicated by way of
special purpose reports that are tailor-made to the needs of particular manager.
Your introduction to the terms and concepts of accounting will be from a financial accounting
perspective as applicable to hospitality businesses. These concepts will provide a solid
foundation on which analysis can be applied in various ways for making a variety of decisions in
a managerial accounting and financial management capacity

The Accounts
When financial transactions of a business enterprise are recorded in the accounting records, six
major categories of accounts are used to accumulate useful information. These categories are:
1) Assets things of value owned by the business.
2) Liabilities debts owed by the business to others.
3) Shareholders (or Owners) Equity the amount the shareholders (owners) have
invested in the business plus all accumulated profits earned by the business that have not
yet been distributed to the shareholders.
4) Revenues arise as a result of selling products (i.e. goods) or services to customers.
5) Cost of Goods Sold the cost specific to the products that has been sold.
6) Expenses all other costs incurred in operating the business.

In the following sections, these categories of accounts will be expanded upon and the specific
items and sub-classifications that fall within these major categories will be discussed.

1) Asset Accounts
Assets are things of value owned by the business, such as cash in the bank, inventory on hand,
and equipment in use, to name only a few of many types of assets that a business may have.
Given that a business can own several types of assets at any particular time, the general asset
category is sub-divided into three groups of assets so that information about a businesss assets
can be presented in a more meaningful way. In simple terms, assets are classified into one of
three categories based on what normally happens to them:

(a) Current Assets consist of cash and other asset items that are normally converted into
cash within one year. Typical current assets include:
i) Cash on hand, and on deposit in bank.
ii) Short-Term Investments such as GICs, mutual funds, etc. owned by the
business that can be sold to obtain cash on short notice. To be classified as
such, it must be managements intention to hold them for less than one year.
iii) Accounts Receivable represents the collectible amount of money owed to the
business by customers. Typically arising from sales to customers on credit.
iv) Inventory products purchased by the business and held for sale to customers.
This includes food, beverage, and other merchandise.

With respect to current assets, they are presented in the financial statements (i.e. the
Balance Sheet discussed later) in a specific order. They are to be listed in order of
liquidity, which pertains to the speed and ease by which the asset will be converted
into cash. Those current assets that are most liquid will be listed first followed by
those that are less liquid. This ordering of current assets is useful to users in
evaluating the ability of the company to pay its debts as they come due.
The current assets presented above are in order of liquidity.

(b) Fixed Assets consist of asset items that are acquired to be used to provide support for
the operation of the business. These assets are not bought to be sold. These assets
will be held or used by the business for a period longer than one year. Fixed assets
can be thought of as long-term assents. Typical fixed assets include:
i) Land and buildings
ii) Furniture (i.e. tables, chairs, beds, etc.)
iii) Equipment (i.e. appliances, computers, etc.)
iv) China, glassware, silverware, linen, etc.
v) Vehicles
An important feature of fixed assets (other than land) is that they have a limited life
span in that they will eventually wear out and need to be replaced. Each year that a
fixed asset is used and partially wears out, a portion of its cost is charged as an
expense referred to as amortization expense. The values of each fixed asset (other
than land) must be reduced by the accumulated amount of amortization expense
claimed during their life.
The fixed asset category is often times referred to as Property, Plant, and
Equipment or Capital Assets.

(c) Other Assets consist of asset items that are not included in the first two categories.
This catchall group includes items such as copyrights and patents, which have value
to the business but no physical form or substance

2) Liability Accounts
Liabilities are the debts and obligations that the business owes to others, such as amounts owing
to banks, suppliers, employees, and the government among others. Given that a business can
have several types of liabilities at any particular time, the general liability category is sub-
divided into two groups of liabilities so that information about a businesss debts and obligations
can be presented in a more meaningful way. Liabilities are classified into one of two categories
according to when they are due to be paid off:
(a) Current Liabilities consist of liability items that are due to be paid within one year.
Typical current liabilities include:
(i) Accounts Payable represents money owing to suppliers and others for goods
(good, beverages, supplies, etc.) and/or services (repairs, legal, etc.) purchased
on credit but not yet paid for. If you have such an unpaid bill, you have an
account payable.

(ii) Wages Payable represents money owing to employees relating to wages
earned by the employees for work they have performed but have not yet
been paid for. This current liability typically exists between payroll pay dates.
(iii) Income Taxes Payable represents the business income taxes owing to the
government but not yet paid for by the business.

(b) Long-Term Liabilities consist of liability items that are not due to be repaid until after
one year. These types of debts and obligations usually continue for several years
before they are fully paid off. Typical long-term liabilities include:
(i) Loans or Notes Payable are loads repayable to banks or other lenders where
payments are due sometime beyond one year.
(ii) Mortgage Payable long-term loan-repayable to banks or other lending
financial institutions where an asset of the business (usually land and
buildings) is put up as collateral security for the loan. Terms of this type of
debt require repayments over several years.

3) Shareholders Equity Accounts
Shareholders Equity (or sometimes referred to as Stockholders Equity) represents the owners
financial interest in the business. In simple terms, equity consists of amounts that have been
utilized by the business but belong to the owners (i.e. shareholders) and is essentially owing to
them by the business. There are two categories of shareholders equity:
(a) Common Stock represents the amount that the shareholders (owners) have invested
into the business in return for a share of ownership of the business.
(b) Retained Earnings reflects the accumulated amount of profits (less any losses)
generated by the business from its inception that belongs to the shareholders but has
not yet been paid out to them in the form of dividends. As will be discussed a little
later, profits earned by the business belong to the owners (shareholders) of the
business but may not always be paid out to owners. Instead, these profits are often
reinvested back into the business (i.e. retained by the business) so that it may
continue to grow.

4) Revenue Accounts
Revenue for a business primarily represents the dollar amount earned or billed to a customer
when the business sells its products (i.e. food, beverages, merchandise) or provides its services
(i.e. accommodations). Revenue is often times referred to as Sales or Fees.
Revenue may also be earned from other sources such as interest, rent, commissions, etc.

5) Cost of Goods Sold Accounts
Cost of Goods Sold represents the total cost of all the products (i.e. food, beverages, and
merchandise) that have been sold during a period to generate revenue. It should be noted that this
account will not be applicable if the business is engaged in providing services only. For these
service businesses, there is no product being sold and therefore there will be no cost of goods
sold amount. For businesses engaged in selling products, the cost of goods sold account
represents one of the primary expenses of the business.
When a product item is first purchased by the business, say for $100, this cost amount is initially
recorded to the inventory account (current asset) and will continue to be reflected in inventory
cost balance as long as the item is on hand and available for sale. Once the product has been
sold, its $100 cost amount will then be recorded to the Cost of Goods Sold account and removed
from the inventory account balance.
Notice that only the cost amount of the item is recorded to this amount. The selling price (say
$180) would be recorded to the Revenue account mentioned above.
It is easy to see that there is a clear relationship between the cost of inventory acquired (asset)
and its eventual transformation into cost of goods sold (expense) when it has ultimately been
sold.

6) Expense Accounts
Expense accounts are where expenses of running a business are recorded. These are the costs
incurred in operating the business and are collectively referred to as Operating Expenses.
Operating expenses are different from cost of goods sold in that they are not specifically
associated with the cost of products purchased for resale but rather all other costs incurred during
the period to provide for and maintain smooth operation of the business from day-to-day.
Operating expenses are typically grouped into two main categories:
(a) Selling Expenses are costs related to the businesss marketing activities and efforts to
sell its products or services. Typical selling expenses include: advertising, promotion,
salaries paid to sales staff, commissions paid to sales staff, delivery and distribution
costs to name a few.

(b) General and Administrative Expenses are all other operating expenses incurred to
run and manage the business. Typical general and administrative expenses include:
wages and salaries paid to office staff, insurance, interest, property taxes, rent, utilities,
repairs and maintenance, amortization or fixed assets, and supplies used up, etc.
While substantially all of the expenses of a business fall under the classification of an
Operating Expense (i.e. selling or general and administrative), there is one other type of
expense that is classified separately outside of this category as it does not relate to the
operating activities of the business. This separately classified expense is Income Taxes
Expense, which is an expense levied by the government based on the amount of pre-tax
profits earned by the business. Income Taxes Expense is an expense of the business over
which management has little or no control.


Financial Statements
From a financial accounting perspective, after all of the financial transactions of the business
for the period have been recorded, classified, and summarized into the appropriate accounts
(as outlined above), this collection of financial information needs to be presented in a set of
financial statements so that it may be communicated in a summarized fashion to interested
external users.
As mentioned earlier, financial statements are the means by which the business reports
information relating to the results of its operations for a given period (i.e. how well the
business has performed for a given period of time) as well as its financial position or
condition (i.e. how healthy the business is at a given point in time). Three of the primary
financial statements of a business are:

(a) Income Statement reports the results of operations (revenues, costs and expenses, and
resulting profit or loss) of the business during a specific period of time. An Income
Statement can cover a month, quarter, or an entire year as is commonly the case. This
statement is useful to users (i.e. creditors and investors) so that they may make
informed judgements about how much income the business is likely to make in future
years.

(b) Balance Sheet often times referred to as the Statement of Financial Position as it
reports the financial position (assets, liabilities, and shareholders equity) of the business
at a specific point in time. Think of a balance sheet as a snapshot or freeze-frame of a
business as or a particular date. The reporting date for the Balance Sheet is the last day of
the reporting period that the Income Statement covers (i.e. end of month, quarter, or year
as appropriate). This statement is useful to users in evaluating the financial health of the
business. Such as the type and value of the business assets, the amount of corresponding
debt and when it is to be repaid, and the net worth of the owners financial interest in the
business.
(c) Statement of Retained Earnings is a small statement that reports how the Retained
Earnings balance, reported in the Balance Sheet, has changed (as a result of profits (or
losses) earned, and dividends paid) during a specific period of time. This statement acts
as a bridge or link between the Income Statement and the Balance Sheet of the business
for the reporting period. The reporting period covered by the Statement of Retained
Earnings is the same as that covered by the Income Statement (a month, quarter, or year
as appropriate).
These financial statements will now be illustrated and the presentation of the elements reported
in them will be addressed.


The Income Statement
Refer to exhibit B on page 15 for an illustration of an Income Statement for a business operating
a hotel with restaurant. It would be useful to refer to it as you read through the following
discussion explaining its elements.
As with any financial statement, they must be clearly titled. The standard format for a title of a
financial statement comprises three lines (1) Name of the business (2) Name of the financial
statement, and (3) The time period covered by the financial statement.
Notice that because the Income Statement covers a period of time, the third line of the title
referencing the time period must contain the phrase For the Year Ended or For the Month
Ended immediately before period ending date.
The Income Statement is divided into major components made up of the general account
classifications that were discussed earlier. Revenues (i.e. Sales or fees) are reported first
followed by the Cost of Goods Sold amount which is deducted from the total revenue amount to
get what is called Gross Profit.

Gr7oss Profit is not an account but rather a subtotal calculated on the Income Statement as
[Revenues Cost of Goods Sold]. This figure represents how much earnings the business
has left after buying and selling its products. This is the amount of earnings available to
cover (i.e. pay for) all other expenses of running the business.
Following the Gross Profit amount, all Operating Expenses are reported according to the
appropriate classifications as either Selling Expenses or General and Administrative
Expenses. Total Operating Expenses are then deducted from the Gross Profit amount to get what
is called Income from Operations.

Income from Operations is another subtotal calculated on the Income Statement as
[Gross Profit Operating Expenses]. This figure represents income earned from core
business operating activities and excludes amounts that do not reflect normal operating
activities such as income taxes expense as this is an expense over which management has
no control.
This is an important figure for evaluating managements performance as it reflects the
performance results that are under the control of management and excludes those results
that are not.

Following the Income from Operations amount, the final expense item, Income Taxes Expense,
is reported. Income Taxes Expense is deducted from Income from Operations to get what is
called Net Income.

Net Income is the profit earned (or the loss suffered) by a business during the period, after all
costs and expenses have been deducted from revenues. Net Income (or Net Loss) is
commonly referred to as The Bottom Line as it is the last amount reported on the Income
Statement. This total represents the profit amount that belongs to the shareholders (owners)
of the business. It is a measure of how well the business did overall, for its owners
When revenues exceed costs and expenses, Net Income results; when costs and expenses
exceed revenues, a Net Loss results.
The Net Income (or Net Loss) figure from the Income Statement is used in the preparation
of the Statement of Retained Earnings that will be discussed next.

The Statement of Retained Earnings
Refer to exhibit C on page 16 for an illustration of a standard Statement of Retained Earnings
for any business. It would be useful to refer to it as you read through the following discussion
explaining its elements
The Statement of Retained Earnings is similar to the Income Statement in that it covers a period
of time. Accordingly, the third line of the title referencing the time period must also contain the
phrase For the Year Ended or For the Month Ended immediately before the period ending
date.
The Statement of Retained Earnings builds up to the balance of the Retained Earnings amount to
be reported on the Balance Sheet at the end of the reporting period. This is accomplished by
starting with the Retained Earnings balance at the beginning of the reporting period and reporting
the following amounts that result in a change to Retained Earnings during the period:
(a) Addition of Net Income or Deduction of Net Loss This is the amount reported on the
Income Statement for the period. The profits earned (or losses suffered) by the business
belong to the shareholders (owners) but are initially retained by the business. Since these
amounts belong to the shareholders, they are included with the Retained Earnings balance
to update the accumulated amount of undistributed earnings owed to the shareholders.
(b) Deduction of Dividends Paid dividends declared and paid to the shareholders during
the period represent a distribution of a portion of the accumulated earnings of the
business. Dividends are deducted from the Retained Earnings balance as they represent
an amount of previously retained earnings that is no longer owing to the shareholders.
It is important to understand that dividends are NOT an expense of the business and will
never appear on the Income Statement as they do not pertain to a cost of operating the
business. Dividends are distributions of previously earned profits to the shareholders
(owners). A business first determines its revenues and expenses and then computes net
income or net loss. It is at this point, that a business may decide to distribute a dividend to
the owners.
It is also important to note that retained earnings are NOT a balance of cash that is awaiting
distribution to shareholders. It represents the balance of earnings that belong to the shareholders
but for the time being have been reinvested back into the business. In essence, the retained
earnings balance is, for the most part, represented by (or tied up in) various assets of the
business. It is entirely possible for a profitable business to have a significant retained earnings
balance while at the same time having very little cash in the bank.
After adjusting the beginning Retained Earnings balance for these items, the balance of Retained
Earnings at the end of the reporting period can be calculated. The ending Retained Earnings
figure from this statement is used in the preparation of the Balance Sheet, which is discussed
next.

The Balance Sheet
Refer to exhibit D on page 17 for an illustration of a Balance Sheet for a business operating a
hotel with restaurant. It would be useful to refer to it as you read through the following
discussion explaining its elements.
Unlike the Income Statement and the Statement of Retained Earnings, the Balance Sheet reports
financial information at a specific point in time rather than for a period of time. As such, there is
no period reference in the third line of the title. Instead, the phrase As at is included
immediately before the date of the Balance Sheet.
The Balance Sheet is divided into major sections corresponding to the general account
classifications (and the related sub-classifications that were discussed earlier. Assets are
presented first followed by Liabilities and finally Shareholders Equity.
The Asset section is presented in three separate categories, each with an appropriate heading, and
subtotal: (1) Current Assets (in order of liquidity), (2) Fixed Assets, and (3) Other Assets. The
subtotals for each of these asset categories are then added together to determine the Total Assets
figure to be reported.
The Liability section is presented in two separate categories, each with an appropriate heading,
and subtotal: (1) Current Liabilities, and (2) Long-Term Liabilities. The subtotals for each of
these liability categories are then added together to determine the Total Liabilities figure to be
reported.
The Shareholders Equity section is presented as a single section with two components:
(1) Common Stock, and (2) Retained Earnings. Recall that the Retained Earnings amount to be
reported on the Balance Sheet is the same amount that is reported as the ending balance on the
Statement of Retained Earnings for the period. These equity components are added together to
determine the Total Shareholders Equity figure to be reported.
As a final step in the preparation of the Balance Sheet, we must prove that the statement does in
fact balance and that the underlying fundamental accounting equation has been satisfied. This
fundamental accounting equation forms the basis of the balance sheet and is as follows:
ASSETS = LIABILITIES + SHAREHOLDERS
EQUITY
The Asset section of the Balance Sheet already reflects the Total Assets figure as described
above. This amount must equal the sum of the Total Liabilities and the Total Shareholders
Equity amounts. As a final step, add these two totals and present the Total Liabilities and
Shareholders Equity figure as the last line on the Balance Sheet. If this amount does not equal
the Total Assets figure the accounting equation has not been satisfied and there must be an error
contained in the financial statements that must be corrected.

As a final point on Financial Statements, it is important to realize that although the three
statements discussed have separate and distinct purposes as to what they are trying to
communicate, they are very much interrelated in respect of the financial information they are
reporting for the business enterprise as a whole. Exhibit E on page 18 illustrates this
interrelationship between the financial statements of a business

A good understanding of accounting from the standpoint of the account terminology and
classifications as well as the financial statements is critical to be able to read, interpret, and
analyze a set of financial statements. The ability to analyze financial statements of a business and
assess its operating performance and financial health is an important skill for any user of
financial statements (internal or external) as this is the basis for making key economic decisions.


Exhibit A
WHAT IS ACCOUNTING?

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Exhibit B Income Statement
HWR Eat & Sleep Ltd.
Income Statement
For the Year Ended December 31, 2008

REVENUE $ 340,000
Room Sales 230,000
Food and Beverage Sales $ 570,000
Total Revenue
COST OF GOODS SOLD
Food and Beverage 190,000
GROSS PROFIT 380,000
OPERATING EXPENSES
SELLING EXPENSES

Salaries for Salespeople $ 30,000

Advertising 18,000
Sales Promotion 14,000
Total Selling Expenses 62,000

GENERAL AND ADMINISTRATIVE EXPENSES
Wages and Employee Benefits 142,000

Supplies Used 6,000
Insurance 10,000
Telephone 7,000
Interest 10,000
Utilities 24,000
Amortization 11,500
Maintenance and Housekeeping 19,500
Total General and Administrative Expenses 230,000
TOTAL OPERATING EXPENSES 292,000
INCOME FROM OPERATIONS 88,000
Income Taxes Expense 23,700
NET INCOME $ 64,300

Exhibit C Statement of Retained Earnings
HWR Eat & Sleep Ltd.
Statement of Retained Earnings
For the Year Ended December 31, 2008

Retained Earnings, January 1, 2008 $ 187,700
Add: Net Income for the year 64,300

252,000

Less: Dividends Declared during the year 59,000
Retained Earnings, December 31, 2008

$ 193,000


Exhibit D Balance Sheet
HWR Eat & Sleep Ltd.
Balance Sheet
As at December 31, 2008
ASSETS
CURRENT ASSETS
Cash $ 8,500
Short-term Investments 35,000
Accounts Receivable 3,500
Inventory 19,000
Total Current Assets $ 66,000
FIXED ASSETS

Land $ 60,000
Building 400,000
Less: Accumulated Amortization Building (125,000)
Furniture & Equipment 245,000
Less: Accumulated Amortization Furniture & Equipment (74,000)
Silverware & Linens 90,000
Less: Accumulated Amortization Silverware & Linens (48,000)
Total Net Fixed Assets $ 548,000
OTHER ASSETS
Goodwill $ 20,000
Patents and Copyrights 80,000
Total Other Assets $ 100,000
TOTAL ASSETS $ 714,000
LIABILITIES
CURRENT LIABILITIES
Accounts Payable $ 27,000
Salaries and Wages Payable 6,000
Income Taxes Payable 18,000
Total Current Liabilities $ 51,000
LONG-TERM LIABILITIES
Mortgage Payable $ 250,000
Notes Payable 120,000
Total Long-Term Liabilities $ 370,000
TOTAL LIABILITIES $ 421,000
SHAREHOLDERS EQUITY
Common Stock $ 100,000
Retained Earnings, December 31, 2008 193,000
TOTAL SHAREHOLDERS EQUITY $ 293,000
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $714,000
Exhibit E

Illustration of the Interrelationship between the Major
Financial Statements

BALANCE SHEET
ASSETS $ 10,000


LIABILITIES $ 3,000

SHAREHOLDERS EQUITY

Common Stock $ 2,000
Retained Earnings $ 7,000
$ 10,000


STATEMENT OF RETAINED EARNINGS
Retained Earnings, Beginning of year

$ 4,000
Add: Net Income for the year

Less: Dividends

2,000



Retained Earnings, End of year


INCOME STATEMENT

Revenues $ 40,000

Cost of Goods Sold 22,000

Gross Profit 18,000

Expenses 15,000



A
L
+
SE
HAT2084 Hospitality and Tourism Accounting
Overview of Financial Accounting and Reporting
In-Class Example Problem Preparation of Financial Statements
The Bates Motel Ltd. operates as a 25 room hotel with a small bar and restaurant. The
company has just completed its operations for the year ending December 31, 2008. It is
not time for the financial information relating to the 2008 fiscal year to be compiled in a
set of financial statements and distributed to the shareholders of the company as well
as the bank. The companys bookkeeper has recorded all of the business transactions
for 2008 into the accounting records and has summarized them into the account
balances that appear below.
Required:
PART 1:
Using the data from the following list of accounts and balances, prepare the Income
Statement (in good form) for the Bates Motel Ltd. for 2008.

Account
Account
Balance
Advertising expense $ 20,000
Amortization expense 23,000
Equipment rent expense 7,000
Food and beverage costs (served) 40,000
Income taxes expense 4,300
Insurance expense 17,000
Interest expense 6,000
Maintenance and housekeeping expense 12,000
Property taxes expense 8,000
Sales food and beverage 75,000
Sales lodging 200,000
Sales promotion expense 11,000
Salesperson commission expense 4,000
Utilities expense 25,000
Wages expense 80,000



{continued on next page}

HAT2084 Hospitality and Tourism Accounting
Overview of Financial Accounting and Reporting
In-Class Example Problem Preparation of Financial Statements (continued)
PART 2:
(a) Using the data from the following list of accounts and balances, prepare the
Balance Sheet (in good form) for The Bates Motel Ltd. at the end of the 2008 fiscal
year.

Account
Account
Balance
Accounts payable $ 7,000
Accounts receivable 8,000
Accumulated amortization building 45,000
Accumulated amortization china, glassware, silver 16,200
Accumulated amortization furniture 22,000
Building 100,000
Cash 5,000
China, glassware, silver 25,000
Common stock 10,000
Furniture 40,000
Inventory food and beverage 6,000
Land 20,000
Mortgage payable (over 20 years) 72,000
Wages payable 800

(b) Based on the information provided above could you complete the Balance Sheet?
What information are you missing?
PART 3:
(a) Using the data from the following list of accounts and balances, as well as any
required information from the Income Statement prepared in part 1 on the previous
page, prepare the Statement of Retained Earnings (in good form) for The Bates
Motel Ltd. for 2008.

Account
Account
Balance
Dividends declared and paid $ 12,000
Retained earnings, January 1, 2008 25,300

(b) Now go back and complete the Balance Sheet that you started in Part 2 above.
(c) To facilitate a smooth and easy preparation of financial statements at the end of an
operating period, in what order should the financial statements be prepared?
HAT2084 Hospitality and Tourism Accounting
Worksheet for Practice Problem Texas Steak house Inc.
Requirement: Parts #1 & #2


Account
Balance
Major
Fin. Stmt.
Classification
Financial
Statement
Reported On
Accounts payable $ 24,500
Accounts receivable $ 4,000
Accum. Amortn building $ 15,000
Accum. Amortn furniture & equipment $ 25,000
Advertising expense $ 5,500
Bank loan payable (over 5 years) $ 34,000
Building $ 60,000
Cash $ 34,000
Common stock $ 40,000
Cost of food sold $ 42,000
Cost of liquor sold $ 11,000
Amortization expense $ 5,500
Dividends $ 20,000
Food sales $ 120,000
Furniture and equipment $ 52,000
Income taxes expense $ 2,000
Income taxes payable $ 1,500
Insurance expense $ 3,600
Interest expense $ 3,000
Inventory $ 7,000
Kitchen fuel expense $ 2,400
Land $ 30,000
Laundry and dry cleaning expense $ 2,100
Liquor sales $ 50,000
Patents $ 4,000
Property taxes expense $ 1,500
Rent expense $ 6,000
Repairs and maintenance expense $ 1,900
Retained earnings, June 1, 2007 $ 63,000
Salaries and wages expense $ 55,000
Sales promotion expense $ 4,400
Short-term investments $ 8,000
Supplies used $ 5,300
Utilities expense $ 3,800
Wages payable $ 1,000


HAT2084 Hospitality and Tourism Accounting
Overview of Financial Accounting and Reporting
Practice Problem (2) Income Statement Preparation

Falls Tours Ltd. is a business that provides scenic bus and helicopter tours at Niagara
Falls. The business has just finished its fiscal year that started on November 1, 2007.
The following account balances have been compiled from the accounting records and
pertain to the fiscal year just completed.

Account
Balances
Radio communication expenses $ 10,000
Insurance 18,000
Garage and hangar rent 19,000
Bus tour fees 115,000
Fuel and oil 135,000
License 2,000
Interest expense 20,000
Helicopter tour fees 265,000
Repairs and maintenance 25,000
Office supplies used 3,000
Wages 55,000
Advertising 7,000
Telephone 8,000
Amortization 80,000
Promotional supplies used 5,000


Required:
Prepare, in good form, the Income Statement for Fall Tours Ltd. to report the results of
the operations for the fiscal year just completed.



FINANCIAL STATEMENT
ANALYSIS