Hospitality management accounting

HOSPITALITY

MANAGEMENT

ACCOUNTING

EIGHTH EDITION

MARTIN G. JAGELS

MICHAEL M. COLTMAN

JOHN WILEY & SONS, INC.

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This book is printed on acid-free paper.
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Copyright © 2004 by John Wiley & Sons, Inc. All rights reserved

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Library of Congress Cataloging-in-Publication Data:

Jagels, Martin.

Hospitality management accounting / Martin G. Jagels, Michael

M. Coltman. — 8th ed.

p. cm.

Coltman’s name appears first on the earlier ed.

Includes index.

ISBN 0-471-09222-3 (cloth)

1. Hotels—Accounting. 2. Taverns (Inns)—Accounting. 3. Food

service—Accounting. 4. Managerial accounting. I. Coltman,

Michael M., 1930– . II. Title.

HF5686.H75C53 2004

657'.837—dc21 2002012155

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission

site at www.wiley.com.

CONTENTS

PREFACE v

CHAPTER 1 BASIC FINANCIAL ACCOUNTING REVIEW 1

CHAPTER 2 UNDERSTANDING FINANCIAL STATEMENTS 51

CHAPTER 3 ANALYSIS AND INTERPRETATION

OF FINANCIAL STATEMENTS 97

CHAPTER 4 RATIO ANALYSIS 131

CHAPTER 5 INTERNAL CONTROL 189

CHAPTER 6 THE BOTTOM-UP APPROACH TO PRICING 239

CHAPTER 7 COST MANAGEMENT 293

CHAPTER 8 THE COST-VOLUME-PROFIT

APPROACH TO DECISIONS 325

CHAPTER 9 OPERATIONS BUDGETING 361

CHAPTER 10 STATEMENT OF CASH FLOWS AND

WORKING CAPITAL ANALYSIS 411

CHAPTER 11 CASH MANAGEMENT 457

CHAPTER 12 CAPITAL BUDGETING AND

THE INVESTMENT DECISION 491

CHAPTER 13 FEASIBILITY STUDIES — AN INTRODUCTION 521

CHAPTER 14 FINANCIAL GOALS AND

INFORMATION SYSTEMS 545

APPENDIX COMPUTERS IN HOSPITALITY

MANAGEMENT 573

GLOSSARY 593

INDEX 603

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Welcome to the eighth edition of Hospitality Management Accounting! Your

studies of the hospitality, tourism, and service industries are taking place dur￾ing a time of amazing growth and success. Around the world, new operations

are being created, while established companies continue to expand their prod￾ucts and services, which, in turn, enhances competition. This increasing growth

and competition affects not only hospitality operators, but also the potential cus￾tomers they seek to serve.

Across the industry, hospitality operators and managers are relying on man￾agerial accounting techniques to help them thrive in this expanding environment.

The industry as a whole is becoming more cost and profit conscious, while po￾tential customers are placing increased importance on price, quality, and the

level of services they receive. Hospitality industry providers have begun focus￾ing greater attention on increasing their revenue, minimizing costs, and maxi￾mizing profit levels, without affecting the quality of service they can provide,

relative to the cost of providing those services.

Hospitality Management Accounting continues to evolve with the industry,

to give students a solid understanding of how they can use managerial accounting

skills in their future careers. This text makes no attempt to cover the detailed

concepts and mechanics of financial accounting, or the detailed procedures of

bookkeeping. However, Chapter 1 presents a complete review of the basic fun￾damentals of financial accounting. The scope and content is designed for the

student who is taking courses that are related to the managerial aspects of the

hospitality industry and are, by their nature, accounting oriented. Although most

of the chapters are quite complete, they are not, nor are they meant to be, ex￾haustive. This book is introductory in nature and it is hoped that the reader will

be prompted to independently explore some of the topics in other books where

they are discussed in greater detail.

NEW TO THE

EIGHTH EDITION

All material, including and especially the exercises and problems, has

been thoroughly checked and rechecked to allow for greatest accuracy.

PREFACE

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Chapter 1 has been revised so straight-line, units-of-production, sum￾of-the-year’s-digits, and double-declining depreciation methods are dis￾cussed in detail and consolidated into one chapter.

In Chapter 2, the section on inventory control methods has been revised

to improve conceptual understanding, with greater emphasis placed on

perpetual inventory.

The section on the statement of cash flows is now incorporated into Chap￾ter 10 so its discussion along with that of working capital can be exam￾ined sequentially.

The problems section at the end of each chapter has been expanded

to allow students to test their skills and comprehension of the chapter

concepts.

Key terms are now boldfaced within the text to help students identify

those concepts that are key to understanding hospitality managerial

accounting.

ORGANIZATION

The book is designed to give students both a conceptual understanding and

a practical use of internal accounting information. The structure and sequence

of topics in the book were carefully planned to serve as a basis for developing

managerial accounting procedures, quantitative analysis techniques, and report￾ing concepts. For the eighth edition, all information, procedures, and concepts

have been updated, and several chapters have been revised significantly.

Chapter 1, “Basic Financial Accounting Review,” has been revised to pro￾vide a condensed view of basic financial accounting concepts. Coverage of the

fundamental accounting equation has been expanded to improve student under￾standing and emphasize the equation’s purpose, how changes to the equation

are developed, recorded, and implemented, and how those changes affect the

basic accounting equation. Also included are straight-line, units of production,

sum-of-the-year’s digits and double-declining depreciation methods. The con￾cept of adjusting entries has been expanded in greater detail, and the discussion

of the accounting cycle of a profit-oriented business has also been expanded.

In Chapter 2, “Understanding Financial Statements,” greater emphasis is

given to creating an income statement, statement of ownership equity, and bal￾ance sheet. Inventory control methods have been revised to improve conceptual

understanding, with greater emphasis placed on perpetual inventory.

In Chapter 3, “Analysis and Interpretation of Financial Statements,” the dis￾cussion and illustrations of comparative balance sheets and comparative income

statements have been improved and expanded. Several supporting illustrations

have also been revised and modified to enhance student understanding.

vi PREFACE

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The discussion of liquidity ratios in Chapter 4, “Ratio Analysis,” has been

supplemented with enhanced illustrations showing how changes in the current

accounts affect the current ratio as well as working capital. The illustrations have

been expanded to support the discussion of liquidity and turnover ratios. The

trend continues as credit sales are rapidly changing toward credit card sales from

accounts receivable or house accounts, and credit card ratios have been expanded

in conjunction with accounts receivable.

The text and illustrations in Chapter 6, “The Bottom-Up Approach to Pric￾ing,” have been revised to better explain the nature and purpose of this pricing

method and how it can be compared to a completed income statement. Greater

emphasis is placed on the techniques to determine operating income (income

before tax) and net income (after tax).

In Chapter 8, “The Cost–Volume–Profit Approach to Decisions,” emphasis

is placed on the relationship between breakeven sales volume and breakeven

unit sales. Breakeven is discussed in detail to ensure that students have a clear

understanding of this concept before going on to learn how added cost func￾tions are brought in to complete a profit volume analysis.

Chapter 10, “Statement of Cash Flows and Working Capital Analysis,” con￾tains a detailed discussion of the statement of cash flows, indirect method, with

supporting illustrations. By covering the statement of cash flows and working

capital sequentially, students can follow a clear progression through the chap￾ter and see how key operating, financial, and equity accounts are used to de￾velop a statement of cash flows and a working capital analysis. The discussion

of working capital analysis stresses the strong link between the statement of

cash flows and the working capital analysis.

Although they are not essential components of a managerial accounting

course, Chapter 13, “Feasibility Studies—An Introduction,” and Chapter 14, “Fi￾nancial Goals and Information Systems,” can be used in class as supplemental

chapters at the discretion of the professor.

Wherever new material has been incorporated within the text, exercises and

problems have been added to test student assimilation of the new material.

FEATURES

The book contains several pedagogical features in every chapter to help stu￾dents grasp the concepts and techniques presented:

Introductions introduce the key topics that will be presented in the chap￾ter. Chapter objectives list the specific skills, procedures, and techniques

that students are expected to master after reading the material.

PREFACE vii

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Key terms are in bold within the text so that students can easily famil￾iarize themselves with the language of managerial accounting and de￾velop a working vocabulary.

Computer applications are included at the end of each chapter that ex￾plain how managers and accountants are using computers to process

accounting information and improve managerial decision making.

The chapter summary concisely pulls together the many different points

covered in the chapter to help trigger students’ memories.

Discussion questions ask students to summarize or explain important con￾cepts, procedures, and terminology.

An ethics situation for each chapter challenges students’ decision￾making abilities and teaches them to look beyond the numbers and con￾sider how accounting information can be used to affect other areas of a

hospitality operation.

Exercises have been upgraded and expanded to tie together concepts from

each chapter.

Problems test students’ basic accounting skills and the application of con￾cepts. Each chapter has been upgraded.

The case at the end of each chapter has been upgraded to ensure un￾derstanding of managerial accounting applications and developing con￾ceptual understanding and analysis techniques using realistic business

examples. The chapter case problem is tied together with other cases

throughout the book and builds on the concepts learned in previous chap￾ters. Thus, each chapter’s case will build on or rely on information a stu￾dent derived in a preceding chapter’s case as a starting point or as a source

of supplemental information.

The glossary has been expanded to summarize the key terms presented

in the text.

SUPPLEMENTARY MATERIALS

A Student Workbook (0-471-46637-9) is available to accompany this text.

It contains an outline summary of the key topics in each chapter, a short series

of word completion, true/false, and multiple-choice questions, short exercises,

and comprehensive problems. The word completion, true/false, and multiple￾choice questions are oriented toward a conceptual understanding of the chapter

material, while the short exercises and comprehensive exercises are practical and

application oriented. Solutions to these questions and problems are included af￾ter each chapter. Following a three-chapter sequential block, the workbook con￾tains a three-chapter self-review test, with answers included, so students can

gauge their progress through the course.

viii PREFACE

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An Instructor’s Manual (0-471-46636-0) is also available. It contains detailed

solutions to each chapter’s exercises, problems, and cases, all of which have been

thoroughly checked for accuracy. Alternative math solutions are shown where

possible throughout the exercise and problem solutions. Course instructors may

select the print version of the Instructor’s Manual or go to www.wiley.com/

college/ for an electronic version of the Instructor’s Manual and an electronic

true/false and multiple choice test bank.

PREFACE ix

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I would like to thank Cathy Ralston of the University of Guelph, in particular,

who read every word of the eighth edition manuscript and checked the exercises

and problems as well as their solutions in the Instructor’s Manual to help en￾sure their accuracy.

Additionally, a number of professors and instructors have given suggestions

and advice, which aided in the development of the eighth and previous editions.

I thank them for taking the time and effort to share their thoughts with me:

Earl R. Arrowood, Bucks County Community College

Herbert F. Brown III, University of South Carolina

Ronald F. Cox, New Mexico State University

Karen Greathouse, Western Illinois University

Robert A. McMullin, East Stroudsburg University

John W. Mitchell, Sault College

Susan Reeves, University of South Carolina

John Rousselle, Purdue University

Paul Teehan, Trident Technical College

Thanks to the copyeditor and proofreader of this edition for their assistance.

Finally, the editors at John Wiley & Sons, especially JoAnna Turtletaub, Julie

Kerr, and Liz Roles, have been especially helpful in bringing the eighth edition

to publication.

Martin G. Jagels

ACKNOWLEDGMENTS

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BASIC FINANCIAL

ACCOUNTING REVIEW

INTRODUCTION

CHAPTER 1

Every profit or nonprofit business en￾tity requires a reliable internal system

of accountability. A business account￾ing system provides this accountabil￾ity by recording all activities regard￾ing the creation of monetary inflows

of revenue and monetary outflows

of expenses resulting from operating

activities. The accounting system

provides the financial information

needed to evaluate the effectiveness

of current and past operations. In ad￾dition, the accounting system main￾tains data required to present reports

showing the status of asset resources,

creditor liabilities, and ownership eq￾uities of the business entity.

In the past, much of the work re￾quired to maintain an effective ac￾counting system required extensive

individual manual effort that was te￾dious, aggravating, and time consum￾ing. Such systems relied on individ￾ual effort to continually record

transactions, to add, subtract, summa￾rize, and check for errors. The rapid

advancement of computer technology

has increased operating speed, data

storage, and reliability accompanied

by a significant cost reduction. Inex￾pensive microcomputers and account￾ing software programs have advanced

to the point where all of the records

posting, calculations, error checking,

and financial reports are provided

quickly by the computerized system.

The efficiency and cost-effectiveness

of supporting computer software al￾lows management to maintain direct

personal control of the accounting

system.

To effectively understand con￾cepts and analysis techniques dis￾cussed within this text, it is essential

that the reader have a conceptual as

well as a practical understanding

of accounting fundamentals. This

chapter reviews basic accounting

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principles, concepts, conventions, and

practices. This review should be of

particular benefit to the reader who

has taken an introductory accounting

course or who has not received

accounting training for some time.

2 CHAPTER 1 BASIC FINANCIAL ACCOUNTING REVIEW

CHAPTER OBJECTIVES

After studying this chapter and completing the assigned exercises and problems,

the reader should be able to

1 Define and explain the accounting principles, concepts, and the concep￾tual difference between the cash and accrual methods of accounting.

2 Explain the rules of debits and credits and their use as applied to double￾entry accounting by increasing or decreasing an account balance of the

five basic accounts; Assets, Liabilities, Ownership Equity, Sales Revenue,

and Expenses.

3 Explain the basic balance sheet equation: Assets
Liabilities Owner’s

Equity.

4 Explain and demonstrate the difference between journalizing and posting

of an accounting transaction.

5 Explain the income statement and its major elements as discussed and ap￾plied to the hospitality industry.

6 Complete an unadjusted trial balance, balance sheet, and income state￾ment.

7 Explain and demonstrate end-of-period adjusting entries required by the

matching principle.

8 Demonstrate the use of four depreciation methods.

9 Complete an analysis to convert a business entity from cash to an accrual

accounting basis.

Financial accounting is concerned with providing information to users out￾side of business that are in some way concerned or affected by the performance

of the business; stockholders, creditors, lenders, governmental agencies, and

other outside users.

Hospitality management accounting is concerned with providing spe￾cialized internal information to managers that are responsible for directing and

controlling operations within the hospitality industry. Internal information is the

basis for planning alternative short- or long-term courses of action and the de￾cision as to which course of action is selected. Specific detail is provided as to

how the selected course of action will be implemented. Managers direct the

needed material resources and motivate the human resources needed to carry

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