Restaurant Financial Basics41586

R E S TA U R A N T FINANCIAL BASICS CONTENTS Preface ix Introduction to Financial Management Debits and Credits—The Mechanics of Accounting 17 The Balance Sheet 57 The Income Statement 79 Analysis and Interpretation of Financial Statements 101 Cash Flow 133 Understanding Cost Concepts and Break-even 155 Pricing for Profits 177 Operating Budgets 203 10 Accounting Aspects of Food and Beverage Control 229 11 Payroll Accounting 257 12 Accounting for Fixed and Other Assets 279 13 Cash and Revenue Control 293 Recommended Reading 327 Index 329 P R E FA C E Restaurant managers often see themselves as “people” persons They enjoy the satisfaction that comes from serving guests and doing their personal best to exceed their guests’ expectations Consistently producing and serving quality food and beverage products increases the level of job satisfaction of most managers However, managers in today’s environment need to know much more than just how to serve good food and drink at reasonable prices In addition to numerous other tasks, they must also know how to “report” or “account” for the activities and costs related to managing their restaurants Systems used to report the revenue, expenses, “bottom-line profits,” and overall financial health of a business involve accounting processes and procedures The term “accounting” is a variation of the word “account,” which is defined as “a report, record, description or explanation related to the finances of a x R E S TA U R A N T F I N A N C I A L B A S I C S person or business.” Restaurant managers must know the basics of restaurant accounting for the sake of their constituents and themselves: ■ ■ ■ ■ ■ Guests: Understanding accounting basics allows a manager to monitor costs involved in providing outstanding guest service at a price that ensures the restaurant is profitable In addition, guests who pay by credit card or advance deposit deserve to know that their payments will be properly credited to their bills Proper accounting procedures help ensure that this occurs Thorough understanding of the restaurant’s financial condition helps managers to make operating decisions that positively influence their guests’ dining experiences Employees: Employees are the focus of many accounting procedures Payroll taxes, wages and salaries, and benefits are just a few of the employee-related areas that must be accounted for If a restaurant is to provide employees with steady jobs and competitive wages, its managers must be very knowledgeable about accounting Vendors/Suppliers: The individuals and organizations that sell the products and services managers need to run their businesses need to know about the creditworthiness of the restaurants with which they business Questions regarding the operation’s financial health must be answered using standard financial reports that can easily be understood and interpreted by outside groups such as vendors Owners/Investors: If managers work for a publicly held company (one that is owned by stockholders) its investors will require that the financial information they receive be timely and accurate Data must also conform to commonly accepted financial reporting standards to clearly and fairly present the financial condition of the business This is the only way investors can monitor the value of their investment Banks and other lending institutions also require the use of standard accounting procedures If they did not, a business could misrepresent its financial strength to acquire more loan proceeds than it is qualified to receive Such a business might then be unable to repay its loans, and the funds of the bank and its depositors would unfairly and needlessly be at risk Governmental Agencies: There are numerous federal, state, and local governmental agencies that require the reporting of financial informa- P R E FA C E tion From employee wage reports needed to compute payroll taxes to the reporting of food and beverage revenues used to determine sales taxes, governmental agencies require the regular and precise reporting of a wide range of financial data The taxes paid on the restaurant’s profits are determined in large measure by financial operating results presented annually in a manner acceptable to the Internal Revenue Service (IRS) Foodservice managers whose operations have nonprofit status (e.g., schools, hospitals, military institutions) must also submit reports to comply with governmental regulations ■ ■ The Hospitality Industry: One of the advantages to the use of generally accepted accounting principles is that the results obtained can be compared to the operating results of other, similar foodservice operations For example, food, labor, rent, and utility costs can be compared when the operators of two (or more) units consistently use the same accounting procedures to report results The National Restaurant Association (NRA) regularly publishes financial data about the restaurant industry that managers can best interpret if they record their own financial data in a comparable way Managers Themselves and Their Careers: Future employers evaluate a prospective manager’s past success to predict future success Applicants for management positions may be asked about their previous impact on the revenue, costs, and profits in the operations they have managed or helped to manage They must be able to speak knowledgably about accounting-related aspects of their performance In addition, restaurant managers’ compensation and bonuses are usually tied to the restaurant’s financial performance A thorough understanding of basic accounting procedures helps to ensure that managers can monitor and influence aspects of the restaurant’s operation that relate to their personal financial and career success BACKGROUND INFORMATION Some restaurant managers may believe the tasks of accounting and financial management are too complex and “should be left to an accountant.” In fact, a manager must interact with others as accounting systems are designed and as xi xii R E S TA U R A N T F I N A N C I A L B A S I C S systems/procedures to collect financial data are developed Effective managers must be able to discuss their needs with professional accountants and understand the accounting information that is provided As well, they must be able to ask the right questions about the meaning of financial information None of these or related activities can occur unless the manager has a good working knowledge of the basics of a managerial accounting system The manager who understands the basic information provided in this book will be able to: ■ ■ ■ ■ Know what information is needed for the short- and long-term control of the restaurant Understand information reported in financial statements Take corrective action(s) as necessary to improve the restaurant’s profitability Make operating decisions with full knowledge of their potential impact upon the restaurant’s financial status This book also recognizes that restaurant managers are very busy The authors have attempted to separate the “must know” from the “nice to know” information Both the depth and breadth of the discipline of accounting has been narrowed to focus on what the manager must know and be able to in everyday operations Accounting will be placed within the context of the full range of duties and responsibilities of the restaurant manager The accounting information provided will be easy to read, easy to understand, and easy to apply CONTENT OF BOOK This book focuses on providing restaurant managers with a clear and up-to-date survey of financial management issues important to the successful completion of their jobs Each chapter focuses on a specific topic and provides a comprehensive discussion of relevant issues The book can be used in two different ways: ■ It can be read cover-to-cover in chapter sequence Using this approach, managers can begin to acquire the comprehensive background of P R E FA C E xiii accounting and financial information relevant to their restaurant’s operation ■ Chapters (or even partial chapters) can be read (consulted) on an asneeded basis If, for example, a manager wishes to use break-even analysis to consider whether entertainment should be added on a weekend evening or if he/she has questions about procedures for developing/analyzing data from an operating budget, these specific chapters/sections can be reviewed The book is divided into two basic units The first provides an overview of financial management and then reviews the basic elements of a restaurant’s two most important financial statements, the balance sheet and income statement It then provides information about how to interpret them Additional background information is provided relative to cash flow, understanding cost concepts, establishing menu selling prices, and developing/using operating budgets The second part of the book addresses issues that begin when planning activities conclude Operating concerns relating to food and beverage controls, payroll and equipment accounting, and revenue and cash control are addressed, always with a focus on the information most critically required by busy restaurant managers Book elements include: Manager’s Brief: A short overview of what will be covered and why it is important begins each chapter Internet Assistant: Readers will be directed to Internet addresses throughout the book that can provide more information Manager’s Tools: Where appropriate, recordkeeping/accounting forms and control procedures are provided that can be used “as is” or modified to meet the needs of a specific restaurant Manager’s 10 Point Effectiveness Checklist: Each chapter concludes with a checklist of activities that can be undertaken by the reader to improve operations and/or knowledge For example, a section of the book related to cash flow includes a TACTIC item that advises the manager to monitor cash flow on a monthly basis This book has been carefully developed to help practicing restaurant managers understand the concepts and procedures needed to accurately analyze, un- xiv R E S TA U R A N T F I N A N C I A L B A S I C S derstand, and report the financial status of their business (or an operation they might invest in or purchase) There is a significant difference between simply recording and summarizing financial data and analyzing and effectively using that data This book teaches managers how to undertake all of these essential managerial tasks and shows them how to them both well The creation of a book such as this one is truly the work of many individuals, as well as the authors Thus, we wish to express our appreciation, first to our families and friends for their support, and second to Ms Debbie Ruff and Ms Rosa Soliz for their technical assistance The authors wish all readers the very best as they learn and apply the accounting principles so critical for continued success in the exciting field of hospitality We offer this publication in the hope that it will help them and their businesses prosper Raymond S Schmidgall David K Hayes Jack D Ninemeier INTRODUCTION TO FINANCIAL MANAGEMENT MANAGER’S BRIEF In this chapter you will begin the study of procedures to effectively manage and document your restaurant’s finances You will be introduced to the accounting process and its four specialty areas In addition, you will see how the various users of accounting information will count on you to follow special accounting principles and practices that have been standardized for use by businesses in general and restaurants more specifically As you use these specialized principles other businesses and government agencies that may be required to review your financial documents will be able to understand and use them There are several restaurant management and staff positions that may assist you in managing the money you earn and spend in your operation This chapter introduces you to each of them and the important roles they can play in the financial management process R E S TA U R A N T F I N A N C I A L B A S I C S Restaurant managers are not accountants; however, in this chapter you will learn how the financial control processes necessary for success are interrelated with the accounting process and the work of the accountant Finally, you will review the characteristics of an effective working relationship among the restaurant manager, owner, and accountant If you own or manage an existing restaurant the accounting system is already established It may be a cost-effective system that yields high-quality, usable information or it may be a less-than-adequate system that is not cost-effective A new manager beginning work in the restaurant must know the basics of effective financial accounting systems to know, first, if the current system provides meaningful and helpful information, and second, what to if it does not Alternatively, if you are going to own or manage a new restaurant that is “on the drawing board,” you may be asked for input on the design of the basic accounting system, or at least on the development of source documents and basic record-keeping procedures If a system is being proposed (for example, by an accounting service you have hired for the task) you should be able to evaluate its potential worth to your new restaurant Regardless, then, of the restaurant you will manage (existing or not-yetopened), you will need to know about the standards that make up a good accounting system A good restaurant manager must be aware of what is needed, why it is needed, how information can most effectively be collected, and when accounting-related activities must be undertaken FINANCIAL MANAGEMENT: WHAT IS IT? FINANCIAL MANAGEMENT The process of organizing, analyzing, interpreting, recording, summarizing, and reporting financial information in ways that are meaningful for owners, managers, and other internal users and for lenders, government agencies, and other external users Also referred to as accounting Restaurant managers use financial information to manage activities involving money that is earned and spent in the operation of their business Financial information that summarizes these activities must be organized and expressed in ways that are meaningful Analysis and interpretation of data is necessary, and the results must be recorded, summarized, and reported to those needing to know about the economic health of the restaurant As will be seen, users will be both internal—owners and managers, for example—and external—including lenders and government agencies 322 R E S TA U R A N T F I N A N C I A L B A S I C S ■ Review and approve bank statement reconciliations each month ■ Employ an outside auditor to examine the accuracy of deposits annually If verification of sales deposits is done correctly and no embezzlement is occurring, the following holds: Revenue receipts ϭ Revenue deposits By following these steps, Faris has completed the revenue security system Its four key principles follow: ■ No product shall be ordered from the kitchen/bar unless a permanent record of issue is made ■ Product orders must equal guest charges ■ Both the cashier and a supervisor must verify revenue receipts ■ Managers must personally verify all bank deposits It is possible to develop and maintain a completely manual revenue control system Each of the four major components of the revenue control system can be implemented without the use of a computer or even a cash register In today’s world, however, this approach is wasteful of time and suspect in accuracy The amount of information needed to effectively operate a restaurant grows constantly Guest dining choices, vendor pricing, inventory levels, payroll statistics, and revenue control are just a few concerns that involve data collection and manipulation Fortunately, new technologies can easily and quickly assemble the data needed to make good management decisions A restaurant manager should not expect a computer to “bring” control It may, however, take good control systems and add speed, accuracy, or additional information To improve a revenue security or any other cost control system, a computerized system will be of immense value If a restaurant has no controls, and if a manager is not committed to the control process, the computer will simply become a high-tech adding machine used to sum up guest checks and nothing more Properly selected and understood, however, technology-enhanced systems can be a powerful ally in the cost control/revenue security system CASH AND REVENUE CONTROL 323 WWW: Internet Assistant A variety of software programs are available to help integrate all of a restaurant’s financial activities One of the most popular is Great Plains, offered by Microsoft The popularity of Great Plains is due in part to its integration with the equally popular Microsoft Excel and Word programs To view the financial management tools Microsoft offers small business owners, including restaurants, go to www.greatplains.com/smallbusinessmanager/default.asp CASH AND REVENUE CONTROL PROCEDURES FOR SMALL RESTAURANTS Many of the cash and revenue control procedures discussed in this chapter assume that several accounting-related positions are set up to enable duties to be separated Small restaurant operations not have this luxury It becomes the responsibility of the owner/manager to perform key duties to overcome potential weaknesses in the internal control system What, at minimum, should the owner/manager do? These critical duties are outlined below24: ■ ■ 24 Cash receipts: Open all mail each day, list cash receipts, and keep a copy of the list; deposit all cash every day, compare the deposit with the bookkeeper’s cash receipts debit, and reconcile cash receipts with cash register data Cash disbursements: Sign all checks and review and cancel all supporting documentation; use only prenumbered checks—account for them when signing checks; total the check disbursements periodically; compare the total to the bookkeeper’s cash credit and prepare the bank reconciliation Adapted from: Raymond Schmidgall, Hospitality Industry Managerial Accounting, Fourth Edition (Lansing, Mich., 1997) 324 R E S TA U R A N T F I N A N C I A L B A S I C S ■ ■ ■ ■ Revenue control: Keep all cash registers locked; remove cash register tapes when not in use; compare cash register tape totals with daily cash debits and cash deposits Payroll: Examine the payroll worksheet (or payroll journal) to note employees’ names, gross pay, hours worked, deductions, and net pay; add the payroll and compare the net pay with the cash credit and distribute payroll checks Accounts receivable: Review aging of accounts receivable (if applicable); personally resolve any disputed account balances General tasks: Review all general journal entries; employ and bond a competent, trustworthy bookkeeper If possible, use an independent auditor to conduct an annual audit; periodically conduct limited surprise audits of cash and accounts receivable CASH AND REVENUE CONTROL 325 MANAGER’S 10 POINT EFFECTIVENESS CHECKLIST Evaluate your need for and the status of each of the following financial management tactics For tactics you judge to be important but not yet in place, develop an action plan including completion date to implement the tactic AGREE (NOT DONE) ❑ ❑ ❑ All active bank accounts are reconciled monthly and reviewed by the manager ❑ ❑ ❑ Managers count cash and petty cash banks at unannounced intervals ❑ ❑ ❑ All checks received are dated, and the notice “For Deposit Only” is stamped with the restaurant’s name when each check is accepted ❑ ❑ ❑ Cash revenues are recorded and cash drawers are balanced at the end of each shift or at least once daily ❑ ❑ ❑ Cash drawers are locked and keys are removed any time the drawer is left unattended ❑ ❑ ❑ Checks used to pay restaurant bills are numbered, used in sequence, supported by proper documentation, and reviewed by someone not responsible for preparation of the checks (unless that person is the manager) ❑ ❑ ❑ No food or beverage products are issued from the production area without a written guest check or its equivalent ❑ ❑ ❑ Guest checks are numbered, issued, and used to verify revenue totals on a daily basis ❑ ❑ ❑ 10 Employees have been trained about and use techniques to help detect and reduce theft and fraud by customers ❑ ❑ ❑ TARGET COMPLETION DATE AGREE (DONE) Managers distribute an employee manual to all employees detailing penalties imposed for theft of the restaurant’s assets TACTIC WHO IS RESPONSIBLE? DON’T AGREE (DON’T NEED) IF NOT DONE RECOMMENDED READING Friedlob, G Thomas and Franklin J Plewa Understanding Balance Sheets New York: John Wiley & Sons, Inc., 1996 An excellent and inexpensive book if you are interested in learning more about balance sheets and how to understand them McVety, Paul J., Bradley J.Ware, and Claudette Lévesque Fundamentals of Menu Planning, 2nd Edition New York: John Wiley & Sons, Inc., 2001 The ability to develop and properly price a menu is an important one This is an excellent book that thoroughly discusses this topic as well as other price-related menu development concepts Miller, Jack E., David K Hayes, and Lea R Dopson Food and Beverage Cost Control, 2nd Edition New York: John Wiley & Sons, Inc., 2001 This book is an excellent resource with up-to-date information on the latest foodservice technology including a discussion on procedures to analyze income statements and make necessary operational corrections to improve profits INDEX Absolute changes, 100 Accelerated depreciation method, 38, 71, 283, 284 double declining balance, 283, 284–285 Accountants: duties of, 10 external, 11 -manager relationship, 12–14 Accounting: accuracy, 297 benefits to manager, xi, xii, vs bookkeeping, characteristics of effective systems, college courses, 54 control and, 11–12 defined, ix–x, equation, 17–18, 19–21 generally accepted principles (GAAP), 6–9, 33, 253 personnel positions, 10–11 specialized areas of, 3–5 transaction types, 27–29 users of information, x–xi, 5–6 Accounting cycle, 47–50 adjusting entries, 49 closing entries, 49–50 financial statement preparation, 49 journalizing, 47 posting, 47–48 trial balance post-closing, 50 trial balance preparation, 48–49 Account numbers, 48 Accounts: asset accounts, 22–24 closing entries, 45–46, 49–50 debits and credits, 26–31 defined, 22 general ledger, 47–48 income measurement in, 31–43 liability accounts, 22, 24–25 owners’ equity accounts, 22, 25–26 revenue and expense accounts, 26, 32, 45–46 withdrawals and dividends, 46–47 Accounts payable: on balance sheet, 67 control procedures for, 307–308 debits and credits, 32 defined, 330 INDEX Accounts payable (cont’d) in purchases journal, 53 trade/other, 24, 67 Accounts receivable: contents of, 23, 61 control procedures for, 306–307, 324 debits and credits, 32 defined, 8, 19, 61 turnover ratio, 115–116 Accrual accounting system, 8, 12, 250 Accruals and adjustments, 32–43 depreciation on fixed assets, 37–38, 39 interest accruals, 40, 42–43 inventory/cost of goods sold, 33–36, 39, 41 payroll accruals, 38 prepaids, 36–37, 39, 41 types of, 25, 33, 69 Accuracy of accounting information, Activity ratio, 119–122 Actual cost, 245–246, 252–255 Adjusting entries, 42, 49 Allocation: cost, 162, 163, 180, 197–198, 214–216 profit requirements, 197 Allowance for doubtful accounts, 23 American Institute of Certified Public Accountants (AICPA), 296, 297 Assets: in accounting equation, 17, 20, 21 on balance sheet, 57, 59, 60–66 current, 60–62, 75 fixed, 62–64, 75 intangible/deferred expenses, 65–66, 75 investments, 64–65 contra-asset account, 38, 63 defined, 6, 19 equities, 19, 84–85 historical cost, “other assets” category, 65–66, 290 return on assets ratio, 123 revenue/expenses impact on, 32 turnover ratio, 120–121 types of accounts, 22–24 See also Depreciation; Fixed assets Auditing, defined, Auditors: duties of, external, 11, 302 internal, 11 Authorization, 301 Average cost, 167 Balances, account, 29–31, 43–44 Balance sheet, 21, 43, 44, 49, 57–76 assets on, 57, 59, 60–66 current, 60–62 fixed, 62–64 insurance, 64–65 intangible/deferred expenses, 65–66 common-size, 107–110 comparative, 103–105 corporations, 71–72 defined, 58 format of, 73–75 liabilities on, 57, 60, 67–71 current, 67–69 long-term debt, 70–71 manager’s checklist, 76 purposes of, 58–59 sole proprietorship/partnership, 72–73 Bank checks See Checking account Banks deposits, verification of, 321–322 Banquets, deposits on, 25, 68, 82 Bar: cash receipt procedures, 304 license costs, 66, 290 verification of product sales, 317–318 See also Beverage costs; Beverage pricing; Beverage sales Bartender theft, 313–315 Base selling price, 189–190, 194, 196, 198–200 Beverage budget, 210–211 Beverage control See Food and beverage control Beverage costs: actual, 252–255 allocation of, 197–198 allowable, 195, 200–201 of beverage sold, 96 estimates, 211 See also Cost Beverage inventory See Inventory Beverage pricing: integrated with food, 184 multiplier and, 195 profit approach to, 197–201 subjective approach to, 180 Beverage sales: cost of sales, 96 gross profit and, 96–97 on income statement, 87, 91 per seat ratio, 126–127 ratio, 126 required profit and, 218, 219 See also Bar Board of directors, accounting information for, Bond discount and issue costs, on balance sheet, 66 Bonding of employees, 299, 315 Bonds payable, 70 Bookkeeping, 3, 10 Bottom-up pricing, 186–189 Break-even analysis, 169–175 Budget reforecasting, 226 Budgets: computerized programs, 211 internal control and, 302 types of, 205–206 See also Cash budget; Operating budget INDEX Budget variance, 223 Buildings: capital lease, 282 improvements in progress, 66 leasehold improvements, 64, 282–283 purchase costs, 24, 63 Business entity principal of accounting, 6–7 Business transactions: defined, 18 recording, 18–19, 28–29 Capacity fixed costs, 157 Capital budget, 205 Capital expenditures, 281 Capital lease, 282 Cash: balances, 135, 137, 145 on balance sheet, 60, 73 defined, 134, 205 general ledger posting, 48, 49 house banks, 136 imprest system, 135, 136 Cash accounting system, Cash budget, 139, 143–153 defined, 144, 205 example of, 148–153 format for, 145–147 preparation of, 147–148 purpose of, 144–145 Cash control, 303–306 disbursements, 305–306, 323 receipts, 304–305, 323 Cash on deposit, 22 Cash disbursements, control procedures for, 305–306, 323 Cash disbursements journal, 52–53 Cash flow, 59, 80, 133–154 defined, 139 vs income flow, 137–139 increase/decrease, 134–135 manager’s checklist, 154 statement of (SCF), 133, 139–143, 144 types of activities, 141–142 See also Cash budget Cash on hand, 22, 58–59 Cashiers: cash receipt procedures, 304–305, 313 guest payment to, 319 server payment to, 320 theft by, 313–315 Cash management, 135–137 Cash receipts: control procedures, 304–305, 313, 323 employee fraud, 312–315 over/short, 314 Cash receipts journal, 48, 50–51, 201 Certified Public Accountant (CPA), 11 Chain of command, 298 Check acceptance, verification services, 135, 310–311 331 Checking account: balance, 136 control procedures, 305–306 Check signing device, 305 Chief accounting officer (CAO), 10 China, glassware, linen, silver, uniforms, and utensils, 24, 64, 283, 286–287 Closing entries, 45–46, 49–50 Collusion, employee, 240, 300 Common-size financial statements: balance sheet, 107–110 defined, 107 income statement, 110–112 Common stock account, 71 Comparative financial statements, 102–113 absolute and relative changes in, 102–103 defined, 102 horizontal analysis of, 103–107 manager’s checklist, 132 operating results/operating budgets, 112–113 significance factors and, 105 vertical analysis of, 107–112 Complimentary meals/drinks, 253, 254, 315 Conservatism principle of accounting, 8, 289 Consistency principal of accounting, 8, 286 Contra-asset account, 38, 63 Contribution margin (CM): defined, 174 menu engineering, 232, 234–235 pricing, 191–192 Control: basic principle of, 11 budget, 206–207 five-step process, 11–12, 206–207 See also Food and beverage control; Internal controls Controllable costs, 162–163 labor, 261 Controller, 10, 11 Convenience foods, 258 Corporations: balance sheet, 71–72 cash flow, 137 earnings per share (EPS) ratio, 125 equity accounts, 25–26 financial information requirements of, 81 income statement, 90, 91 Cost, 155–176 allocation, 162, 163, 180, 197–198, 214–216 average, 167 break-even analysis and, 169–175 controllable, 162–163 defined, 156 differential, 163 direct, 162 fixed, 157–158, 161 incremental, 167–168 of inventory, 245–246 manager’s checklist, 176 mixed, 159–160, 161 332 INDEX Cost (cont’d) noncontrollable, 163 overhead, 162 pricing and, 180–183 relevant, 164–166 standard, 168–169 sunk, 166–167 total, 160–162 variable, 158–159, 161, 209–210 See also Beverage costs; Expenses; Food costs; Labor expenses; Operating expenses Cost of sales, 12, 35–36, 87, 95–96, 119, 127, 252–253 Cost of sales ratio, 127 Coupons, reduced-price, 315, 321 Credit balance, 29–31 Credit cards: collection experience, 147 employee fraud, 314 guest fraud, 135, 310, 311 Creditors, accounting information for, Credits See Debits and credits Currency of accounting information, Current assets, on balance sheet, 60–62, 75 Current fair value, Current ratio, 115 Daily receiving report, 240, 241–242 Debit card fraud, 310, 311 Debits and credits: balances, 29–31, 42, 48–49 in closing entry, 45–46 defined, 26–27 depreciation, 37–38 determining entries, 28–29 manager’s checklist, 55 posting, 47–48 revenues/expenses impact on, 32 Debt: composition of, 59 financing, 118 long-term, 25, 69–71 payment schedule, 148 See also Loans Debt-equity ratio, 117–118 Deferred expenses, 65–66, 75 Delivery invoice, 240–241 Departmental budget, 205 Deposit, banquet, 25, 68, 82 Deposit accounts, 24 Depreciation: accelerated method, 38, 71, 283, 284 double declining balance, 283, 284–285 accumulated account, 24, 37–38, 63 china, glassware, linen, silver, uniforms, and utensils, 286–287 computer programs, 286 consistency principle and, 286 defined, 4, 19, 98, 279–280, 283 as indirect expense, 83–84, 89 salvage value and, 165, 284 straight-line method, 37–38, 39, 63, 283, 284, 285 Derived demand, 184 Differential costs, 163 Direct costs, 162 Direct expenses, 83 Direct items, 241–242 Direct operating expenses (DOE), 92 Discretionary fixed costs, 157 Dividends payable, 25, 47, 69 Double declining balance depreciation, 283, 284–285 Drink coupons, 321 Due to affiliated/associated companies, 70 Due to officers and stockholders, 70 Earnings per share (EPS) ratio, 125 Effective cost of loan, 136 Elasticity, 182 Elasticity of demand, 181–182 Embezzlement: defined, 295 See also Theft and fraud, employee Employee earnings record, 264–265, 268 Employees: accounting information on, x accounting personnel, 10–11 benefits on income statement, 87, 89, 92 meals, 97–98, 127, 253, 254 revenue and, 259 cashiers, 304–305 vs independent contractors, 273–274, 275 in line vs staff positions, 9–10 minimum-staff, 260 payroll and withholding taxes, 68 physical inventory by, 247–248 separation of duties, 300–301, 302 time card, 264, 265 tip reporting procedures, 274–276 training and supervision, 297 See also Internal controls; Labor expenses; Payroll; Theft and fraud, employee Employee unions, accounting information for, Equation, basic accounting, 17–18, 19–21 Equipment See Depreciation; Fixed assets Equities: owners’, 19, 20, 21–22 stockholders’, 19 Equity accounts, 25–26 Ethics, code of, 299 Expenses: defined, 7, 83 direct, 83 impact on debits and credits, 32 on income statement, 81, 87–90, 92–99 indirect, 83–84 matched to revenue, 7–8, 33, 253 owners’ equity and, 21–22 INDEX prepaid, 24, 36–37, 39, 41, 62 projected, 209–210 and revenue accounts, 26, 32 See also Accruals and adjustments; Beverage costs; Cost; Food costs; Labor expenses; Operating expenses; Revenue and expense accounts Fair Labor Standards Act (FLSA), 264, 265, 268 Fair value, current, Federal Insurance Contributions Act (FICA), 270 Federal Unemployment Tax Act (FUTA), 272 FICA (federal retirement taxes), 68, 272 FIFO (first in-first out) method, 73, 244, 245 Financial accounting: defined, vs managerial accounting, software programs, 323 Financial Accounting Standards Board (FASB), 289 Financial analysts, accounting information for, Financial leveraging, 118 Financial management See Accounting Financial statements: accounting equation and, 21 analysis of See Comparative financial statements; Ratio analysis audited, 3, of cash flows, 133, 139–143, 144 of financial vs managerial accounting, periodicity of, preparation of, 43–44, 49 See also Balance sheet; Income statement Financing activities, 140, 141 Fixed assets, 279–289 on balance sheet, 59, 62–64, 75 defined, 59 disposal of, 288–289 exchange of, 289 gains on sale of, 84–85 manager’s checklist, 291 net book value, 283 purchase records for, 281–283 turnover ratio, 120 See also Depreciation Fixed costs, 157–158, 161 Fixed payroll, 260–261 Food and beverage control, 11, 229–256 manager’s checklist, 256 menu engineering, 230–238 product issuing, 250–251 purchasing, 238–241 receiving, 241–243 See also Inventory Food costs: actual, 245–246, 252–255 actual/budgeted, 12, 222 allowable, 196 333 complimentary meals, 253, 254 contribution margin (CM) and, 232, 234–235 daily, 241, 242–243, 251 employee meal, 97–98, 127, 253, 254 pricing and, 180, 190, 191, 193 projected, 218–219 of sales, 12, 35–36, 87, 95–96, 119, 127, 252–253 yield and, 255 See also Cost Food inventory See Inventory Food only restaurants, profit pricing in, 195–197 Food pricing See Pricing Food sales: cost of, 12, 35–36, 87, 95–96, 119, 127, 252–253 gross profit and, 96–97 on income statement, 87, 91 required profit and, 218, 219 See also Revenue Food sales ratio, 126 per seat, 126–127 Franchise fee, 65–66, 290 Fraud: defined, 294 See also Theft and fraud Full-service restaurants: labor costs in, 259 profit pricing in, 197–201 Furniture and fixtures, 24, 64 Gains, on income statement, 84–85, 90 General ledger, 47–48, 300, 301 Generally Accepted Accounting Principles (GAAPs), 6–9, 33, 253, 286, 289 Gift certificates outstanding account, 69 Glassware, china,linen, silver, uniforms, and utensils, 24, 64, 286–287 Going concern principle of accounting, Goodwill, 66, 290 Governmental agencies, accounting information for, x-xi, Great Plains, 323 Gross pay, 270, 272 Gross profit, 96–97 Guest accounts, control procedures for, 306 Guest checks: cashier fraud and, 314–315 payment methods, 319–321 server fraud and, 312–313 verification of, 313, 318–319 Guest theft See Theft and fraud, guest Historical cost principal of accounting, Horizontal analysis, 103–107 Hospitality Financial & Technology Professionals (HFTP), Hospitality programs, 54 334 INDEX Hourly rate: overtime, 265, 268–269 regular, 265, 268 Imprest system: payroll account, 263 petty cash fund, 135, 136 Improvements: leasehold, 64, 282–283 in progress, 66 Income, net See Net income Income flows, 137–139 Income statement, 49, 79–100 capital expenditures on, 281 common-size, 110–112 comparative, 105–107 content of, 86–90 cost of goods sold, 95–96 defined, 80 employee meal costs, 97–98 format of, 79–80, 86–87, 88 gross profit, 96–97 income taxes on, 90, 99 manager’s checklist, 100 nature of income, 82–85 preliminary, 35 pro forma, 204 responsibility accounting, 81 service charges, 97 simple, 44 supplementary schedules, 90–95 users of, 80–81 Income taxes: deferred, 70–71 estimated and accrued, 69 fixed asset exchange reporting, 289 forms (IRS), 264 on income statement, 90, 99 incremental and average, 168 on profits, 247 state, 270 tip reporting, 275–276 withholding amounts, 270 Income taxes payable, 69 Incremental cost, 167–168 Independent contractor status, 273–274, 275 Indifference point, 161 Indirect expenses, 83–84 Inelastic demand, 182 Insurance expense, 36, 94 Intangible expenses, 65–66 Integrated pricing, 184 Interest accruals, 40, 42–43 Interest expense: on income statement, 90, 95 number of times interest earned ratio, 118 Internal controls, 293–325 accounts payable, 307–308 accounts receivable, 306–307, 324 cash, 303 disbursements, 305–306, 323 receipts, 304–305, 323 elements of, 298–302 manager’s checklist, 325 motives for theft, 294–295 objectives of, 296–298 for small restaurants, 323–324 vulnerability to theft, 295–296 See also Revenue control Internal Revenue Service (IRS), 6, 264, 273, 276 Internet Web sites: break-even analysis, 175 budget preparation, 211 check fraud, 135 credit/debit card theft, 135, 311 depreciation values, 286 hospitality programs, 54 income statement trends, 85 ingredient yields, 255 Microsoft tools, 323 standardized recipes, 231 tip regulations, 276 Inventory, 243–250 on balance sheet, 61, 73–74 end-of-the-period, 33–36, 39, 41 periodic, 36 perpetual, 245, 248–249 physical, 247–248 turnover, 119–120, 249–250 types of accounts, 23 valuation, 244–247 Investing activities, 140 Investment account, 24 Investments: on balance sheet, 61–62, 64–65 of excess cash, 145 marketable securities, 61–62 Investors, accounting information for, x, Issue requisition, 239, 250–251 Issuing system, 250–251 Job description, 302 Journalizing, in accounting cycle, 47 Journals: cash disbursements, 52–53 cash receipts, 50–51, 301 general, 47 payroll, 53–54, 264, 269–273 purchases, 53 sales, 51–52 Just-in-time (JIT) delivery, 240–241 Labor expenses, 257–277 components of, 262 controllable and noncontrollable, 261 defined, 260 importance of controls, 258 operating budget and, 215 pricing and, 193–194 as prime cost, 252, 258 INDEX ratio, 127–129 revenues and, 259 See also Payroll Land account, 24 Land costs: on balance sheet, 62 purchase price and, 282 Lapping, 306 Leasehold improvements, 64, 282–283 Leases: capital, 282 rental deposits, 65, 290 Ledger, 47–48 Leveraging, financial, 118 Liabilities: in accounting equation, 20, 21 on balance sheet, 57, 60, 67–71 current, 67–69 long-term debt, 70–71 defined, 7, 19 types of accounts, 22, 24–25 License costs, bar, 66, 290 Life insurance, as asset, 290 LIFO (last in-first out) method, 244, 245 Linen, china, glassware, and silver, 24, 64, 283 Line positions, 9–10 Liquidity: defined, 59 ratio, 114–116 Loans: current ratio and, 115 effective cost of, 136 financial leveraging and, 118 Long-term debt, 25 current portion of, 69 defined, 70 types of, 70–71 Losses, on income statement, 84, 85, 90 Maintenance contract, purchase of, 281–282 Managerial accounting defined, relationship with financial accounting, 12 Managerial operating efficiency ratio, 124–125 Managers: -accountant relationship, 12–14 authorizations, 301 benefits and “perks”, 295 five-step control process, 11–12 leadership of, 298 menu pricing role of, 183–184 uses of accounting information, xi, xii, Manager’s checklist: accounting process, 15 balance sheet, 77 cash flow, 154 cost, 176 debits and credits, 55 financial statement analysis, 132 fixed assets, 291 food and beverage controls, 256 income statement, 100 operating budget, 227 payroll, 277 pricing, 202 Margin of safety, 174 Marketable securities, 23–24, 61–62 Marketing expenses, on income statement, 89, 93 Mark-up method: expense projections, 209–210 pricing, 189–190 Master budget, 205 Matching principle of accounting, 7–8, 33, 253 Materiality principle of accounting, Menu engineering, 230–238 contribution margin (CM), 232, 234–235 control tools, 231 defined, 231 worksheet, 232, 233, 235–238 Menu pricing See Pricing Microsoft, 323 Minimum-staff payroll, 260 Mixed costs, 159–160, 161 Mortgage payable, 70 Multipliers, price, 190, 195–196 Music and entertainment expenses, on income statement, 89, 92 National Restaurant Association (NRA), xi, 88, 113, 130 Nation’s Restaurant News (NRN), 85 Net book value, 283 Net income: basic accounting equation, 21–22 on income statement, 80 measurement of, 31–43 transaction approach to, 82 Net pay, 271, 272 Net worth, 59 Noncash activities, 140–141 Noncontrollable costs, 163 labor, 261 Notes payable, 24, 67–68 Notes receivable, 23, 61 Number of times interest earned ratio, 118 Objective methods of pricing, 178, 180, 181 Occupancy costs, on income statement, 89, 94 Operating budget, 192, 193, 195, 203–227 advantages of, 206 beverage, 210–211 as control tool, 206–207 defined, 204 development process, 207–219 expense projections, 209–210 expense reforecasting, 226 format, 220–222 manager’s checklist, 227 participative process and, 204–205 335 336 INDEX Operating budget, (cont’d) profit requirements, 209 pro forma, 204 revenue projections, 208–209, 212–214 revenue reforecasting, 226 rounded estimates in, 220 standards, 211–212 variance analysis process, 223–225 Operating expenses: in cash budget, 147 forecasting, 109–110 on income statement, 87, 88, 89, 92, 93–94 ratios, 129 Operating ratio, 125–129 Opportunity cost, in cash management, 137 Organizational structure, 298–299 Organization costs, on balance sheet, 65 Overages, cash, 314 Overhead costs, 162 Overhead expenses, 89, 93–94 Overtime hourly rate, 265, 268–269 Owners’ equity, 22 in accounting equation, 20, 21 on balance sheet, 71 corporations, 25 defined, 19 profitability ratio, 122 profit and, 21–22, 32 sole/multiple owners, 25 temporary accounts, 26, 32, 45, 46, 49–50 P&L See Income statement Paid-in-capital in excess of par account, 72 Partnerships: balance sheet, 72 equity account of, 25 income statement, 90, 91 Past earnings, 59 Payroll: accrued, 38 in cash budget, 147 controls, 262–263, 324 deductions, 270–271 defined, 260 fixed vs variable, 260–261 gross pay, 270, 272 on income statement, 87, 89, 91 manager’s checklist, 277 net pay, 271, 272 in operating budget, 215 overtime hourly wage rate, 265, 268–269 records, 264–265 regular hourly wage rate, 265 revenue and, 259 tip reporting and, 274–276 See also Labor expenses; Salaries and wages Payroll journal, 53–54, 264, 269–273 payroll entry, 269–272 payroll tax entry, 272–273 Payroll and withholding taxes, 68 Performance standards, 11, 206 Periodic inventory, 36 Periodicity principal of accounting, Permanent tax difference, 99 Perpetual inventory, 245, 248–249 Petty cash fund, 135, 136, 303 Physical inventory, 247–248 Planning, managerial accounting in, Point-of-sales (POS) system, 297, 313, 316, 318 Posting, 47–48 Practicality principle of accounting, Precheck/postcheck system, 313 Precosting, recipe, 190, 231 Preferred stock account, 71 Preopening costs, on balance sheet, 65 Prepaid expenses, 24, 36–37, 39, 41, 62 Price multipliers, 190, 195–196 Price quotation, 239 Pricing, 177–202 base selling price, 189–190, 194, 196, 198–200 bottom-up, 186–189 cost approach to, 180–181 elasticity of demand and, 181–183 increase, 201 integrated, 184 manager’s checklist, 202 objective methods of, 178, 180, 181, 189–194 contribution margin, 191–192 mark-up, 189–190 prime cost, 193–194 ratio, 192–193 profit approach to, 183–184, 185 in food and beverage restaurants, 197–201 in food only restaurants, 195–197 reduced-price coupons, 315, 321 subjective methods of, 178, 179, 184–185 Prime costs: labor, 252, 258 pricing and, 193–194 Product issuing, 250–251 Profit: gross, 96–97 inventory valuation and, 247 requirements, 183, 197, 201, 209, 214–218, 219 See also Net income Profitability: menu engineering and, 232, 234–235 ratio, 122–125 Profit centers, 162, 163 Profit and loss statement See Income statement Profit margin: defined, 156 ratio, 122–124 Profit pricing: defined, 183 in food and beverage restaurants, 197–201 in food only restaurants, 195–197 formula, 185 Pro forma income statement, 204 INDEX Property See Depreciation; Fixed assets Purchase order, 239, 240 Purchase requisition, 239, 240 Purchases journal, 53 Purchasing: of fixed assets, 281–283 just-in-time (JIT), 240–241 source document flow, 238–240 Quick-change artist, 311–312 Ratio: classifications, 114 defined, 113 Ratio analysis, 101–102, 113–131 activity ratio, 119–122 bases for comparison, 129–130 defined, 113 limitations of, 130–131 liquidity ratio, 114–116 operating ratio, 125–129 profitability ratio, 122–125 solvency ratio, 116–118 users of, 113 Ratio pricing, 192–193 Receiving, 241–243 Receiving report, daily, 240, 241–242 Recipes: ingredient yields, 255 precosting, 190, 231 standardized, 231 Reforecasting, budget, 226 Regular hourly wage rate, 265, 268 Relative changes, 103 Relevance of accounting information, Relevant costs, 164–166 Remittance advice, 306 Rental deposits, 65, 290 Rent expense, prepaid, 36, 39, 41 Repairs and maintenance: contract purchase, 281–282 on income statement, 89, 94 leasehold improvements, 64, 282–283 Residual value, 165 Responsibility accounting, 81 Restaurant industry, financial data on, xi Retained earnings, on balance sheet, 72 Retained earnings statement, 74, 141 Return on assets ratio, 123 Return on owners’ equity ratio, 122 Revenue control, 308–325 cashier/bartender theft, 313–315 guest theft, 309–312 manager’s checklist, 325 security system, 315–323 bank deposits, 321–322 guest charges, 313, 318–319 principles of, 322 product sales, 317–318 sales receipts, 319–321 337 server theft, 312–313 for small restaurants, 323–324 Revenue expenditures, 280–281 Revenue and expense accounts: accruals and adjustments, 32–43 closing, 45–46 as temporary owners’ equity account, 26, 32 Revenues: break-even analysis and, 169–175 defined, 8, 82–83 impact on debits and credits, 32 on income statement, 81, 87, 88, 94–95 labor costs and, 259 matched to expenses, 7–8, 33, 253 owners’ equity and, 21–22 projected, 208–209, 212–214, 217 Royalty contract, 290 Salaries See Payroll Salaries and wages payable, 68 Salaries and wages worksheet and check register, 264, 266–267 Sales accounts See Revenue and expense accounts Sales history, 208 Sales journal, 51–52 Sales receipts, verification of, 319–321 Sales tax payable, 68 Sales volume: break-even analysis and, 169–175 costs and, 157–162 pricing and, 181–183 Salvage value, 165, 284 Seat turnover: pricing and, 188 ratio, 121–122 Securities and Exchange Commission, (SEC), 6, 81 Security devices, 302 Security system See Revenue control Separation of duties, 300–301, 302 Servers: guest check fraud, 312–313 payment methods and, 320 Service charges, 97 Shortages, cash, 314 Significance factor, 105 Silver, china, glassware, linen, uniforms and utensils, 24, 64, 283, 286–287 Skips (walks), guest, 309, 319 Social Security taxes, 271 Software programs: budgeting, 211 depreciation values, 286 Great Plains, 322 standardized recipes, 231 Sole proprietorship: balance sheet, 71–72 equity account, 25 income statement, 90, 91 338 INDEX Solvency: defined, 116–117 ratio, 117–118 Source documents, 10 Staff See Employees; Labor expenses; Payroll; Theft and fraud, employee Staff positions, 10 Standard costs, 168–169 Standard recipes, 231 Statement of cash flows (SCF), 133, 139–143, 144 State taxes, 270, 272 State Unemployment Tax Act (SUTA), 272 Stock: capital account, 25 common and preferred, 71 earnings per share (EPS) ratio, 125 treasury, 72 Stockholders’ equity, 19, 59 Storeroom clerk, 250–251 Stores, value of, 241–242, 251 Straight-line depreciation, 37–38, 39, 63, 283, 284, 285 Subjective methods of pricing, 178, 179, 184–185 Sunk cost, 166–167 Supplementary schedules, 90–95 quick-change artist, 311–312 walks (skips), 309, 310, 319 Time card/clock, employee, 264, 265, 297 Timing difference, 99 Tip reporting procedures, 274–276 Total costs (TC), 160–161 Treasury stock, 72 Trial balance: adjusted, 42, 43, 44, 49 defined, 29, 31 post-closing, 50 preparation of, 31 Turnover, inventory, 119–120, 249–250 Taxable income, 99 Tax accounting, defined, Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 275 Taxes: payroll and withholding, 68, 272–273 Social Security, 270 See also Income taxes Taxes payable, 24 income tax, 69 sales tax, Taxing authorities, accounting information for, 6, 81 Theft and fraud, employee: bank deposit falsification, 321–322 bonding and, 299, 315 cashier/bartender, 313–315 collusion and, 240, 300 internal control policy and, 11, 296–302 lapping, 306 motives for, 294–295 opportunity for, 295 server, 312 Theft and fraud, guest: credit/debit card, 309–310, 311 Internet Websites, 135 personal checks, 310–311 Vacations, mandatory, 299 Variable costs, 158–159, 161, 209–210 Variable payroll, 261 Variance analysis, 222–225 Vendors, accounting information for, x Verification: credit/debit card, 310, 311 of guest charges, 318–319 personal checks, 135, 310–311 of product sales, 317–318 of revenue receipts, 319–321 Vertical analysis, 107–112 Voucher system, accounts payable, 307, 308 Uniforms, china, glassware, linen, silver, and utensils, 64, 283, 286–287 Uniform System of Accounts for Restaurants (USAR), 130 balance sheet, 74–75 fixed asset classification, 280 income statement, 79, 86–87, 90 “other assets” category, 290 Unit elasticity, 182 Unpaid invoices, 40 Utensils, china, glassware, linen, silver, and uniforms, 64, 283, 286–287 Utility expenses, on income statement, 89, 93 Wages See Payroll Walks (skips), guest, 309, 310, 319 Wealth, vs net income, 82 Websites See Internet Websites Weighted average method of inventory valuation, 245, 246 W-4 form (IRS), 264 Working capital, 67 W-2 form (IRS), 264 Yields, ingredient, 255 Zero-based budgeting, 210 ... reporting of financial information basic accounting system to assure that all financial Auditors evaluate whether the restaurant? ??s financial information is properly statements fairly present the financial. .. staff assistance in financial management of the restaurant ❑ ❑ ❑ Manager clearly understands the difference between financial management and accounting ❑ ❑ ❑ The restaurant? ??s financial management... decisions; the “deliverables” of financial ac- which involves organizing and presenting financial incounting are such financial statements as the balance formation in financial statesheet, income