Solution manual managerial accounting and finance for hospitality operations CHAPTER 05

CHAPTER INTERNAL CONTROL FOR HOSPITALITY OPERATIONS I Questions Refer to page 116, paragraph Refer to page 116, paragraphs and 3 Refer to pages 117 to 122 One of the characteristics of hospitality businesses that render them vulnerable to theft is that there are many cash transactions Many hotel and restaurant guests use cash to settle their accounts and to make other purchases during their stays Even though credit cards are increasingly being used, a large number of transactions that involve cash occur each day Many hotels have several profit centers that are open for much of the day (sometimes even 24 hours) These operations need cash banks They also require several cashier shifts rather than the single shift many retail outlets can get by with Cash is the most vulnerable of all assets It is therefore imperative to have an effective system of internal control over cash An operation’s internal controls may be documented and reviewed by flowcharting and by using internal control questionnaires A flowchart diagrams the flow of documents through an organization, indicating the origin, processing, and final deposition of each document In addition, the flowchart shows the segregation of duties Flowcharting is useful because it provides a concise overview of the internal control system It facilitates review of the internal control system, enabling management to identify weaknesses for corrective action A second device for studying a hospitality operation’s system of internal control is the internal control questionnaire (ICQ) The ICQ uses a series of questionnaires about controls in each accounting area to identify weaknesses ICQs generally provide complete coverage for each accounting area However, they not reveal document flows as flowcharts From a practical viewpoint, both flowcharts and ICQs should be used in documenting and reviewing an operation’s system of internal control 5-2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations To handle minor disbursements requiring cash, a petty cash fund should be established Initially, the fund should be established with sufficient cash to handle approximately one month’s transactions The responsibility of accountability and administration of the fund should be under the control of one person The essence of the bank statement reconciliation is to bring the reported bank statement balance into equality with the check register balance Adjustments are made to the reported bank balance by adding or deducting information shown in the check register but not yet handled by the bank Typically, bank omissions will be deposits made but not shown and checks issued but not cashed by the bank The bank statement will inform the business of additions and deductions made from the business checking account that are not known until shown on the bank statement The purpose of a standard cost control is to indicate whether or not all aspects of the business are operating properly and according to desired standards Standards of performance should be established and results evaluated so that management can determine if standards are being met and so that decisions can be made that will improve standards, increase performance, and ultimately produce higher profits II Refer to pages 132 and 133 Practical Exercises and Problems A EXERCISES EXERCISE 1 Effectiveness and efficiency of operations Effectiveness and efficiency of operations; Reliability of financial reporting Effectiveness and efficiency of operations Effectiveness and efficiency of operations Effectiveness and efficiency of operations Effectiveness and efficiency of operations; Reliability of financial reporting EXERCISE 2 Preventive Control Preventive Control Detective Control Preventive Control Detective Control Internal Control for Hospitality Operations EXERCISE 3 10 Preventive (P) Preventive (P) / Detective (D) Detective (D) Preventive (P) Detective (D) Preventive (P) Detective (D) Preventive (P) Detective (D) Preventive (P) Accounting (AC) Administrative (AD) Accounting (AC) Administrative (AD) Administrative (AD) Accounting (AC) Accounting (AC) Administrative (AD) Accounting (AC) Accounting (AC) EXERCISE 4 Preventive (P) Detective (D) Preventive (P) Preventive (P) Preventive (P) Preventive (P) Preventive (P) Preventive (P) Accounting (AC) / Administrative (AD) Accounting (AC) Administrative (AD) Administrative (AD) Administrative (AD) Accounting (AC) / Administrative (AD) Administrative (AD) Accounting (AC) / Administrative (AD) B PROBLEMS PROBLEM Requirement (1) Total disbursements from the fund P809.60 Requirement (2) Petty cash fund, October Less: Disbursements in October Balance before replenishment Add: Reimbursement, October 31 Balance of Petty Cash Fund, November Accounting, November 30 Cash IOU – desk clerk Disbursements per audit Total Shortage P1,000.00 809.60 P 190.40 809.60 P1,000.00 P 19.10 100.00 780.90 P 900.00 P 100.00 5-3 5-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations The total amount due from the clerk is P200 represented by the P100 shortage during the cash count and P100 advance he/she took from the fund PROBLEM Bank Statement Reconciliation Bank Statement Balance Add: Deposits in transit Erroneous debit Subtotal Deduct: Outstanding checks # 3581 P2,980 # 3650 4,020 Erroneous credit Reconciled balance P35,060 22,660 200 P57,920 Check Register Balance P47,400 Deduct: Service charge (40 (7,000) (3,560 P47,360 Reconciled balance P47,360 PROBLEM The responsibilities which the owner should take over are: Approving invoices for payment Signing checks Collecting cash from office & restaurant & verifying cash against the tapes Depositing the cash in the bank (This may be delegated.) PROBLEM The present system of selling tickets is much more effective in controlling the revenues from the bar than allowing the bartender to accept the payment from the customers Accounting for the revenues will be more cumbersome and fraudulent acts of the bartender will be more difficult to detect In any case, cash receipts should be centralized or delegated to someone other than the bartender PROBLEM Requirement (a) Item Cost Selling Price P2.00 1.10 2.25 1.75 2.25 2.00 P6.00 4.50 7.00 5.00 5.00 7.95 Quantity Sold Total Standard Cost Total Standard Revenue 654 2,196 1,110 990 295 259 P1,308.00 2,416.00 2,498.00 1,733.00 664.00 518.00 P 3,924.00 9,882.00 7,770.00 4,950.00 1,475.00 2,059.00 Cost Percentag e 33.33% 24.45% 32.15% 35.01% 45.02% 25.16% Internal Control for Hospitality Operations 5-5 TOTAL P9,137.00 P30,060.00 Standard cost percentage Total Standard Cost = Total Standard Revenue = P9,137.00 P30,060.00 x 100 = 30.40% = P9,201 P30,060.05 x 100 = 30.61% Actual cost percentage = Total Actual Cost Total Actual Revenue Difference 0.21% Requirement (b) If I were the dining room manager, I would be satisfied with the results because the variance of 0.21% is very insignificant It should be remembered that standard cost and revenues are estimated figures and the fact that the actual figures almost equaled these standards yield very good outcome  ...5-2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations To handle minor disbursements requiring cash, a petty cash... 5-3 5-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations The total amount due from the clerk is P200 represented by the P100 shortage during the cash count and P100... Effectiveness and efficiency of operations; Reliability of financial reporting Effectiveness and efficiency of operations Effectiveness and efficiency of operations Effectiveness and efficiency of operations