Hospitality Financial Accounting

JERRY J. WEYGANDT, PH.D., C.P.A., is the Arthur Andersen Alumni Professor of Accounting at the University of Wisconsin–Madison. DONALD E. KIESO, PH.D., C.P.A., is the KPMG Emeritus Professor of Accounting at Northern Illinois University. PAUL D. KIMMEL, PH.D., C.P.A., is an Associate Professor of Accounting at the University of Wisconsin–Milwaukee. AGNES L. DeFRANCO, Ed.D., C.H.E., is a Professor in the Conrad N. Hilton School of Hotel and Restaurant Management at the University of Houston.

• CHAPTER 1 HOSPITALITY ACCOUNTING IN ACTION 1FEATURE STORY: Financial Reporting: A Matter of Trust 1What Is Accounting? 2Who Uses Accounting Data? 4Brief History of Accounting 5Distinguishing between Bookkeeping and Accounting 6Accounting and You 6The Building Blocks of Accounting 7Ethics—A Fundamental Business Concept 8Generally Accepted Accounting Principles 8Assumptions 9Basic Accounting Equation 11The Accounting Cycle and the Flow of Information 14The Uniform System of Accounts and Financial Reporting 15Lodging Industry 16Foodservice Industry 16Club Industry 16Spa Industry 16Gaming Industry 17Accounting and Financial Management in Hospitality 17Hotel Operations 17Hotel Accounting Department Organization 20Foodservice Operations 22Club Operations 23Appendix The Accounting Profession 25Public Accounting 26Private Accounting 26Not-for-Profit Accounting 26CHAPTER 2 ACCOUNTING PRINCIPLES 30FEATURE STORY: Certainly Worth Investigating! 31The Conceptual Framework of Accounting 32Objectives of Financial Reporting 33Qualitative Characteristics of Accounting Information 34Elements of Financial Statements 35Operating Guidelines 36Assumptions 36Monetary Unit Assumption 37Economic Entity Assumption 37Time Period Assumption 37Going Concern Assumption 37Principles 37Revenue Recognition Principle 38Matching Principle (Expense Recognition) 38Full Disclosure Principle 40Cost Principle 40Constraints in Accounting 41Materiality 42Conservatism 42Summary of Conceptual Framework 42Financial Statement Presentation—An International Perspective 43Using the Building Blocks 44Transaction Analysis 45Summary of Transactions 50Financial Statements 52Income Statement 52Retained Earnings Statement 52Balance Sheet 54Statement of Cash Flows 54CHAPTER 3 THE RECORDING PROCESS 66FEATURE STORY: No Such Thing as a Perfect World 67The Account 68Debits and Credits 69Debit and Credit Procedures 69Stockholders’ Equity Relationships 72Expansion of the Basic Equation 73The Accounting Cycle 73Steps in the Recording Process 74The Journal 75The Ledger 77The Recording Process Illustrated 81Summary Illustration of Journalizing and Posting 87The Trial Balance 88Limitations of a Trial Balance 89Locating Errors 91Use of Dollar Signs 91Electronic Data Processing 92Comparative Advantages of Manual versus Computerized Systems 92A Look into the Future 93CHAPTER 4 ADJUSTING THE ACCOUNTS 102FEATURE STORY: Timing Is Everything 103Timing Issues 104Selecting an Accounting Time Period 105Fiscal and Calendar Years 105Accrual- versus Cash-Basis Accounting 105Recognizing Revenues and Expenses 106The Basics of Adjusting Entries 107Types of Adjusting Entries 108Adjusting Entries for Prepayments 108Adjusting Entries for Accruals 115Summary of Basic Relationships 120The Adjusted Trial Balance and Financial Statements 122Preparing the Adjusted Trial Balance 122Preparing Financial Statements 122Alternative Treatment of Prepaid Expenses and Unearned Revenues 124Prepaid Expenses 124Unearned Revenues 126Summary of Additional Adjustment Relationships 127CHAPTER 5 COMPLETION OF THEACCOUNTING CYCLE 136FEATURE STORY: Everyone Likes to Win 137Using a Work Sheet 138Steps in Preparing a Work Sheet 138Preparing Financial Statements from a Work Sheet 141Preparing Adjusting Entries from a Work Sheet 144Closing the Books 144Preparing Closing Entries 145Closing Entries, Illustrated 147Posting of Closing Entries 147Preparing a Postclosing Trial Balance 149Summary of the Accounting Cycle 150Correcting Entries—An Avoidable Step 151Classified Balance Sheet 154Standard Classifications 154Classified Balance Sheet, Illustrated 158CHAPTER 6 FINANCIAL STATEMENTS 168FEATURE STORY: Cash Is King 169The Income Statement 170Multiple-Step Income Statement 170Single-Step Income Statement 174Departmental Income Statement 175Consolidated Income Statement 176Classified Balance Sheet 176Relationship between the Income Statement and the Balance Sheet 177The Statement of Cash Flows: Purpose and Format 178Purpose of the Statement of Cash Flows 178Meaning of Cash Flows 179Classification of Cash Flows 179Significant Noncash Activities 180Format of the Statement of Cash Flows 181Usefulness of the Statement of Cash Flows 182Preparing the Statement of Cash Flows 183Indirect and Direct Methods 183Indirect Method for Statement of Cash Flows 185First Year of Operations—2008 185Second Year of Operations—2009 189CHAPTER 7 FINANCIAL STATEMENT ANALYSIS 204FEATURE STORY: “Follow That Stock!” 205Basics of Financial Statement Analysis 206Need for Comparative Analysis 206Tools of Financial Statement Analysis 207Horizontal Analysis 207Balance Sheet 208Income Statement 208Retained Earnings Statement 210Vertical Analysis 210Balance Sheet 210Income Statement 211Ratio Analysis 213Liquidity Ratios 214Profitability Ratios 217Solvency Ratios 220Summary of Ratios 221Limitations of Financial Statement Analysis 222Estimates 222Cost 222Alternative Accounting Methods 223Atypical Data 223Diversification of Firms 223CHAPTER 8 ACCOUNTING FOR MERCHANDISINGOPERATIONS IN HOSPITALITY 232FEATURE STORY: Selling Dollars for 85Cents 233Merchandising Operations 234Operating Cycles 235Inventory Systems 236Recording Purchases of Merchandise 238Purchase Returns and Allowances 240Freight Costs 241Purchase Discounts 241Recording Sales of Merchandise 243Sales Returns and Allowances 244Sales Discounts 245Completing the Accounting Cycle 246Adjusting Entries 246Closing Entries 247Summary of Merchandising Entries 247Work Sheet for a Merchandiser 248Using a Work Sheet 248CHAPTER 9 INVENTORIES AND COST OF GOODSCALCULATION 260FEATURE STORY: $12,800 Worth of Blueberry Muffins! 261Inventory Basics 262Classifying Inventory 263Determining Inventory Quantities 263Inventory Accounting Systems 265Periodic Inventory System 266Recording Transactions 266Recording Purchases of Merchandise 266Recording Sales of Merchandise 267Cost of Goods Sold 268Determining Cost of Goods Purchased 268Transfers In and Out 270Food Cost Calculations 271Beverage Cost Calculations 271Income Statement Presentation 272Inventory Costing under a Periodic Inventory System 273Using Actual Physical Flow Costing— Specific Identification 273Using Assumed Cost-Flow Methods—FIFO, LIFO, and Average Cost 274Financial Statement Effects of Cost-Flow Methods 278Using Inventory Cost-Flow Methods Consistently 280Inventory Errors 281Income Statement Effects 281Balance Sheet Effects 282Statement Presentation and Analysis 282Presentation 282Analysis 283CHAPTER 10INTERNAL CONTROL AND CASH 288FEATURE STORY: Minding the Money in Moose Jaw 289Internal Control 290Principles of Internal Control 291Limitations of Internal Control 296Cash Controls 296Internal Control over Cash Receipts 297Internal Control over Cash Disbursements 300Use of a Bank 302Making Bank Deposits 302Writing Checks 302Bank Statements 304Reconciling the Bank Account 305CHAPTER 11 PAYROLL 318FEATURE STORY: Payroll: A Manageable Cost in the Hospitality Industry 319Payroll Defined 320Internal Control of Payroll 320Hiring Employees 321Timekeeping 321Preparing the Payroll 323Paying the Payroll 323Fair Labor Standards Act 323Determining the Payroll 324Gross Earnings 324Payroll Deductions 325Net Pay 327Recording the Payroll 327Maintaining Payroll Department Records 327Recognizing Payroll Expenses and Liabilities 329Recording Payment of the Payroll 329Tipped Employees 330Tip Reporting 331Employer Payroll Taxes 336FICA Taxes 336Federal Unemployment Taxes 336State Unemployment Taxes 337Recording Employer Payroll Taxes 337Filing and Remitting Payroll Taxes 338CHAPTER 12 ACCOUNTING FOR RECEIVABLESAND PAYABLES 346FEATURE STORY: Financing His Dreams 347Accounts Receivable 348Types of Receivables 348Recognizing Accounts Receivable 349Valuing Accounts Receivable 350Disposing of Accounts Receivable 357Credit Policies 360The Credit Department 360The Credit Policy before, during, and after the Event 360City Ledger of a Hotel 361Notes Receivable 361Determining the Maturity Date 362Computing Interest 363Recognizing Notes Receivable 364Valuing Notes Receivable 364Disposing of Notes Receivable 364What Is a Current Liability? 367Notes Payable 367Sales Tax Payable 368Payroll and Payroll Taxes Payable 369Unearned Revenues 371Current Maturities of Long-Term Debt 371CHAPTER 13 LONG-TERM ANDINTANGIBLE ASSETS 380FEATURE STORY: Time to Relax 381Long-Term Assets 383Determining the Cost of Long-Term Assets 383Land 384Land Improvements 384Buildings 384Equipment 385Depreciation 386Revising Periodic Depreciation 394Expenditures during Useful Life 395Long-Term Asset Disposals 396Intangible Assets 401Patents 402Copyrights 402Trademarks and Trade Names 402Franchises and Licenses 403Goodwill 403CHAPTER 1 4 SOLE PROPRIETORSHIPS,PARTNERSHIPS, ANDCORPORATIONS 410FEATURE STORY: “Two All Beef Patties, Special Sauce, Lettuce, Cheese, Pickles, Onions on a Sesame Seed Bun” 411Sole Proprietorships 412Partnerships 413Association of Individuals 413Mutual Agency 413Limited Life 414Unlimited Liability 414Co-ownership of Property 414Advantages and Disadvantages of a Partnership 414The Partnership Agreement 415Formation of a Partnership 415Division of Net Income or Net Loss 416Partnership Financial Statements 419The Corporate Form of Organization and Stock Transactions 420Characteristics of a Corporation 420Forming a Corporation 424Corporate Capital 424Accounting for Common Stock Issues 429Accounting for Treasury Stock 432Preferred Stock 436Dividends 438Cash Dividends 438Stock Dividends 441Entries for Stock Dividends 442Effects of Stock Dividends 443Stock Splits 443Retained Earnings 445Retained Earnings Restrictions 446Prior Period Adjustments 447Retained Earnings Statement 447APPENDIX ASPECIMEN FINANCIAL STATEMENTS: PepsiCo, Inc. 454APPENDIX BSUBSUDIARY LEDGERS AND SPECIAL JOURNALS 482FEATURE STORY: Different Roads for Different Folks 483Expanding the Ledger—Subsidiary Ledgers 484Nature and Purpose of Subsidiary Ledgers 484Example 485Advantages of Subsidiary Ledgers 486Expanding the Journal—Special Journals 487Sales Journal 488Cash Receipts Journal 490Purchases Journal 495Cash Payments Journal 496Effects of Special Journals on the General Journal 498Photo Credits 505Index 507