1. Copyright  2006 Pearson Education Canada Inc. 13-1

2. Copyright  2006 Pearson Education Canada Inc. 13-2 Outline  Objectives of Financial Statement Presentation  Financial Analysis  Trend Analysis, Vertical and Horizontal Analysis, Ratio Analysis, Liquidity Analysis, Solvency and Leverage Analysis  Profitability  Operating Performance Analysis  Cash Flow Analysis  Auditor’s Opinion  Notes to the Financial Statements  Limitations of Financial Statements

3. Copyright  2006 Pearson Education Canada Inc. 13-3 OBJECTIVES OF FINANCIAL STATEMENT PRESENTATION Provides useful information  For credit and investment decisions  In assessing cash flow prospects about business’ economic resources, including claims to those resources and changes in them

4. Copyright  2006 Pearson Education Canada Inc. 13-4 Financial Analysis  Trend Analysis  Vertical and Horizontal Analysis  Ratio Analysis  Cash Flow Analysis.

5. Copyright  2006 Pearson Education Canada Inc. 13-5 Trend Analysis  Used to predict earnings by forecasting future revenues and expenses  Past experience is projected into the future, taking into consideration known or planned changes.

6. Copyright  2006 Pearson Education Canada Inc. 13-6 Vertical and Horizontal Analysis  Vertical Common ‑ Size Analysis Compares all figures on the statement with a base figure selected from the same statement  Horizontal Common-Size Analysis Compares all figures on one financial statement with the same account selected from a base year

7. Copyright  2006 Pearson Education Canada Inc. 13-7 Ratio Analysis Indicates the strengths and weaknesses of a hospitality firm by calculating basic relationships Liquidity Solvency and Leverage Profitability Operating Performance

8. Copyright  2006 Pearson Education Canada Inc. 13-8 Liquidity Analysis Liquidity ratios measure the hospitality firm's ability to meet its short ‑ term obligations as they become due  Current ratio- provides a rough measure of liquidity  Quick Ratio- Measures the extent to which cash and- near cash items (short ‑ term investments and receivables) cover current liabilities  Accounts Receivable Turnover -shows the number of times that accounts receivable is converted into cash during the period

9. Copyright  2006 Pearson Education Canada Inc. 13-9 Solvency and Leverage Analysis Viewed as an indicator of the company's ability to meet its long ‑ term obligations as they mature Debt to equity ratio - an expression of the creditors' financing in relation to the owners’ financing Interest Coverage - measures the ability of the company to meet its annual interest costs

10. Copyright  2006 Pearson Education Canada Inc. 13-10 Profitability Profitability Analysis Centers on the measurement of a hospitality firm's ability to generate earnings from the available resources Return on Equity- a fundamental measure of profitability from the standpoint of current and prospective investors Return on Assets - a measure of the return obtained on all the company's assets without consideration of the method used to finance them Profit Margin - expresses the net income per dollar of sale Operating Efficiency Ratio - expresses the ability of a hotel firm to operate profitably by relating income before fixed charges to revenues

11. Copyright  2006 Pearson Education Canada Inc. 13-11 Profitability Measures for Investors Earnings Per Share - reflect management's success in achieving earnings for the owners Price-Earnings ratio - serves as a reflection of how much the investing public is willing to pay for the company's prospective earnings Dividend Yield - relates the current price of the company's common stock to the annual dividend as a measure of current return on investment

12. Copyright  2006 Pearson Education Canada Inc. 13-12 Operating Performance Analysis Activity and operating ratios measure the effective utilization of the hospitality firm's assets while relating business success to the company's ability to generate revenues and control expenses Inventory Turnovers - show how rapidly goods (e.g., food and beverages) are being sold and replaced during the period Cost Percentages- measure the relative efficiency of the operations Annual Occupancy Percentage - measures the use of facilities through the generation of revenues from the sale of space. Average Daily Rate - serves as an indication of the rate structure and/or salesmanship ability

13. Copyright  2006 Pearson Education Canada Inc. 13-13 Cash Flow Analysis Cash flow analysis encompasses the review of major sources and uses of cash reported on the Statement of Cash Flow Sources of cash Internal- Operations External - Issuance of preferred and common stock Sale of non-operating assets/ Debt issuances Uses of Cash Expansion Repayment of debt Dividend/ Purchase of treasury stock

14. Copyright  2006 Pearson Education Canada Inc. 13-14 Examination of Supplemental Information AUDITOR’S OPINION NOTES TO THE FINANCIAL STATEMENTS

15. Copyright  2006 Pearson Education Canada Inc. 13-15 Auditor’s Opinion Main purpose of the independent audit is to provide external parties with a reasonable degree of assurance as to the validity of the information contained in the financial statements. The CA's opinion letter includes  A scope paragraph  Opinion paragraph  Unqualified (or clean) Opinion  Qualified Opinion  Disclaimer of Opinion  Adverse Opinion

16. Copyright  2006 Pearson Education Canada Inc. 13-16 Notes to the Financial Statements Considered an integral part of the financial statements.  Summary of Significant Accounting Principles  Commitments and Contingencies  Segment Reporting  Pension Plans  Long ‑ Term Debt Obligations  Subsequent Events  Other Disclosures

17. Copyright  2006 Pearson Education Canada Inc. 13-17 Limitations of Financial Statements  Conventional financial statements are prepared under a constant dollar.  Facts and conditions not specifically reflected on the financial statements could have a major impact on the future of a hospitality firm.  Only those facts that can be expressed in monetary terms are included in the financial statements.  Judgmental factors pertaining to diverse accounting treatments of inventory, depreciation, capitalizing vs. expensing expenditures, and the like make meaningful comparisons of hospitality firms doubtful.