The Accounting Process

The process of accounting involves organizing and summarizing a multitude of business data into a form that is usable to a manager.

1) gather and record original transaction documents

2) assign to accounts and sub-accounts

3) prepare statements

4) management action

Financial Statements

Income Statement or Profit/Loss Statement: summarizes the financial activity of the organization over a specific period of time (annually, quarterly, monthly).

Quoggy Jo Ski Center

Income Statement

8/31/16 Through 4/30/17

REVENUE
Lift Tickets		$14,597.50
Lodge Rental		$870.00
Other Income		$313.48
Retail Sales		$432.00
Ski Pass Sales		$2,650.00
Ski Rental		$3,405.00
Ski Swap Revenue		$2,684.59
Snackbar		$1,932.98
T-Shirt Sales		$140.50
TOTAL REVENUES		$27,026.05
OPERATING EXPENSES
Insurance:
- Car Insurance	$50.00
- Property Insurance	$277.00
- Ski Liability	$5,765.00
- Workers Comp	$635.75
Total Insurance		$6,727.75
Payroll:
Full-time		$5,643.00
Part-time		$1,495.00
Payroll Taxes:
- Fed SSN-Med	$677.45
- Fed Unemployment	$25.13
-State Unemployment	$117.90
- State Withholding	$7.00
Total Payroll Taxes		$827.48
Petty Cash		$315.96
Publicity:
- Newspaper Ads	$302.06
- Parade	$74.15
- Brochures	$125.45
Total Publicity		$501.66
Repairs:
- Buildings & Grds	$986.04
- Vehicles	$480.35
Total Repairs		$1,466.39
Ski Equipment:
- New Skis	$863.51
- Ski Supplies	$47.52
Total Ski Equip		$911.04
Ski races		$105.25
Snackbar Supplies		$868.08
Supplies:
- Business	$2.88.88
- Cleaning	$25.00
Total Supplies		$313.88
T-Shirts		$323.40
Taxes:
- Business Tax	$145.00
- Property Tax	$1,423.48
- Sales Tax	$508.99
Total Taxes		$2,077.47
Utilities:
- Electric (lodge)	$868.47
- Electric (tow)	$244.53
- Gasoline	$318.60
- Heating Oil	$646.75
- Snow Removal	$255.00
- Telephone	$280.59
- Trash removal	$39.50
Total Utilities		$2,653.44
Expenses - Other		$47.07
TOTAL OPERATING EXPENSES		$25,952.78
PRE-TAX INCOME Less tax reserve		$  1,073.27  $    450.00
Net Income		$      623.27

Cash Flow Statement: shows the difference between revenues and expenses over a monthly or quarterly period.

Quoggy Jo Ski Centre: 6-Month Cash Flow Statement

	January	February	March	April	May	June	Total
Net Revenues	2,000	2,300	1,800	300	300	250	6,900
Expenses	2,300	1,500	1,200	435	275	205	5,985
Monthly Cash Flow	(300)	800	600	(135)	25	45
Cumulative Cash Flow	(300)	500	1,100	965	990	1,035
Cash at Beginning of Month	2,000	1,700	2,500	3,100	2,965	2,990
Cash Position at End of Month	1,700	2,500	3,100	2,965	2,990	3,035

Balance Sheet: shows the financial condition of an organization at a point in time (month, quarter, or year).

Balance Sheet

Assets		Liabilities and Net Worth
Cash	2,300.00	Accounts payable	845.00
Merchandise Inventory	3,200.00	Taxes Payable	325.00
Accounts Receivable	165.00	Total Current Liabilities	1,170.00
Total Current Assets	5,665.00
Ski Shop Fixtures	800.00	Bank Loan	2,000.00
Office Equipment	2,500.00	Total Long Term Liabilities	2,000.00
Total Fixed Assets	3,300.00	Total Liabilities	3,170.00
Total Assets	8,965.00	Total Net Worth	5,795
		Total Liabilities and Net Worth	8,965.00

	current assets - cash and those assets that can be turned into cash.
	accounts receivable - amounts not yet collected from customers and are currently due.
	fixed assets - assets not intended for sale that are used to create, display, or transport the product/service. Including land, buildings, machinery and equipment.
	depreciation - an accounting method used to expense the decline in useful value of a fixed asset due to normal wear, tear, and obsolescence.
	accounts payable - the amount the business owes to its suppliers, and to service providers from whom they have bought goods/services on credit and to employees for salaries.
	current liabilities - debts for regular business operations that will come due in the near future.
	long-term liabilities - debts that are due after one year from the date from the financial report, usually mortgages, bonds and other major loans.
	net worth (owner's equity) - the portion of the business that is owned free and clear of all debts.

Budget Statement: allows the commercial recreation and tourism manager to review the financial activity of the enterprise with respect to the planned program of income and expenditure. It shows how much of a budgeted amount has been spent or received as a given point in the fiscal term.

Quoggy Jo Ski Center December 31, 2017
	Budget	Actual	Committed	%	Balance
Revenue
Lift Tickets	16,000	14,500	0	90.6	1,500
Snack Bar	2,500	1,932	0	77.2	568
Ski Rental Shop	4,000	3,405	0	85.1	595
Lodge Rental	1,500	870	0	58	630
Total Revenue	24,000	20,707	0	86.2	3,293
Expenses
Personnel	12,000	7,965	1,525	79	2,510
Maintenance	5,000	1,466	960	48.5	2,574
Program/Ski Supplies	1,500	988	90	71.8	422
Transportation	2,250	1,061	600	73.8	589
Promotion	2,000	1,112	400	75.6	488
Total Expenses	22,750	12,582	3,575	55.3	6,583

Financial Planning

The main purpose of financial records is to provide the commercial recreation and tourism manager with information to use in planning and decision making.

Break Even Analysis

Break Even Analysis: is a management control device that helps determine how much must be sold at a given price in order to exactly cover costs. Profit is realized with the sale of each unit after the break-even point.

Fixed costs: expenses that must be paid in full, regardless of how many customers purchase the product or service. Fixed costs typically include management salaries, payroll, property taxes, equipment leases, utilities, maintenance, insurance, rent/mortgage, legal/accounting fees, and advertising, vehicles, and major equipment.

Variable costs: expense that increase or decrease depending upon how many customers use the product or service. Typically, a ratio can be established between the number of customers and the item of expense.

Break Even Analysis - Contribution Method

BE Point= total fixed costs / revenue per unit - variable costs per unit

Example:

$    4,400___ = $4,400 = 88 sales/week
$60 - $10          $50

Ratio Analysis

Ratio analysis is one of the best ways to measure the relative efficiency and of the business.

	Quick ratio: cash plus accounts receivable compared to current liabilities. Quick = (current assets - inventories)/current liabilities
	Current ratio: used to estimate the ability of a business to meet its short term financial obligations.  Current assets should be twice current liabilities (ratio of 1.o or higher). Current = current assets/current liabilities
	Debt-to-net worth ratio: used to compare the total financial obligations of the business to the investment of its owners.  Debt -t-net-worth = current and long term liabilities/net worth
	Activity ratios: Average collection period : shows the average time to receive payment for products/services delivered. Average collection period = (accounts receivable/sales) x 365 day
	Profitability ratios: Return on equity = net profits after taxes/equity
	Profitability ratios: Return on sales = net income/net sales
	Debt/coverage/leverage ratios: Equity ratio = Equity/Total Assets

Cash Flow Management

Most commercial recreation and tourism businesses have periods during their peak season when they generate more revenue than needed to meet expenses. Conversely, during off-seasons, expenses usually demand more cash than revenues generate. The primary objective of cash flow management is to smooth out these uneven combinations of revenue and expenses. Two Primary Strategies for Improving Cash Flow

1) Emphasize transactions that increase or accelerate cash inflow.

2) Pursue transactions that economize or delay cash payments.

Require cash payments

require prompt payment

deposit revenues the day they are received

only pay bills on due dates

minimize inventory buildup

Budgeting - A budget is a plan of action with price tags attached. It projects everything that is expected to occur in the coming year, with the associated revenues and costs.

Budgeting Problems:

	over-budgeting - too complex budget
	budgeting based only on precedent - budgets should reflect current market conditions, not historical data
	overestimating revenue by overestimating demand - be cautious in estimating revenues
	underestimating expenses - be realistic in estimating expenses and have a reserve fund to cover shortfalls
	regarding budgets as a straitjacket - budgets are tools and not written in stone. be flexible when necessary

How to Increase Profits

Opportunities to increase profits may be realized at each stage of the formula used to produce the income statement:

Sales

- Cost of Goods

Margin on Sales

- Operating Expenses

Profits

Strategies to Increase Profits

	Price Increases: if cost of goods is stable and sales volume does not decline.
	Increased sales volume: if margin on sales can be held constant or reduce margin, increase volume.
	Improved purchasing: accurate purchasing of the types/amount of products consumers want. Economy of scale.
	Volume purchasing: buying in bulk may save money.
	Consignment: Get products on consignment and pay for only items sold.
	Inventory control: enough but not too much stock
	Reduce labor costs: use part time help; contract for specialists; hire generalists
	Reduce overhead costs: lease facilities; share capital assets and overhead with other businesses; sell-off non-productive assets; reduce other overhead; utilities, telephone, maintenance, advertising
	Financial controls: avoid losing money through employee errors or dishonesty.

Auxiliary Revenue Sources

A secondary line or products/services that may significantly add to your profitability.

Core product extensions Recreation programs Equipment rental Repair services Food and beverage concessions Retail product sales (pro-shop) Video games        Leased space to outside business

Five Types of Consumer Credit

1. open (charge) account - purchases are billed on a regular cycle

2. revolving account - customers are allowed a fixed amount of credit and pay a minimum each month.

3. budget account - used for somewhat costly items

4. installment account - used for high-end items and requires a down payment and monthly payments

5. bank debit card - purchases are charged to a existing savings or checking account

Types of Budgets

The two primary types of budget are operating & maintenance (O&M) and capital.

Operating & Maintenance (O & M): a type of budget used to help the manager operate the day-to-day business. All budgets other than Capital budgets are operating budgets. It contains detailed information of all administrative costs (personnel salaries, payroll taxes and benefits, office rentals, maintenance, equipment, insurance etc.) required to operate the business, usually for one year. Budgets are based on a fiscal or a calendar year. A fiscal year is normally July 1 to June 30. A calendar year is January 1 to December 31. Sample: Line Item Budget

Capital: is utilized for long-range, high-cost, and long-term budget items such as new buildings, vehicles, major facility renovations etc. It is a separate document that includes proposed expenditures for carrying out major purchases and construction projects of a substantial and long-term nature. These would include the purchase of heavy equipment, vehicles, land purchases and/or the purchase or construction of new facilities (golf courses, intergenerational centers etc). They might include major retrofit/renovation projects but not routine maintenance expenses. NOTE: Start-up expenses and NOT included in a capital budget. Sample: Capital Budget Capital Budget 2018 2019 2020 2021 Trampoline   $14,300     Bounce House       $18,000 Generator1     $6,000

 

[return to Chapter Five]

Copyright 2012 Northern Arizona University, ALL RIGHTS RESERVED