Accounting and Financial Management in Foodservice Operations

David K. Hayes, PhD, has taught hospitality courses at Purdue University, Texas Tech University, The University of Houston, and Lansing Community College. He has served as the Vice President of Broadcast and Video Training for the American Hotel & Lodging Educational Institute. Jack D. Ninemeier, PhD, is an Emeritus Professor in the School of Hospitality Business at Michigan State University. He has many years’ experience developing and providing training and resource materials for commercial and non-commercial foodservice operations. He has also written several hundred articles for trade journals and created training monographs. Part of Wiley’s Foodservice Operations: The Essentials series.

Preface ix

Acknowledgments xiii

Dedication xv

1 Fundamentals of Accounting and Financial Management 1

Professional Accounting 2

Accounting for Effective Financial Management 3

Accounting Specializations 5

Users of Accounting Information 10

The Uniform System of Accounts for Restaurants (USAR) 11

Generally Accepted Accounting Principles (GAAP) 13

The Mechanics of Financial Management 20

Bookkeeping 20

Summary Accounting 21

Financial Analysis 21

Ethics in Accounting 22

2 The Mechanics of Accounting 27

Recording Business Transactions 28

The Basic Accounting Equation 29

Accounts Used in the Basic Accounting Equation 31

Asset Accounts 32

Liability Accounts 33

Owners’ Equity Accounts 34

Revenue and Expense Accounts 35

Recording Changes to the Basic Accounting Equation 37

Double- Entry Accounting 38

The Journal and General Ledger 39

Credits and Debits 40

Security of Financial Data 48

3 The Income Statement 55

The Importance of the Income Statement 56

Users of the Income Statement 59

Frequency of Income Statement Preparation 63

USAR Income Statement Format 64

Sales (Revenue) 65

Total Cost of Sales 66

Total Labor 68

Prime Cost 70

Other Controllable Expenses 71

Non- Controllable Expenses 75

Profits (Income) 77

Ebitda 78

Utilizing the Income Statement 80

Supporting Schedules 80

Comparative Analysis 81

4 The Balance Sheet 88

The Importance of the Balance Sheet 89

Users of the Balance Sheet 90

Limitations of the Balance Sheet 94

USAR Balance Sheet Format 95

Assets 95

Liabilities and Owners’ Equity 104

Analysis of the Balance Sheet 107

Ratio Analysis 107

Vertical Analysis 114

5 The Statement of Cash Flows 120

The Importance of Cash Flow 121

Sources and Uses of Funds 125

Creating the Statement of Cash Flows 131

Cash Flow from Operating Activities 133

Cash Flow from Investing Activities 138

Cash Flow from Financing Activities 139

Net Changes in Cash 140

Supplementary Schedules 142

Statement of Cash Flows Analysis 145

6 Understanding Costs and Break- even Analysis 150

The Importance of Understanding Costs 151

Types of Costs 152

Fixed and Variable Costs 153

Mixed Costs 156

Step Costs 163

Direct and Indirect (Overhead) Costs 164

Controllable and Non- Controllable Costs 165

Other Types of Costs 166

Break-even Analysis 170

Computation of Break- even Point 172

7 Profitable Pricing 181

Pricing for Profits 182

The Importance of Price 182

The Operator’s View of Price 183

The Guest’s View of Price 184

Factors Affecting Menu Pricing 185

Economic Conditions 186

Local Competition 187

Level of Service 187

Type of Guest 188

Product Quality 188

Portion Size 189

Delivery Method 190

Meal Period 191

Location 191

Bundling 192

Methods of Food and Beverage Pricing 194

Cost-based Pricing 194

Contribution Margin- based Pricing 197

Evaluation of Pricing Efforts 199

Menu Engineering 199

Calculating Popularity (Number Sold) 199

Calculating Weighted Contribution Margin 200

Menu Modifications 203

8 Food and Beverage Cost Control 207

The Importance of Food and Beverage Cost Control 208

Sales Forecasts 209

Standardized Recipes 212

Purchasing and Receiving Products 214

Purchasing Food and Beverage Products 214

Receiving Products 218

Managing Inventory and Production 223

Placing Products in Storage 223

Maintaining Product Security 225

Managing Production 226

Controlling the Cost of Sales Percentage 228

Controlling Food Costs 228

Controlling Beverage Costs 229

Optimizing Cost of Sales 231

9 Labor Cost Control 238

The Importance of Labor Cost Controls 239

Total Labor Costs 239

Factors Affecting Total Labor Costs 241

Accounting for Total Labor Costs 246

Types of Labor Costs 247

Accounting for Labor Costs 247

Assessment of Total Labor Costs 251

Sales per Labor Hour 252

Labor Dollars per Guest Served 253

10 Operating Budgets 263

The Importance of Operating Budgets 264

Types of Operating Budgets 264

Advantages of Operating Budgets 265

Creating an Operating Budget 266

Revenue Forecasts 268

Expense Forecasts 270

Monitoring the Operating Budget 276

Comparing Planned Results to Actual Results 277

Modifying the Operating Budget 283

11 Cash and Revenue Control 288

The Importance of Revenue Control 289

External Threats to Revenue Security 290

Internal Threats to Revenue Security 291

Developing a Revenue Security Program 296

Objectives of Internal Revenue Control 296

Elements of Internal Revenue Control Systems 297

Implementing and Monitoring a Revenue Security Program 299

Verification of Product Issues 300

Verification of Guest Charges 302

Verification of Sales Receipts 303

Verification of Sales Deposits 303

Verification of Accounts Payable (AP) 305

12 Accounting for Fixed and Other Assets 310

Accounting for Fixed Assets 311

Recording Fixed Asset Purchases 312

Depreciating Fixed Assets 314

Straight-Line Depreciation 314

Double Declining Balance Depreciation 315

Other Issues Related to Fixed Assets 317

Uniforms, Linens, China, Glass, Silver, and Utensils 317

Disposal of Fixed Assets 318

Exchange of Fixed Assets 319

Accounting for Other Assets 321

Choosing Professional Accounting Assistance 322

Monitoring Evolving Accounting Issues 327

Glossary G-1

Index I-1