Hospitality Finance HB 311
Popular in Course
Popular in OTHER
This 6 page Class Notes was uploaded by Ms. Ambrose Hills on Saturday September 19, 2015. The Class Notes belongs to HB 311 at Michigan State University taught by Arjun Singh in Fall. Since its upload, it has received 70 views. For similar materials see /class/207504/hb-311-michigan-state-university in OTHER at Michigan State University.
Reviews for Hospitality Finance
Report this Material
What is Karma?
Karma is the currency of StudySoup.
Date Created: 09/19/15
Chapter 1 Guide for Exam 1 1 Understand difference between accounting and nance a 57 Accounting i System of record keeping designed to portray a firms operations to the world in a fair and unbiased way ii Records are used periodically to produce financial statements that present the companies results to anyone who reads them Finance i Is the art and science for handling money ii To raise money to acquire an asset to do some project 2 areas iii Investments in nancial markets iv Financial management of companies V 2 Understand difference between real and financial asset a b Real assets i Object or thing such as a car house factory or a piece of machinery ii They provide service of some kind such as transportation shelter or the ability to produce something Financial assets i Are legal documents they re value comes from the fact that they give their owners claim to future cash ows ii Are either stock or bonds and their claim to future income based on ownership of debt 3 What is a financial market and role of stockbrokers a b Financial Market i It s a framework or organization in which people can buy and sell securities in accordance with well de ned rules and regulations ii Stock market iii Are places investors buy nancial assets from companies that issue them Stockbroker i A licensed person who helps investors buy and sell securities for commission The stock market is really the entire network of brokers and exchanges all connected together 4 Organizational structure of financial management department and roleresponsibilities a Finance Department 1 Chief Financial Of cer CFO or VP of Finance repeitto the President of the company b Roles and Responsibilities 1 Keeping records Paying employees and vendors Receiving payments from customers iquot iv Borrowing amp Purchasing assets v Selling stock vi Paying dividends Finance department is responsible for its own activities but has a responsibility for the operation of other departments as well Finance Department Organization TREASURER CONTROLLER 5 Cash Flow from perspective of nance and why important a The Accounting System portrays a business s financial results in ways that re ect what is physically going on b In Finance is less interested in such portrayal and tends to concentrate on where cash is coming from and going to cash is king i How does the rm look to shareholders ii The fundamental principle behind a nancial cash ow perspective of daily operations is that every task is a link in the chain of events that leads to getting paid When you talk to your accountant your financial controller or your operations manager this is the view of the business they have It is a very important view if you like getting paid each month There is nothing wrong with it It is also not the only useful way of looking at things 6 Advantage and Disadvantage of sole proprietorship vs corporation Also understand how taxation makes a difference in the two forms a Sole Proprietorship i Someone who owns an unincorporated business by himself or herself ii Entrepreneur to get started get a local permit and declare business open iii The law makes no distinction between you the sole proprietor and your business Virtually all the legal and tax consequences associated with sole proprietorships ow from this essential element b Advantages i Avoidance of double tax ii You can deduct your business losses to the extent of your total income that you may have from all sources including interest dividends and gains from the sale of nonbusiness property Furthermore if you are married and file a joint tax return your business losses will also offset your spouse39s income Your ability to deduct losses as a sole proprietor may reduce your family39s total income tax burden and may be particularly useful during a startup or downturn phase of your business 0 Disadvantages i The sole proprietor are personally liable for all the debts of your sole proprietorship The reason for this is once again the law makes no distinction between you the sole proprietor and your sole proprietorship ii You may pay higher income taxes d Corporation i a legal entity that is created under the laws of a state designed to establish the entity as a separate legal entity having its own privileges and liabilities distinct from those of its members ii Must go through a legal process of incorporation and register with the state using a lawyer to le all papers costly e Advantages 39 Its stockholders limited liability Since the corporation is a separate legal entity its stockholders are protected from the debts and liabilities of the corporation A corporation has unlimited life If an owner dies or sells his interest the corporation will continue to exist and do business ii39 Ability to easily establish insurance and retirement plans iv Ownership of corporation is easily sold or transferred through sale or transfer of stock v Capital can be raised through sale of stock f Disadvantages i double taxation 1quot A corporation has centralized management which may remain in place after sale of business 7 What is the primary goal ofmanagement a To run a company b Need goals or objectives against which to measure the implication of its decisions c Shareholder Wealth Maximization i Management works for stockholder and the goal is the maximization of the shareholders wealth Chapter 2 1 Understand difference between cash flow and income statement a Cash Flow i It details the movement of cash in and out of the company Constructed form the income statement and balance sheet Flow over an entire period of time Represent 1 Operating Activities 2 Investing Activities 3 Financing Activities b Income Statement It starts with the dollar amount of the company has sold deducts costs expenses and taxes and winds up with a gure called Net Income EAT Eamings After Tax i Shows money owing in and out of the organization iii Flow of money over a certain period of time 2 Understand the meaning and concept of depreciation from an accounting and nance perspective a Depreciation i Artificial accounting device that spread the cost of an asset over its estimated useful life no matter how its acquired or paid for ii To match the ow of the assets cost into the income statement with the delivery services over time Cost and expense usually include depreciation Accounting Perspective i Entry posting depreciation expense to the income statement post the same amount to the balance sheet account called accumulated depreciation c Finance Perspective i Depreciation is a nancial ction it doesn t represent a current ow of money even through its treated as a cost or an expense it has nothing to do with how an asset is acquired or paid for 3 Ability to calculate straightline and accumulated depreciation a StraightLine Depreciation i The cost spread evenly over the life of an asset DPNCRN DPN Annual straightline depreciation charge C Cost ofthe asset R Residual value of the asset N Useful economic life of the asset years b Accumulated Depreciation i The entry posting depreciation expense to the income statement posts the same amount to the balance sheet Income statement Depreciation Expense Balance Sheet Accumulated Depreciation ii Is carried as an offset to the value of an asset so at any time the net value of an asset is the difference between its original cost and its accumulated depreciation Each Balance Sheet will carry 3 numbers related to the asset Gross value 2 Accumulated Depreciation 3 Net Value 4 Understand the double entry system of accounting and accounting periods a Means that each entry has two equal parts called sides each side of an entry is made to a different accounts b 2 sides represent where we get the money and what we do with it c The 2 sides are called Debits and Credits 5 Understand clearly all the different parts of an a Income statement Sales 1 COGS 1 Gross Margin 1 Expenses 1 EBIT Interest Expense EBT Tax 1 Net Income b Balance Sheet Assets Cash xx AR xx Inventory g Current Assets xxx Fixed Assets Gross xx AD amp Net amp Total Assets xxxx I will ask concept and calculation questions related to these nancial statements 6 What is the difference between a municipal bond and corporate bond And calculate effective rate based on impact of tax a Municipal Bond Taxable Income Munis i Are bonds issued by government authorities below federal level includes state counties cities ii The interest of Federal Bonds is not exempt but is taxable b Corporate Bond i A bond the can be converted into a speci c of shares of stock at owners discretion ii Not tax exempt Income Avg Tax rate Total Tax Liability taxable income including dividends Less Deductions Exem tions Taxable income excl divid 7 What is the marriage penalty a In the tax system the phenomenon that a 2 income marriage couple pays more tax than the sum of 2 single people making the same money TETR Total Effective Tax Rate TF TS 1 TF 8 You should be able to calculate personal and corporate taxes similar to class work and homework 9 Difference between marginal and average tax a Marginal Tax i Rate that will be paid on the next dollar of income the person earns ii Relevant for investment decisions b Average Tax i The percentage of total income the person pays in taxes ii Total tax bill taxable income Use bracket hypothetical tax rate Practice Problems 19 The Benjamin family had wage earnings of 85000 in 2003 They received interest of 4500 on corporate bonds and 1500 on bonds issued by the state Their dividend income was 500 and they had a 1000 long term capital gain on the sale of securities They paid real estate taxes of 1450 state income tax of 3000 and donated 550 to their church They paid interest of 8000 on their home mortgage They have one dependent child What was their tax liability for 2003 24 Dick Dowen is considering three investment opportunities a A 45 City of Chicago bond that is tax exempt at both the state and federal level b A 635 State of Illinois bond that is tax exempt at the state level but taxable at the federal level c A 67 McDonald s bond that is taxable at both the state and federal level If the Illinois state tax rate is 6 and Dick s marginal federal tax rate is 30 which investment yields the highest aftertax return Chapter 3 1 Understand components of a statement of cash ows and related activities a Operating i have to do with running the business of an day to day basis ii Include 1 Buying inventory 2 Producing and selling a product 3 Paying expenses and taxes 4 Collecting on credit sales 5 Recognize money from operating transactions 6 Through the current balance sheet account iii Operating income 1 Adds back depreciation which was subtracted in the calculation of NI Analyzes balances other than cash Net Depreciation 7 Net changes in current accounts cash from Operating Activities b Investing 7 i Occur when the rm buys invests in or sells things such as xed assets that enable it to do business Investing activities also include long term purchases and sales of financial assets ii Typically includes purchasing xed assets PPampE Property plant and equipment 0 Financial Assets i Stocks and bonds more generally a document giving its owner a claim to certain future cash ows Stocks base that claim on ownershipequity while bonds base it on debt securities 11 d Financing i Occurs when the company borrows money pays off loans and sells stock or pays dividends They have to do with raising money and servicing obligations that come along with it 1 Company has taken another loan 2 Sale of stock 3 Dividend payment A sale of stock increases a liability which increases equit ii deal with the capital accounts long term debt and equity You should be able to recognize transactions and where they t For example purchase of a fixed asset is what activity Paying dividends is what activity 2 Understand the cash ow rules and how they affect sources and uses of cash a Cash Flow Rules 1 Rules are that changes in balance sheet accounts result in sources and use of cash b Rules i Assets Increase Use of cash ii Assets Decrease Source of cash iii Liabilities Increase Source of cash iv Liabilities decrease Use of cash 3 You should be able to recognize the different categories of ratios and their purpose For example current ratio is a liquidity ratio which measures ability to pay short term obligations a Ratios Categories i Liquidity 1 Ability to pay short term obligations a Current Rutio CA CL b Quick Rutio CAinventory CL Asset management 1 Shows how company uses its resources to generate revenue and pro t and avoid costs a ACPuveruge collection perio accounts Receivables Avg daily sales or Accounts receivubles sales 360 b Inventory turnover COGSinventory c Fixed usset turnover sales Fixed Assets d Totul usset turn over sales total assets Debt management 1 How effectively the firm uses other people s money and if it s using too much borrowed a Debt rutio LT Debt CL Total Assets b Debt to equity rutio LT Debt Equity c TIE EBIT interest d Cush Coveruge EBIT Depreciation interest e Fixed churge coveruge EBIT lease pymts interest lease pymts ii39 iv Pro tability 1 Several measures to assess the success of the whole venture in making money 2 Return on Sale Assets and Equity a ROS NI Sales b ROA NI Total Assets c ROE NI Equity v Market value 1 Give an indication of how investors feel about the company s nancial future a PE Ratio Stock Price EPS EPS EAT of Shares EAT NI Indication of the value the stock market place on a company b Murket to book vulue rutio Stock Price Book value per share 4 Understand common size statements and their purposeadvantage a Common size statements i The rst step in nancial analysis is usually the calculation of a set of ratios