C9 Analyzing Results Using The Income Statement

Chapter 9
Analyzing Results Using

The Income Statement
© 2015 John Wiley & Sons Food and Beverage Cost Control, 6th
Hoboken, NJ 07030 Edition
Dopson, Hayes, & Miller
Main Ideas
 Introduction to Financial Analysis

 Uniform System of Accounts
 Income Statement (USAR format)
 Analysis of Sales/Volume
 Analysis of Food Expense
Main Ideas (cont.)
 Analysis of Beverage Expense

 Analysis of Labor Expense
 Analysis of Other Expenses
 Analysis of Profits
 Technology Tools
Introduction to Financial Analysis
Part of management’s job is to sift through information

and select for analysis those numbers that can shed light
on exactly what is happening in their operations.
Among other things, they will want to determine:
How much money did we take in?

How much money did we spend?
How much profit did we make?
 Documenting and analyzing sales, expenses, and

profits is sometimes called cost accounting.
 However, that same activity is more appropriately

described as managerial accounting, to reflect the
importance managers should place on the process.
 Bookkeeping is the process of recording and

summarizing financial data.
 Managerial accounting is the analysis of recorded

and summarized data.
 Effective managerial accounting decisions rely upon

accurate bookkeeping.
Financial reports related to the operation of a

foodservice facility can be of interest to:
Management
Stockholders
Owners
Creditors
Governmental agencies
The general public
Managers do not have to be a Certified Management

Accountant (CMA) or a Certified Public Accountant
(CPA) to analyze data related to foodservice revenue
and expense.
In 2002, the United States Congress passed the

Sarbanes-Oxley Act (SOX). This law imposes criminal
penalties for those found to have committed accounting
fraud.
Uniform System of Accounts
 The National Restaurant Association has developed

the Uniform System of Accounts for Restaurants
(USAR). The USAR seeks to provide a consistent
and clear manner in which managers can record
sales, expenses, and overall financial condition.
 The uniform systems of accounts are guidelines, not
a mandated methodology.
 Managers should secure copies of appropriate
uniform system of accounts for their operations and
be familiar with its formats and reporting principles.
Income Statement (USAR format)

 The income statement, (P&L) is a summary report
that describes the sales achieved, the money spent
on expenses and the resulting profit generated by a
business in a defined accounting period.
 Each operation’s P&L statement may look slightly
different.
 Managers may prepare annual, quarterly, monthly,
or even weekly income statements.
Income Statement (USAR format)

 A precise definition of exactly what is meant by the
term “profit” must be established for each P&L
statement prepared if it is to be helpful and
communicate information accurately.
 One purpose of the P&L statement is to identify net
income, which is the profit generated after all
expenses of the business have been paid.
The Income Statement (USAR)
The Income Statement (USAR) (continued)
 Income statements list revenue first, then expense,

and finally the difference between the revenue and
expense figures.
 If the difference is positive, it represents a profit.
 If expenses exceed revenue, a loss, represented by a
negative number or a number in brackets, is shown.
 Operating at a loss is often referred to as operating
“in the red” or “shedding red ink.”
A foodservice operation’s income statement (USAR)

can best be understood by dividing it into four sections:
(1) Sales
(2) Prime cost
(3) Other controllable expenses
(4) Non-controllable expenses.
These sections are arranged on the income statement
from most controllable to least controllable by the
foodservice manager.
 The Sales category includes the revenue generated

by all of the food and beverage purchases made by
guests.
 The Prime cost section of a P&L details the amount

that was spent for food and beverages as well as the
total amount spent for labor. Prime cost is defined
as an operation’s total cost of sales added to its total
labor cost.
Revenue and expense categories on the income

statement are most often presented in two ways:
1. Whole dollar amounts

2. Percentages of total sales.
 All expense ratios are calculated as a percentage of

total sales except the following:
– Cost of Sales: Food is divided by food sales
– Cost of Sales: Beverage is divided by beverage

sales
 The income statement is an aggregate statement;

or summary of income and expense.
 Detailed income and expense information can be

found in supporting schedules.
Figure 9.2 Direct Operating Expenses Schedule
% of Direct
Operating
Type of Expense Expense Expenses Notes
Uniforms $ 13,408 10.15%
Laundry and Linen 40,964 31.00
China and Glassware 22,475 17.01 Expense is higher than
budgeted because
china shelf collapsed on
March 22.
Silverware 3,854 2.92
Kitchen Utensils 9,150 6.92
Kitchen Fuel 2,542 1.92
Cleaning Supplies 10,571 8.00
Paper Supplies 2,675 2.02
Bar Expenses 5,413 4.10
Menus and Wine Lists 6,670 5.05 Expense is lower than
budgeted because the
new wine supplier
agreed to print the wine
lists free of charge.
Exterminating 1,803 1.36
Flowers and Decorations 9,014 6.82
Licenses 3,604 2.73
Total Direct Operating 132,143 100.00
Expenses
 The P&L statement is only one of several

documents owners use to help evaluate the success
of a business.
 The P&L statement alone, however, yields

important information that is critical to the
development of future management plans and
budgets.
By reviewing their P&Ls managers can analyze six

critical operational areas:
1. Sales/volume
2. Food expense
3. Beverage expense
4. Labor expense
5. Other controllable and non-controllable expense
6. Profits
Analysis of Sales/Volume
 Sales increases or decreases are computed using the

following steps:
 Foodservice operations can experience total sales

increase in several ways. These are:
1. Serving the same number of guests at a higher
check average.
2. Serving more guests at the same check average.
3. Serving more guests at a higher check average.
4. Serving fewer guests at a much higher check
average.
 The procedure to adjust sales variance to include

menu price increases is:
Analysis of Food Expense
 A food cost percentage can be computed for each

food subcategory. For instance, the cost percentage
for the category Meats and Seafood would be
computed as follows:
 Income statements prepared in other countries can

vary in format from the income statements prepared
according to USAR recommendations.
 One example of this relates to the concept of profits.
 Income statements in some countries are prepared in
a way that indicates an operation's Gross Profit.
Total Sales (-) Total Cost of Sales = Gross Profit
 Inventory turnover refers to the number of times

the total value of inventory has been purchased and
replaced in an accounting period.
 The formula used to compute inventory turnover is:
 The average inventory value is computed as follows:
 Managers must ensure a high inventory turnover is

caused by increased sales and not by increased food
waste, food spoilage, or employee theft.
Analysis of Beverage Expense
 Managers should analyze beverage expenses in the

same manner as they analyze food expenses.
 To analyze the beverage expense category managers
compute their beverage cost percentages, compare
them to planned or targeted beverage expense, and
then compute a beverage inventory turnover rate.
 Beverage inventory turnover is computed using the

following formula:
 If an operation carries a large number of rare and

expensive wines, it will find that its beverage
inventory turnover rate is relatively low.
 Conversely, those beverage operations that sell their

products primarily by the glass are likely to
experience inventory turnover rates that are quite
high.
 All food and beverage expense categories should be

adjusted both in terms of costs and selling price if
effective comparisons are to be made over time.
 As product costs increase or decrease, and as menu

prices change, so too will food and beverage
expense percentages change.
Analysis of Labor Expense
 When total dollar sales volume increases, fixed

labor cost percentages will decline.
 Variable labor costs increase along with sales

volume increases, but the percentage of revenue
they consume should stay relatively constant.
 Declining costs of labor may be the result of

significant reductions in the number of guests
served.
 Effective foodservice managers seek to achieve

reductions in operational expense because of
improved operational efficiencies, not because of
reduced sales or unintended reductions in guest
service levels.
 Salaries and wages expense percentage is computed

as follows:
 COLA (Cost of living adjustment) and/or raises and

changes in menu prices will affect labor costs.
 Managers adjust both sales and cost of labor using the
same steps as those employed for adjusting food or
beverage cost percentage; as follows:
Step 1. Determine sales adjustment
Step 2. Determine total labor cost adjustment
Step 3. Compute adjusted labor cost
percentage.
 This year’s projected labor cost is computed as follows:
 Increases in payroll taxes, benefit programs, and employee

turnover can all directly affect labor cost percentage.
Analysis of Other Expense
 An analysis of other expenses should be performed

each time the P&L is prepared.
 For operations that are a part of corporate chain, unit

managers can receive comparison data from district
and regional managers who can chart performance
against those of other operators in the city, region,
state, and nation.
Analysis of Other Expense
Analysis of Profits
 Profit margin represents the amount of profit

generated on each dollar of sales. It is that portion of
a dollar’s sale returned to the operation in the form
of profits.
 Profit margin is also known as Return on Sales, or
ROS.
 ROS is often the most telling indicator of a
manager’s overall effectiveness at generating
revenues and controlling costs in line with
forecasted results.
Analysis of Profits
 Profit margin percentage is calculated using this

formula:
Analysis of Profits
 While it is not possible to state what a “good” ROS
figure should be for all restaurants, industry
averages, depending on the specific segment, range
from 1% to over 20%.
 Some operators prefer to use operating income as
the numerator for the profit margin formula instead
of net income. Thus is because interest and income
taxes are considered nonoperating expenses and
thus, not truly reflective of a manager's ability to
generate a profit.
Analysis of Profits
 Effective managers are concerned about both the
dollar amount of profit they generate and their ROS
percentages.
 ROS can be a positive number; and when it is, a

profit has been generated.
 ROS can be a negative number; and when it is, a

loss has been incurred.
Analysis of Profits
 An operation’s profit variance % for an accounting

period is measured by the following formula:
Analysis of Profits
 Perceptive foodservice operators recognize that

profits, planet, and people all benefit from an
operation’s green commitment.
 “Planet friendly” management yields many positive
financial outcomes for businesses, as well as for the
health of the local communities they count on to
support them.
 Buying local creates relationships with those who
produce food and keeps money flowing through a
local economy.
Technology Tools
This chapter introduced the concept of management

analysis as it relates to sales, expenses, and profits. In
this area software is quite advanced; thus varied tools
are available to help managers:
Analyze operating trends (sales and costs) over
management-established time periods.
Analyze food and beverage costs.
Analyze labor costs.
Analyze other expenses.
Technology Tools
 Analyze profits.
 Compare operating results of multiple profit
centers within one location or across several
locations.
 Interface with an operation’s point of sales (POS)
system or even incorporate its information
completely.
 “Red flag” areas of potential management
concern.
Technology Tools
 Evaluate the financial productivity of individual

servers, day parts, or other specific time periods
established by management.
 Compare actual to budgeted operating results and
compute variance percentages as well as suggest
revisions to future budget periods based on
current operating results.

C9 Analyzing Results Using The Income Statement

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

C9 Analyzing Results Using The Income Statement

Uploaded by

Copyright:

Available Formats

Chapter 9

Analyzing Results Using

 Introduction to Financial Analysis

 Analysis of Beverage Expense

Part of management’s job is to sift through information

How much money did we take in?

 Documenting and analyzing sales, expenses, and

 However, that same activity is more appropriately

 Bookkeeping is the process of recording and

 Managerial accounting is the analysis of recorded

 Effective managerial accounting decisions rely upon

Financial reports related to the operation of a

Managers do not have to be a Certified Management

In 2002, the United States Congress passed the

 The National Restaurant Association has developed

The Income Statement

The Income Statement

 Income statements list revenue first, then expense,

A foodservice operation’s income statement (USAR)

 The Sales category includes the revenue generated

 The Prime cost section of a P&L details the amount

Revenue and expense categories on the income

1. Whole dollar amounts

 All expense ratios are calculated as a percentage of

– Cost of Sales: Food is divided by food sales

– Cost of Sales: Beverage is divided by beverage

 The income statement is an aggregate statement;

 Detailed income and expense information can be

 The P&L statement is only one of several

 The P&L statement alone, however, yields

By reviewing their P&Ls managers can analyze six

 Sales increases or decreases are computed using the

 Foodservice operations can experience total sales

 The procedure to adjust sales variance to include

 A food cost percentage can be computed for each

 Income statements prepared in other countries can

Total Sales (-) Total Cost of Sales = Gross Profit

 Inventory turnover refers to the number of times

 The average inventory value is computed as follows:

 Managers must ensure a high inventory turnover is

 Managers should analyze beverage expenses in the

 Beverage inventory turnover is computed using the

 If an operation carries a large number of rare and

 Conversely, those beverage operations that sell their

 All food and beverage expense categories should be

 As product costs increase or decrease, and as menu

 When total dollar sales volume increases, fixed

 Variable labor costs increase along with sales

 Declining costs of labor may be the result of

 Effective foodservice managers seek to achieve

 Salaries and wages expense percentage is computed

 COLA (Cost of living adjustment) and/or raises and

 Increases in payroll taxes, benefit programs, and employee

 An analysis of other expenses should be performed

 For operations that are a part of corporate chain, unit

 Profit margin represents the amount of profit

 Profit margin percentage is calculated using this

 ROS can be a positive number; and when it is, a

 ROS can be a negative number; and when it is, a

 An operation’s profit variance % for an accounting

 Perceptive foodservice operators recognize that

This chapter introduced the concept of management

 Evaluate the financial productivity of individual