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ANALYZING FINANCIAL PERFORMANCE (AFP)UNIT 1 - Introduction to accounting, financial statements and analysis of the balance
ACCOUNTING - a management resource that provides financial information to owners and
managers so they can make the best business decisions and measure financial performance
for their business to succeed.
• THE PURPOSE OF ACCOUNTING - is to provide accurate, useful, and timely financial
information. This information may take the form of financial statements, forecasts, budgets, and
many types of reports (cash balance, receivables, graphs and statistical data) that can be used
to measure the financial position and operating performance of hospitality business.
“Accounting involves recording business transaction, analyzing business records and
reports, and producing reliable information”
“Its function is to provide quantitive information, primarily financial in nature, about
economic entities that is intended to be useful in making economic decisions.”
Management structure of the accounting function:
• Chief financial officer (CFO)
• Vice president of finance
• Treasurer
• Controller
• Chief accountant
• Accounting supervisor
Bookkeeping - the initial phase of accounting. Accountants supervise bookkeepers, whose
primary function is to record business transactions: purchases, sales, receipts and payments.
- FINANCIAL ACCOUNTING - concerned with recording and accumulating accounting
information to be used in the preparation of financial statements for external users. Financial
accounting involves the basic accounting
information processes of:
• recording
• classifying
• summarizing business transactions
It also includes accounting for assets,
liabilities, equity, revenue and expenses.
RULE: every transaction affects at least
two accounts
Types of accounts
• Assets (ativo)
• Liabilities (passivo)
• Owners’ Equity (capital proprio)
• Revenue / Income (receita / lucro)
• Expenses (despesas)
, FIRST 3 STEPS:
1. Identify the names of the accounts that are affected
2. Identify the affect of the transactions on the account
3. Identify the type of the accounts that are affected
• BUSINESS TRANSACTIONS - initiate the accounting process. It is the exchange of
merchandise, property, or services for cash or a promise to pay.
Cash received Cash payment
Goods Goods
Business sells Business buys
goods for cash goods for cash
Cash Cash
S
B
E
U
L
Receivables Transaction Payables Transaction Y
L
S
S
Goods Goods
Business sells Business buys
goods on open goods on open
account Accounts account Accounts
Receivable Payable
- Account receivable - eg: if a guest purchases food and beverage items from a restaurant on
open account, the guest’s promise to pay is classified as account receivable.
- Account payable - eg: if a restaurant buys merchandise or supplies on open account, this
promise to pay is classified is classified as an account payable.
A business transaction creates events that affect 2 or more bookkeeping accounts in the
accounting records.
Example 1. When a guest enjoys a dinner at a restaurant and pays for the meal with cash, the
business transaction that occurs is the exchange of food and service for cash. This business
transaction creates the following events that affect the restaurant:
1. The cash received increases the assets of the restaurant
2. A sale is made, thus increasing the sales volume (revenue)
Accounts involved:
1. Cash (affect of transaction: increase)
2. Food sales (affect of transaction: increase)
, Example 2. When the guest enjoys a dinner at a restaurant and pays for the meal by charging
the amount of the guest check to an open account maintained for him by the restaurant, the
business transaction that occurs is the exchange of food and service for a promise to pay. This
business transaction creates the following events that affect the restaurant:
1. The guest’s promise to pay increases the assets of the restaurant
2. A sale is made, thus increasing the sales volume (revenue)
Accounts involved:
1. Accounts receivable
2. Food sales
Example 3. When a restaurant buys food provisions on open account from a supplier, the
business transaction that occurs is also an exchange of food and services for a promise to pay.
This business transaction creates the following events that affect the restaurant:
1. The increase in food provisions increases the assets of the restaurant
2. The restaurant promise to pay increases the liabilities of the restaurant.
Accounts involved:
1. Food inventory
2. Accounts payable
This double-entry system of accounting takes its name from the fact that the same amounts of
debits and credits are entered for each business transaction. If more than 2 bookkeeping
accounts are affected by a transaction, the sum of the debit amounts must equal the sum of the
credit amounts.
• THE ACCOUNTING EQUATION
ASSETS = LIABILITIES + OWNER’S EQUITY
- Assets - cash, possessions and purchased rights ( items with future utility and value)
- Liabilities - debts of the business (accounts payable and debts)
- Equity - represents the owner’s financial interest in the business (“leftover”)
The ultimate purpose of any business is to make profit of the owner. Profit belongs to the
owner and is therefore part of Owner’s Equity.
PROFIT (OE) = REVENUE - EXPENSES
- Revenue / Income - has a positive effect on Owner’s Equity since it increase profit
- Expenses - have a negative effect on OWner’s Equity since decrease profit
, • FINANCIAL STATEMENTS - formal records of a business indicating its activities
- Investors need financial statements to analyze the quality of potential investment or current
stock holding (external user)
- Banks need financial statements to decide whether to loan money (external user)
- Creditors need financial statements to identify any risk involved in doing business with
costumers on an open line of credit (external user)
- The company itself needs financial statements to make the best decisions and succeed
(internal user)
Elements necessary to assemble financial statements
The numerous business transactions (sales, purchases, payroll) are represented by
documents such as:
- register tapes
- bank deposits
- invoices
- checks
- loans
The information from these documents is recorded in accounting records that are then
sorted, summarized and complied into financial statements (usually prepared on a monthly
basis).
Financial statements:
• INCOME STATEMENT - also known as Profit and Loss Statement, shows the result of
operations: revenue (sales), expenses and the resulting profit or loss.
REVENUES - EXPENSES = NET INCOME
Revenues - cost of sales
Gross profit - operating expenses
Income before fixed charges - fixed charges
Income before income taxes - income taxes
=
Net income
• BALANCE SHEET - also referred as statement of financial position shows the financial
position of a business on a specific point in time: assets, liabilities and equity of business.
Presents the financial health of a company.
ASSETS = LIABILITIES + OWNERS EQUITY
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