AGENDA

Quiz – Chapters 1 through 3Chapter 4 – The Income StatementHomework – P & L Report

FOODSERVICE FINANCIAL BASICS

WEEK 3

Chapter 4 – The Income Statement

Objectives

Upon completion of this unit, each student will be able to:

Understand the role and functions of the Income Statement.

Understand the profit or loss from the Income Statement.

Prepare a Profit & Loss report based on sales and cost information.

The Income Statement

More commonly know as the “P&L” (Profit and Loss Statement) and also know as an Operating Statement

Details the Revenue – Expenses = Profit (or loss) for a specific time period…. Usually each month

Compares these categories against budget

The P&L gives you a clear picture of how well the restaurant is operating (or how poorly it is operating)

The P&L Answers these questions:

What is the amount of revenue achieved for the period?

What is the level of expense being incurred for the period? What was the food cost and beverage cost, as a

dollar figure and as a percentage of sales? Were payroll costs kept in line with the budget? How much $$$ was spent on advertising, rent and

other overhead activities? What was the tax expense for the period?

What is the amount of profit being achieved for the period?

Who is interested in this report?

Managers Owners Investors Others, including creditors, lenders and

employees

Steps to prepare P&L Report

Determine time period for the report

Calculate total sales

Calculate total costs

Subtract total costs from total sales

REVENUE – EXPENSES = PROFIT

Responsibility and Users

Who would be responsible for preparing this report?

Who are primary users of this report? Responsibility accounting: Revenues and

expenses reported separately for separate areas of responsibility

Uses: To report sales and expense history To report sales and expense forecasts To report sales and expense actual results To report sales and expense for a future period

Revenue

Inflows of assets that result from the sale of products and services

Interchangeable terms: income, revenue, sales

Assets can be in the form of cash, check, credit card or promise to pay (receivables)

Recognized: at the point of sale when the earnings process is completed when an exchange has taken place

Separate by category to identify contribution

Revenue Sources

Distinct dining areas Banquets Catering Drive – through Carryout Delivery Lounge or bar Bakery Gift Shop Gift certificates and gift cards Merchandise such as t-shirts, caps, etc

Percentages

Sales contributed by ÷ Total = Sales Revenue source Sales Percentage

Expenses

Expenses – Costs incurred by the restaurant to provide food and beverage products and services to the guests.

Direct Expenses- Expenses that are closely related to the products and services provided to the guests.

Indirect Expenses- Costs include depreciation, interest expense, property taxes, and rent expense.

Expenses

Also referred to as Cost of Sales in our industry

Most managers are interested in knowing their food cost percentage, their beverage cost percentage and their overall cost of sales percentage…….WHY

How do you do this???

Expenses

Net Income

Net income as reflected in the restaurants P&L, occurs when revenues exceed expenses.

Gains- are increases in equity that do not result from revenues or investments by owners. i.e. Selling a piece of equipment or another

investment at a profit. Losses- are decreases in equity that do not

result from expenses or distribution to owners. i.e. selling a piece of equipment at a loss, or

experiencing a natural disaster such as a flood or tornado.

Uniform System of Accounts

An accounting system including financial statement formats and dictionaries of financial terms developed specifically for the restaurant industry, which can be used to drive the accounting system for a specific restaurant.

National Restaurant Association & Deloitte & Touche, LLC produce annual report on statistics

Sample Income Statement Sample Income Statement(1).xls

Explanation of TermsExplanation of Terms[1].pdf

Format for Income Statement

Sales Cost of Sales (COGS – Cost of Goods Sold) Gross Profit Operating Expenses (Controllable

Expenses) Occupancy Costs (Noncontrollable

Expenses) Operating Income Interest and Taxes Net Income

Sales/Income

Possible categories of Income Food Beverage Catering Vending Non-Food

Expenses

Controllable vs. Noncontrollable Variable/Fixed/Semi-variable or Mixed Broken down into 5 main categories

(some with several sub-categories) Food & Beverage Cost (COGS) Labor Costs (Salaries and wages)

Payroll taxes, insurance, employee benefits Other Operating Expenses Occupancy Expenses Interest & Taxes

Other Operating Expenses

Direct Operating Expenses Advertising / Marketing Music & Entertainment Utilities General and Administrative Expenses Repairs & Maintenance Supplies Corporate Overhead Fees

Occupancy ExpensesExpenses associated with the physical

space you occupy Rent or Lease Depreciation Insurance Taxes

What do leasing companies consider?

Good Credit Liquid Assets Business Plan Resume’ Realistic Financial Projections Good Location

Restaurant Startup & Growth magazine/Restaurant Owner.com

Taxes Taxes Payable by the Business

Income Taxes : Federal, State, Local Property Taxes: State or Local and assessed based on

property value Personal Property Taxes: Equipment, vehicles,

construction in process Taxes Collected by Business for Government

Sales Tax: Collected by business for the State, Local government and submitted by business

Payroll Taxes: Withheld by employer from employee’s paychecks and paid to Federal and State. Can also include unemployment insurance, worker’s compensation and unemployment compensation.

Classify as Income or Expense

Utilities Revenue from T-Shirt Sales Outside signs Wine Sales Wages Marketing Food Sales Repairs

Cost Behavior

Cost Category

Description Classification

Is it a % or $

Cost of Goods

Controllable Expenses

Occupation Costs

Cost Behavior

Cost Category

Description Classification

Is it a % or $

Cost of Goods Operating Cost

Controllable Expenses

Operating Cost

Occupation Costs

Non-operating Cost

Cost Behavior

Cost Category

Description Classification

Is it a % or $

Cost of Goods Operating Cost & Controllable→

Controllable Expenses

Operating Cost & Controllable →

Occupation Costs

Non-operating Cost& Non-controllable→

Cost Behavior

Cost Category

Description Classification Is it a % or $

Cost of Goods Operating Cost & Controllable→

Variable Cost

Controllable Expenses

Operating Cost & Controllable →

Variable CostFixed Cost

Occupation Costs

Non-operating Cost& Non-controllable→

Fixed Cost

Cost Behavior

Cost Category

Description Classification

Is it a % or $

Cost of Goods Operating Cost & Controllable→

Variable Cost %

Controllable Expenses

Operating Cost & Controllable →

Variable CostFixed Cost

%$

Occupation Costs

Non-operating Cost& Non-controllable→ Fixed Cost $

Cost Behavior when sales change

Cost Category Classification

Is it % or $

What Happens to $$

What Happens to %

Cost of Goods Variable %

Controllable Expenses (Controllable)

VariableFixed

%$

Occupation Costs (Non-controllable)

Fixed $

Cost Behavior when sales change

Cost Category Classification

Is it % or $

What Happens to $$

What Happens to %

Cost of Goods Variable % $$ Change

Controllable Expenses (Controllable)

VariableFixed

%$

$$ Change$$ Same

Occupation Costs (Non-controllable)

Fixed $ $$ Same

Cost Behavior when sales change

Cost Category Classification

Is it % or $

What Happens to $$

What Happens to %

Cost of Goods Variable % $$ Change % to Sales = same

Controllable Expenses (Controllable)

VariableFixed

%$

$$ Change$$ Same % to Sales ≈

same

Occupation Costs (Non-controllable)

Fixed $ $$ Same % to Sales = change

Cost Behavior for Sales Forecasting

Cost Sales Cost $$ Cost %Variable & Mixed (%)

UpDown

IncreaseDecrease

Stays the sameStays the same

Fixed ($) UpDown

SameSame

DecreasesIncreases

Steps for management control

Set Standards

Measure Performance

Determine Variances

Take Corrective Action

Review Performance & Cycle

Another Example

P&L Statement.pdf

Review Questions1. The profit and loss report is also called the

A) balance sheet B) income statement C) bottom line statement D) statement of net worth

2. Which is the correct formula for calculating profit or loss A) Monthly sales x 12 B) Total costs – Total sales C) Total sales – Total costs D) Annual sales – Monthly costs

Questions, cont.3) What is the final step in preparing a profit and

loss statement A) Calculate total sales B) Calculate total costs C) Subtract total cost from total sales D) Determine what time period the report should

cover

4) What information is included at the top of a profit and loss statement? A) Sales B) Costs C) Taxes D) Expenses

Questions, cont.5) An operation’s Budget lists food expenses as

$14,000. The P&L report for the period indicates food expenses were $18,000. What has occurred? A) Tolerance B) Variance C) Standard Deviation D) Corrective Action

6) What technique can be useful to determine the contribution of revenue from different areas? A) Adding all categories together B) Separating sales by categories C) Counting food and beverage sales together D) Subtracting merchandise sales from food sales

Questions, cont.7) One use of the data found in the P&L report is to

A) complete the operation’s staffing process B) aid management in developing training programs C) provide information on the manager’s salary D) analyze trends and identify areas for improvement

8) What term describes the excess of costs over sales? A) Profit B) Break-even C) Loss D) Standards

Questions, cont.9) The first step in preparing an income statement is

to A) name the manager preparing the report B) list the costs to be included it the report C) identify sales to be included in the report D) identify the time period covered by the report

10) What is food cost if ending inventory is $4,000, beginning inventory is $2,500 and food purchases were $15,000? A) $16,500 B) $17,500 C) $13,500 D) $19,000

11) What is prime cost?

Questions, cont.12. An operation’s year-end income statement shows before tax profits of $210,000. Revenues for the year were $1,850,000. What were this operation’s expenses for the year?

a) $1,430,000b) $1,640,000c) $2,060,000d) $2,300,000

13. What is an example of a fixed cost?a) Utility servicesb) Salaries and wagesc) Licenses and permitsd) Repairs and maintenance

Assignment

Read Chapter 5 in text book

Complete Mikki’s Steak House P & L