AFA1105 Hotel Business And Financial Aspects Related To Functioning Of Royal Stay Assessment Task 2 Answer
This text aims to throw light over the conduct of the hotel businesses and the financial aspects that are related to the functioning of the business. A new hotel business has been formed in this text and discussion over the legal status, accounting process, accounting ratios along with the financial statement have been covered. Several decisions required for the sustainability and growth of the business have been made in this report along with the reasons for making such decisions. By the end of this text, users will be able to know that how a hotel business is formed and what all are the aspects involved in the functioning of hotel business.
Formation of “Royal Stay”
Hotel Royal Stay is a joint venture of 2 big international hotel chains that are Hilton & Hyatt. The legal status of the company is “Company Limited by shares” that has authorized capital of $ 150 Million. The face value of each share of company is $ 10 and company has issued 10 million shares till the date. Hence, the issued share capital of the company is $100 million. Hotel has also obtained certificate for the serving the liquor and food in its premises from the relevant authorities authorized by the government.
Royal stay is a hotel with capacity of 100 rooms. It also serves food at all the hours of clock. Guests may also take luxury of the swimming pool along with alcoholic and non-alcoholic drinks during their stay. Hotel organizes night parties on the weekends for the guests. The building of the hotel has 7 floors along with the parking space. Kitchen in the hotel operates 24x7 that provides both vegetarian and non-vegetarian cuisines. All types of food may be expected in the hotel including continental, Italian, Chinese, etc.
Legal Form of “Royal Stay”
The hotel has been registered as Company Limited by shares. The reason form obtaining this legal form is that as it is joint venture of big international hotel chains so it is easy for the hotel to gather the funding by issuing the shares (Dos Santos and Meiriño, 2017). As there are many requirements for the companies to comply with, it is easy for the people that have invested their money in the business. Also, it is beneficial for company itself to generate funding from the issuing its shares as there is no fixed cost that needs to paid to the providers of finance in case of equity shares. Company may pay the dividends if it has sufficient income after managing all the costs of the business (Popov and Lepeshkin, 2016).
To obtain funding for the business, there are several options available to the Hotel “Royal Stay”. Some of them are:
- Issuance of Equity Shares
- Issuance of Preference Shares
- Issuance of Debentures
- Long Term (LTD) Debts
- Secured Loan
- Unsecured Loan, etc.
Hotel may avail any of the financing options to support the funding requirements of the business (Sztorc, 2019). However, it us always beneficial for the businesses to have control over the fixed cost to generate adequate profits. Hence, from all the options available for the hotel, issuance of the equity shares will be the best option as there is no fixed cost attached to it (Didier and Schmukler, 2020). If Debts and loans are taken b y the business than the company has to pay fixed amount of the interest every year that reduces the income of the business. Also, they have to be repaid after expiry of certain time period. Equity Shares are required to be repaid only at the time of the liquidation (Yang, 2016). Hence, Royal Stay has opted the option of issuing equity share capital for managing its funding requirements.
Role of Accounting
Accounting in the Hotel business will help the management in having track over all the financial transactions that are taking place within the organization or in the name of the hotel. There are different fields in accounting. Financial accounting and management accounting are two of them. Financial accounting is concerned with the financial aspects of recording, summarizing and taking care of all the financial transactions that are being affected on the name of the hotel or within the organization (Makarenko and Plastun, 2017). However, management accounting is concerned with preparing reports to aid the management in making important business decisions.
In case of Royal Stay, accounting process involves recording all the financial transactions, summarizing them, preparing financial statements based on such records or accounting books. Also, management accounting is also being taken care of by qualified team to help the help the management in making the important business decisions of Hotel like focusing on attracting a greater number of guests and improving the facilities that may generate additional revenue for the hotel.
Analysis of Financial Statements
Financial Statements (FS) are analyzed by the users to make decisions. There are two types of users for the financial statements. Internal users are the management, Board, employees, etc. External users are the stakeholders, government, suppliers, etc. With the help of analyzing financial statements, the users may assess the financial performance of the company along with its financial position (Easton and Zhang, 2018). As per GAAP, companies are required to prepare mainly 3 statements that form part of the financial statements:
- Profit & Loss Statement (P&L A/c)
- Balance (BS) Sheet
- Cash Flow (CFS) Statement
There are several techniques that may be used in analyzing the financial statement of the business. Some of them have been mentioned and explained hereunder:
- Horizontal Analysis
In this technique, line items of the financial statements are analyzed horizontally which means that the figures of two or more years are compared and analyzed. This technique is helpful in evaluating and comparing the financial performance of the business.
- Vertical Analysis
In this technique, line items of the financial statements are analyzed vertically which means that the figures of are compared and analyzed with the proportions of business. This technique is helpful in evaluating and comparing the financial position of the business.
- Ratio Analysis
In this technique, the figures of financial statements are analyzed with aim to develop a statistical relationship. This helps the management in making business decisions.
Plant, Property & Equipment (PPE) in Royal Stay
There are several assets used by the hotel for running the its business. They include assets like building, land, and several plant & machinery. Below provided are the examples of PPE used by the Royal Stay for its operations:
- Kitchen Equipment: Refrigerator, Ovens, Deep freezers, Deep Fryers, Chimneys, etc.
- Safety Equipment: Fire extinguishers, Smoke Detectors, CCTVs, Sprinklers, etc.
- Air Conditioners
- Vacuum Cleaners
- Laundry Equipment like washing machines
All these assets are subject to depreciations as per relevant accounting standards. There are different types of depreciation methods that may be used by the organizations to charge depreciation over the depreciable assets. Some of them are as follows:
- Straight Line (SLM) Method
- Written Down (WDV) Method or Reducing Balance method
- Units production Method
- Sum of years’ digit
The depreciation method used by the Royal Stay is Straight Line (SLM) Method. In this method of depreciation, a same amount is of depreciation is charged over the assets during the useful life of such assets (Ackermann and Wolf, 2016). Different assets have different useful life, so the amount charged on different asset is also different although their costs are same. In this method, Depreciation amount is calculated by deducting the residual value of the assets from the cost of the assets and dividing the output by the useful life of such asset. The Hotel is using this method because it is simple to calculate depreciation, the value of asset may be depreciated over the useful life completely, whole of the charge for depreciation is known.
Unearned Income & Prepaid Expense
As the business of Hotel Royal Stay is running at large scale, it has lots of expenses or incomes. Expenses like maintenance charges, salaries to staff, electricity expenses etc. Also, it has income from hotel rents, serving food, etc.
Unearned Income: Unearned Income is that income that has been received prior to the delivery of goods or any of the services (Sayer, 2016). They are shown in the liability side of the balance sheet. More specifically, these incomes are the current liabilities for the business. In case of the Hotel Royal stay, Rent Received in Advance on the booking made in advance is an example of unearned income.
Prepaid Expense: Prepaid expenses are those expenses that have not become due yet but has been paid for. They are shown in the assets side of the balance sheet. These expenses are basically advance payment made for the expenses. In case of Hotel Royal Stay, rent paid in advance for the property taken on lease is an example of prepaid expense.
Important Aspects considered by the Banks to Grant Business Loans
Banks look for various aspects of the business to ascertain that the customer will be able to repay the money taken along with the interest or not (Barraza and Zaniboni, 2019). Banks considers the following items before granting the business loans:
- Profit & Loss Statement to check the profitability of the business. Also, bank compares the figures in the P & L statement of current year with the previous years to check the consistency u=in generating revenues & profits.
- Balance sheet to check the actual financial position of the business. Banks check through the balance sheet about the loans already taken by the business and assets held by it.
- Cash Flow (CFS) Cash Statement to check the flow of cash from and in the business.
- Current Ratio to check whether the company will be able to pay the liabilities that becomes due in next 1 year.
- Net Profit Ratio to ascertain the profitable aspect of the business.
- Debt Equity Ratio to check the portion of the capital invested by the internal and external lenders.
- Previous Credit History, etc.
After considering all the above items, banks decide to provide business loans to its customers.
Distribution of Profits
Management has to consider many aspects before distributing the profits generated by Royal Stay. Dividends are the portion of the profit that is distributed amongst the shareholders of the company on the basis of their shareholding (Kadim and Husain, 2020). Management of Royal Stay has to take into account following aspects before distributing the profits as dividend:
- Earnings: The management has to consider whether it has sufficient amount of the profits in current or previous year from which they may declare and pay the dividend.
- Earnings Stability: The management has to decide and check the figures of profits for past few years to ascertain whether the position of earnings from the business is stable or not.
- Position of Cash Flow: The management of Royal Stay has to oversee the position of cash in the business. If they have enough cash to operate the business smoothly then they may proceed for declaration of dividend and if they do not have sufficient cash then they should retain the funds for the operation of business.
- Growth Opportunities: If there are any future projects in pipeline, then the management of Royal Stay shall make provisions for funding such future plans rather then distributing the profits to the members. As the retained earnings are considered as cheapest source of finance, it will be beneficial for the hotel to not distribute the profits and use the amount in future plans of busines.
Cash Flow (CFS) Statement
Below provided is the hypothetical Cash Flow (CFS) Statement of Hotel Royal Stay:
|Particulars||(Amount $ million)|
|Year ended on 30th June 2020||Year Ended on 30th June 2019|
|Opening Cash & Cash Equivalent|| ||2150||1570|
|Operating Activities|| || || |
|Adjustment to reconcile operating Activities|| || || |
|Compensation Based on Shares || ||458||275|
|Deferred tax|| ||230||180|
|Changes in assetes & liabilities (operating)|| || || |
|Other current assets|| ||940||590|
|Other Non-current assets|| ||496||375|
|Deferred income|| ||398||265|
|Other Current Liabilities|| ||458||397|
|Other Non-Current liabilities|| ||245||165|
|Cash flow from Operating activities|| ||12604||8704|
|Investing Activities|| || || |
|Marketable Securities purchased|| ||940||590|
|Marketable Securities proceed on maturity|| ||496||375|
|Marketable Securities sold|| ||398||265|
|Intangible assets acquired|| ||458||397|
|Purchase of PPE|| ||846||687|
|Cash flow from Investing activities|| ||3291||2412|
|Financing Activities|| || || |
|Issuance of shares|| ||496||375|
|Repurchase of shares|| ||398||265|
|Debt Repaid|| ||458||397|
|Changes in papers commercial|| ||846||687|
|Dividends paid|| ||153||98|
|Cash flow from Financing activities|| ||2351||1822|
| || || || |
|(Decrease)/Increase in Cash & its equivalents|| ||18246||12938|
|Closing Cash & Cash Equivalent|| ||20396||14508|