Unit 2 Finance in Hospitality Industry Assignment

AC1.1

Following are some of the sources of funding for a business: Equity

A company can issue to equity to the investors and raise money, if the business is willing to dilute its stake. Equity is a good option to raise the money as it is less risky than debt and also business can raise large amount of the fund if the business is doing pretty well. In equity too there are different types of options available to raise share. Company can go for ordinary equity. It may also raise money through preference share if it doesn’t want to dilute its voting rights. Company may go public or sell it to private investor (Damodaran, 2007).

Loan from Bank

Another most common source of fund is loan from bank. Depending on the past business performance bank will charge interest on the loan. Bank gives loan for short term purpose i.e. working capital management on a revolving basis and also can give loans for extended period of time (Damodaran, 2007).

Bonds

Company can also issue bonds to the public and it is also a good source of funding. However to avail this type of funding, investors should know about the company and it should be independently rated to decide on the interest rate.

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The above mentioned sources of funding are the common among the firms. Company can also use certain unconventional methods like the following:

Leasing Leasing is a option which is widely used by the companies. In this option, the firm doesn’t buy the equipments but instead takes it on lease from another company and pays a regular annual amount on it (Damodaran, 2007). Hire Purchase agreement Its similar to leasing but at the end of the last of installment the firm needs to buy the equipment. In leasing the firm may have the option to buy the equipment but it’s necessary. Asset Based borrowing Investors can also borrow on their assets and get funding. There are also small business investors who can provide funding to the business

AC1.2

A business can have different methods of income generation:

Core business: Depending whether it’s a product company or service company like hospitality industry, majority of the revenues come from this core business. So if it’s a product company then it will gets its main revenue from selling its core business or if it’s a service company then it will get its main revenue from providing the services.

Non-core revenues- Company can also earn revenue from other non core activities like dividends from investments, interest from loan given, and rent from land.

In addition to this company may be doing related tasks such as providing membership and thus giving special benefits. This is related to the main business activity.

AC2.1

For products the price at which company sells the product forms the selling price. For service company the price at which the company provides the services. The costs of the goods is the cost of the material which is used make the final product. It includes the inventory costs and other costs involved directly in making of product. Similarly for service industry mainly it is the cost of labor and also the other assets used to provide services.

AC2.2

Company can use budgeting techniques to check for cash and budget control. It can also use the variances i.e. difference in actual and budgeted values to manage the cash in business. There are also accounting ratios which can be used for cash management (Dyson, 2007)

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AC3.1

Trial balance is calculated from the ledger books of the company. For each account there is a ledger entry. All these ledgers are combined to produce the trial balance. So first is the book keeping entry, and then these are combined to form the ledger entry and then from that trial balance are made. Trial balance has debit and credit section. These two are always equal due to basic accounting equations of double book keeping.

AC3.2

Business accounts are needed to know how the business is performing, source of cash and where the cash is being used. A company needs to know its assets, its payables, and its debt. These can be known from the business accounts. Also to keep a track of transactions business accounts are needed. Adjusting entries in business accounts are needed to arrive at the final figure. For e.g. if the company pays rent in advance then as the year goes company will make adjusting entries for that business account. Notes are needed to explain the transaction

AC3.3

For budget control first an expected budget is prepared by looking at past or experience. Then as the year goes by actual figures are compared with budget figures and if there are large variances then company needs to investigate these variances and try to improvise on keeping the variances low.

Also if the costs are large than the budgeted figures then steps on minimizing these costs should also be taken. This forms the process of budgetary control.

AC3.4

Variances of actual figures from the budgeted figures are used for budget control. In the previous examples the actual rooms did not vary much except in the month of May. Whereas for the price of room sold there were variances in all the three months and actual figures were less than the original figures. Similarly for payroll figures there were large variances. In the month of April it was less whereas in the month of May and June it was more. Hence these figures can be used to improvise the process of making budget and also steps to minimize the costs.

AC4.1

The ratios have been calculated and shown in the table:

Grimes Park Theme

Gross profit Margin 60.00% 60.00%
Net Profit Margin 25.00% 25.00%
Stock turnover 1.07 1.21
Trade Creditors Payment Period 47.91 41.81
Acid Test Ratio 0.52 0.66
Current Assets Ratio 0.86 1.06
Dividend per share 0.08 0.1

Giants House Theme Park

Gross profit Margin 60.00% 57.89%
Net Profit Margin 25.00% 21.05%
Stock turnover 0.80 0.82
Trade Creditors Payment Period 47.45 46.72
Acid Test Ratio 0.64 0.73
Current Assets Ratio 1.09 1.19
Dividend per share 0.12 0.1

AC4.2

Gross profit margins of both the companies are high and almost same. Same is the case with net profit margin. Acid test ratio is below 1 and both the companies can try to improvise is current assets. Giants House Theme park needs to improvise on the stock turnover ratio as it little less.

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AC5.1

The standard cost of 450 is the fixed cost and the 13.5 cost per guest is the variable cost. Contribution is selling price minus the variable cost = 21 -13.5 = 7.5. Break even quantity is 450/7.5 = 60 units and revenue is 60*21 = 1260.

AC5.2

Here the cost per guest is 13.5 units and hence as the number of guests increases the profit per guest which is 7.5 units increases. At 60 units profit will cover the fixed costs and after that the firm will start making profit.

If there are 80 guests then net profit is contribution minus the fixed costs will be 80*7.5 -450 = 150 units. MOS is equal to (80-60)/80 = 25.0%.

If 18.5 units is the selling price then the contribution will change to 5 units and net profit will be (5)* 100 – 450 = 50 units. Breakeven sales is 450/5 = 90 units. MOS will be (100-90)/100 = 10%.

AC5.3

Firm needs to make business decision for short term to make the firm profitable. Here the firm can decide whether to reduce the selling price to 18.5 if the customer guarantees certain number of guests. Hence such short term decisions need to be taken keeping in mind the profit and costs (Wood & Sangster, 2008).

References

Dyson J R – Accounting for Non-Accounting Students (Financial Times/Prentice Hall, 2007) ISBN: 9780273709220 Wood, F. And Sangster, A. (2008). Business Accounting 1. 11th edition. Harlow: Pearson Education Ltd Drury, C. (2003). Cost and Management Accounting: An Introduction. 5th edition. London: Thomson Learning Damodaran, A. (2007). Corporate finance theory and practice. Wiley. com.

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