Accounting_Research_Paper

Hotel Philippine Plaza – Sofitel Hotel Philippine Plaza was first established in the Philippines at September 26, 1976 by the Philippine Plaza Holdings, Inc. as its owner. Sofitel Philippine Plaza is the only 5-star luxury resort hotel in Manila. Sofitel Philippine Plaza is an iconic property standing amid an expansive tropical setting. Known for its spectacular Manila Bay sunset, the hotel continues to attract both local and international travelers alike with its signature brand of Filipino hospitality and the French Joie De Vivre that is reflected in the rituals in food and wine, and varied entertainment offerings. It’s exact address is CCP Complex, Roxas Boulevvard Pasay City 1300, Philippines Situated within a 12-acre prime location, within historic sites, shopping and entertainment centres and near the central business district. It is an integral part of the Cultural Centre of the Philippines, along with the Philippine International Trade and Exhibitions, Folk Arts Theater, Design Centre, World Trade Centre and the Philippine International Convention Centre. It stands to a fifteen minute drive from the international and domestic airports. Located right next to the awe-inspiring Manila Bay, Sofitel Philippine Plaza is a structural masterpiece created by National Artist for Architecture Leandro Locsin, while the hotel’s grounds, resort pool and gardens were designed by Ildefonso P. Santos, another National Artist. Steven Leach, Jr. + Associates renovated the building last 1996, Manny Samson & Associates renovated the building last 2001 and Spin Design Studio Japan renovated the building last 2006. The neighborhood comprises the northern portion of the Manila-Cavite Coastal Road and Reclamation project where the CCP Complex is located; the southern section of Malate District; and the northern section of Pasay City which is traversed by Roxas Boulevard and bounded on the west by Manila Bay. Roxas Boulevard is a 12-lane major thoroughfare traversing the neighborhood in the north south direction where most of the five-star hotels and financial institutions in the cities of Manila and Pasay are located. Diosdado Macapagal Avenue is a newly constructed 8-lane highway connecting CCP Complex to Airport Road and other South bound exit. Ninoy Aquino International Airport is just about seven kilometers southeast of the property. Manila’s tourist belt is about three kilometers to the north Major landmarks within the are the Cultural Centre of the Philippines, Philippine International Trade Centre, World Trade Centre, Philippine National bank Head Office, Government Services Insurance System Senate Building, Philippine International Convention Centre, Folk Arts Theatre, Central Bank of the Philippines and Harrison Plaza Commercial Complex, SM Mall of Asia, Intramuros and Rizal Park. The Hotel Features 609 guest rooms, including 46 suites with private balconies that provide a magnificent view of the famed Manila Bay sunset. Nestled in a tropical resort setting with a sprawling garden and a spectacular lagoon-shaped swimming pool. Standard guest room amenities include mini-bar with coffee and tea service, complimentary mineral water, complimentary daily newspaper, iron and ironing boards, hair dryer, cable color televisions with in-room movies, electronic locks, fax and modem dataports. Two exclusive floors, dedicated to the discerning executive traveler combine luxury and convenience, modern design and high technology and service of the highest order. Accommodations on the 10th floor carry the banner of elegance and comfort, with completely renovated rooms. A Club Concierge and Butler provide personalized service and express check-in and check-out, complimentary amenities for club guests include: breakfast, cocktails with hors d’oeuvres and mid-afternoon snacks; 15-minute internet access; local calls; pressing of one set of suit, shoeshine, among others. It has a 24-hour room service, conferences and banqueting facilities, business center, valet parking hotel transport service, beauty salon, boutiques, laundry and dry cleaning, medical clinic, 24-hour doctor on call, pharmacy, travel agency, kids club. It has The Plaza Kids Club that provides the environment that allows guests, to focus on having fun together or indulge in separate leisure activities. It is an exciting place where children can enjoy fun and creative activities. The facilities are designed to stimulate creativity and learning including a private cinema with Kiddie Flicks and various sections for fun and games which includes, Funky Face Painting, Goodwill Bookshelves, Cool and Wild Video Games, Dunk and Dribble, Creative Crafts and Chef Wannabes. Open to all guests and walk-ins daily. Half day and full day packages include snacks. The hotel also features a unique 10-stall Aqua Golf Driving Range and an 18-hole putting green. Sofitel also offers the Sports Club and Spa that offers comprehensive health and recreational facilities that include a lagoon-shaped outdoor swimming pool, jogging trails and covered tennis court. The fitness facility is equipped with a state-of-the-art gym equipment, aerobics room, sauna, steam and jacuzzi. Spa services are available 24 hours that offers massage, facials, and cosmetic treatments. A professional pool of friendly resort staff, complement the excellent facilities, while US licensed Fitness Instructors offer personalized training, aqua toning, aerobics, pilates and cardio-kickboxing lessons. Hotel Philippine Plaza offers exciting and varied dining facilities and entertainment options: Café Plaza Too: Casual dining serving a lavish spread of international specialties for the Breakfast, Lunch and Dinner Buffet. Offers a Sunday Brunch Buffet and a good selection of Signature dishes as well as international favorites available from its a la carte menu. With a beautiful sunset, view of the Manila Bay and lush greenery, it is the perfect place to dine with loved ones and friends. Siete Pecados: Boasts of a rambunctious Sports Bar with billiards and a concert bar featuring nightly performances by the country’s top live bands. Sunset Bar: An outdoor bar by the pool with the best view of Manila’s famed sunset, serving light snacks, tropical drinks and cocktails. Treasure Island: Features a nightly (weather permitting) Poolside Barbecue of fresh seafood, marinated meats, and an array of salads, tropical fruits and native desserts and ice cream. Features a colorful cultural dance presentation nightly. Spiral: Manila’s newest dining destination and concept restaurant with muti-cuisine open cooking stations serving favorites from the Philippines, China, Japan, India, Southeast Asia and the Mediterranean. Complimentary on-site shuttle service to the city’s major shopping malls, car rentals, Discoveries sundry shop, travel agency, optical shop, pharmacy, photography, complimentary daily newspaper and mineral water, gift shops, full-service beauty salon and barbershop, medical and dental clinics, in-room massage, concierge, laundry and valet service, in-room safe and secured parking space. Today Sofitel is one of the major players in the international upscale hotel market with nearly 200 properties that bring a unique French “art de vivre” to prime locations around the world. Sofitel is now present in all of the world’s major business cities (Paris, New York, London, Washington, Berlin, Tokyo, Chicago, Bangkok, Shanghai, Manilla,…), all the leading holiday resorts (Mauritius, Morocco, Egypt, the West Indies, Indonesia, Brazil…) and in the world’s key international airports (Paris Charles de Gaulle, London Gatwick, Amsterdam, Chicago, Houston,…).   Once again, the highly acclaimed Conde Nast Traveler 2006 Gold List included nine Sofitel properties: Sofitel Chicago Water Tower, Sofitel Lafayette Square Washington D.C., Sofitel Montréal, Sofitel Buenos Aires, Sofitel Rio de Janeiro, Sofitel Old Cataract Aswan, Sofitel Palais Jamaï, Sofitel Métropole Hanoi and Sofitel Royal Angkor. While the Travel & Leisure 2006 Top 500 recognised Sofitel Chicago Water Tower, Sofitel Royal Angkor, Sofitel Métropole Hanoi and Sofitel Winter Palace Luxor. More than 15 new addresses enriched the Sofitel brand in 2005 in the United Kingdom, Spain, Tunisia, China, Australia, New Zealand and the Fijian Islands. While in 2006, the strategic development of the brand will continue in Belgium, China, Thailand, the Philippines, Brazil, Algeria, Saudi Arabia, Syria and Equatorial Guinea. With 168,000 people in 140 countries, Accor is the European leader and one of the world's largest groups in travel, tourism and corporate services, with two major international activities: - hotels: over 4,000 hotels (more than 470,000 rooms) in 92 countries, casinos, travel agencies, and restaurants; - services to corporate clients and public institutions: 19 million people in 34 countries use a broad range of services (food vouchers, people care and services, incentive, loyalty programs) engineered and managed by Accor. Sofitel Philippine Plaza is a corporation form of organization. A corporation is an artificial being created by operation of law having the right of succession and powers, attributes and properties expressly authorized by law or incident to its existence. The corporators are the owners of the corporations. They are called shareholders in a stock corporation and have a right to elect the Board of Directors. They are called members in a non-stock corporation and have a right to elect the Board of Trustees. The founders of a corporation are called incorporators and these are the original shareholders mentioned in the articles of incorporation. The Board of Directors is responsible for the overall supervision of the firm. On their shoulders rest the establishment of its goals and policies. They evaluate management performance and act on legal matter, as well. Expansion programs, dividend declaration, introductions of new products, entry in new market, ventures, meres and consolidations are some of the problems tackled and decided upon by the Board of Directors. The President and the other officers are responsible for implementing the policies set up and the plans drawn by the Board of Directors. Their functions include purchasing, producing, selling, hiring, borrowing and other functions necessary to operate the business. It is a stock corporation where it is owned by individuals or by some non-government units and is organized for profit which is distributed as dividends to the owners. Ownership is sold in units called shares or stock. The owners of the units are called stockholders or shareholders and profits distributed as dividends are based on the number of shares they own. Sofitel Philippine Plaza is a hotel and restaurant basis business that provides services, for a fee, to clients or customers. Sofitel accepts reservations through the different methods such as online reservation system, direct hotel, travel agencies just by dialing to the call center agencies. It accepts room reservations, corporate accounts or even conventions. Restaurants in the hotel is done through the F&B reservations system or accepting reservation in the outlets and have a lot of walk in guest. Majority of the breakfast came from the hotel guests which 80% of the hotel guest and 20% walk in while lunch and dinner, ratio of external is higher compare to breakfast in an 80%:20%. The hotel also features different facilities. Business Center provides secretarial reservation for corporate meeting. Telephone system that uses globe and smart; will go through the globe and smart system. There is unlimited access to the free wifi internet in all public areas and cabled internet in rooms. LeSpa is the wellness center located inside the hotel where they provide treatment together with our partner ZEN institute and Philip Thorma’s salon who provides hair and manicure and other related services. Gift shop – La Botique provide guests easy access on the different types of gift item. Recreation areas such as Driving Range, Patting Grin, Tennis Court and Petanque are also offered in the hotel 24 hours a day. The hotel also offers the nicest swimming pool in Manila and was complimented by the playground in the pool with imported materials made from Australia. Guest laundry is currently out-source. Support Departments are the Sales and Marketing, who ensures that the hotel receives its widest exposure in the market; Engineering Department who ensures to provide continuous utility services and conduct retentive maintenance for all the machineries and equipment in the hotel to ensure excellent facilities provided for the guest and employees; Accounting and General Department which include the executive office, accounting office, purchasing office, IT department and security department. The hotel is fully computerized, with the different hardware and software as follows: Fidelio Office system, Platinum foreback office, materials control, Delfi for catering system. The hotel offers these services: Services at the hotel • Wi-Fi at the hotel • Car hire service desk • Cash machine • Concierge • Dry cleaning / Ironing • Porter • Safe deposit box at reception • Tourist information desk • Travel agent services (implant) Services for children • Babysitting on request • Children's Club for 0 to 3 years • Children's Club for 3 to 6 years • Indoor playground for children • Outdoor playground for children Shops and salons • Beauty salon • Delicatessen • Florist • Gift shop/newspaper shop • Hairdressing salon Parking • Private outdoor parking (paying) • Public outdoor parking (paying) • Valet parking (paying) Facilities for disabled • Comply w/ Americ. Disability Act Leisure facilities: • Fitness centre • Jacuzzi • Massage • Outdoor unheated pool • Sauna • Tanning salon Golf • Golf practice facilities • Golf putting green Tennis court • Outdoor tennis court Other sports activities • Billiards/Snooker • Boules/petanque • Jogging track Meeting Services: • Wi-Fi at the hotel • Business center with support staff • Computer hire facilities • Copy/print service available • Fax machine • Internet connectivity • Secretarial service (typing) Security features: • 24 hour security staff • Video camera at bldg entrance • Video surveillance in hallways • Smoke alarm in public areas Concerns of the hotel Daily operation concerns. Minor – everyday, any concern of the guest are being resolved before the guest will check out. The company seek to attend fast in each complain the guest will have. It will be a bad impression for the guest not to be treated well and not experiencing the best services the hotel will offer. If the guest’s complaints aren’t resolve, it results to sending a complaint letter to the head offices. Safety Securities – the hotel have emergency teams who attend to any emergency 24 hours. There are also swimming drowning incidents that are inevitable and therefore swimming teams are on guard 24 hours. Refresher courses with government agency – in cooperation with the Department of Justice and Red Cross, the hotel crews are well equipped and knowledgeable regarding Earthquake Drills, Fire Drills and Bomb Drills. Crisis Management Committee – Thick check list, this book covers all safety and security precautions. It also covers all types of risk that the hotel may encounter. The Accounting System An information system is an orderly way of doing things from accumulation of data, processing the data and presenting these into meaningful reports for information and judgment. Accounting is an information system where data are processed to produce information which are summarized into reports and communicated to the stakeholders for decision making. The AIS has been defined in many ways. It could simply be defined as an organized way of processing transactions, through the steps in the accounting cycle, so that useful information may be generated and reported to interested parties for decision making purposes. Roque in his Management Advisory Services defines AIS as “an orderly arrangement of personnel, procedures, written records, equipment and devices used for the systematic and organized collection, processing and reporting of financial and other information essential to the official and efficient conduct and evaluation of the activities or transactions of a business enterprise”. The accounting system of processing transactions may be simple or it may be complicated depending on the structure and the operation of an organization. To illustrate, compare the structure and operation of a medical clinic and that of a hospital. The treatment of a patient in a medical clinic may take only three steps: (1) the patient is received by the secretary-nurse who fills up the patient’s card with her personal data including height, weight, and blood pressure, (2) the doctor treats the patient and gives the patient a medical prescription, (3) the patient returns to the secretary-nurse, pays and is given an official receipt. When a disbursement is necessary, the transaction may also be completed in three steps: (1) the secretary-nurse prepares a voucher and shows it for approval to the doctor, (2) the doctor approves the voucher, gives the money and the voucher to the secretary-nurse, (3) the secretary-nurse buys the needed item and attaches the receipt to the voucher. With a very simple set up such as this, only a part-time bookkeeper will be needed who uses a cash book to record the cash receipts and disbursements, a general journal to record all other transactions which cannot be recorded in the cash book and a general ledger where the postings are done by the accountant. There is no need to use subsidiary ledgers since most patients are on cash basis and the patient’s card could also be used to record unpaid account, if there is any. The only business forms needed is the patient’s card, official receipt and voucher. A hospital, on the other hand, would be under a corporate structure and managed by a Board of Directors. Underneath the Board of Directors are several departments each headed by a department chief, and underneath the departments are several sections each headed by a section chief. The structure is complicated because of the different services to be provided. And because of these, there will be a need to hire as many personnel as will be necessary. This kind of set up will need an accounting department headed by a Comptroller assisted by the General Accountant and accounting clerks. Documents of various forms must be prepared, considering the different departments and services. This time, instead of just a cash book and a general journal, special journals will have to be used. It will also be necessary to track down the departmental revenues, expenses and material requisitions by using separate records and documents for each department. In analyzing the business transactions, the company uses the 4 basic principles. Cost-Benefit Approach. Under this concept, the cost of putting up a system must be measure against the benefits to be received from the system. Recall that for a system to work, people, equipment, documents and records must be used. And these would entail a lot of cost for the company. You must have heard of an employee doing the job of two or three employees such as the nurse who acts as the secretary, cashier and purchasing officer. This would be the scenario of the business is economizing but it would open an opportunity for one to omit fraud or theft. Or consider a company who does not want to update its machines or equipment. The amount economized by the company may not be more than the loss it will suffer if, for example, customers stop patronizing the products of the company because of delayed deliveries or poor customer service or slow processing of credit application. A delay or a wrong information will surely lead to a delayed or wrong decision. Internal Control. Internal controls prevent or discourage the commission of theft and errors and ensure that information are accurate and reliable. Internal control has been defined as a plan of organization which includes all procedures, techniques and practices designed to provide an efficient accounting information system and helps a business organization to accomplish the following: safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency and encourage adherence to managerial policies. Internal control includes control over personnel some of these rules are as follows: 1. Only competent person should be hired. 2. These employees must undergo training and development programs to further enhance their skills and update their knowledge. 3. They must be properly supervised as they perform their duties. 4. Clear cut duties must be assigned so that responsibilities could easily be pinpointed. 5. Division of work must be done in such a way that there will be no overlapping of responsibilities and possibility of fraud. An employee for example must not be handling records and receiving cash at the same time. This will give him/her an opportunity to steal the cash and manipulate the records. It is advisable for employees to be rotated on their assignments to familiarize them on the varied roles and functions in the organization and to serve as a check against any irregularity or departure from the system that was set-up. Internal control must also include records and document controls which most often considers the following: 1. The records and documents must be under the custody of a particular employee and not accessible to any person who is not within that area of responsibility. A cashier for example must not have access over the accounting records or the timekeeper should be the only person handling the time cards of the employees. 2. Each function or activity in the organization must be properly supported by documents to ensure accuracy and reliability in the information generated by the system. 3. These documents must be properly prepared and only by the employee in charge. They must be duly verified and approved by some other employee or officer as to accuracy and authenticity. Finally, there is a need to check and balance the different functions and this is possible if the following accounting controls will be considered: 1. There must by reconciliation statements prepared such as the bank reconciliation statement; 2. Physical count of cash, stock and properties must be observed and 3. Periodic internal audit or review must be carried out. Compatibility Principle. This principle simply reminds one that a good accounting information system must suit the needs of a particular business. Thus, a simple structure business will require only a simple accounting information system whereas a complex business structure requires a more sophisticated accounting information system. It is likewise important to consider how the company operates and what reports does it need so that the system could be developed along this line. For example, a company whose marketing department is subdivided by products would need a different processing system which can generate reports by products. The human factor must also be considered. The number of personnel, their abilities as well as their behavior and attitude must complement the accounting information system. They must be able to understand and accept their role in the system for them to be able to carry out their work properly. Flexibility Principle. This principle calls for a system that allows for changes or improvements to be made considering that the structure could be hanged form a sole proprietorship to a corporation. One must los consider the possibility of expanding business operation and therefore the system should allow for the growth of more transactions, departments, equipment and personnel. The AIS tracks down the flow of all information not only those that are financial in nature but also all other information related to accounting. A sales transaction is financial in nature. Related to this, however, is the credit standing of the customers. The system must be able to generate not only the sales summary but also the credit information regarding the suppliers. The AIS must be able to generate not only the purchases summary but also other information regarding the supplier’s line of merchandise, prices and credit terms. The transaction processing system which is a sub-system of the AIS concentrates only on the flow of the financial transactions. The company uses the Computerized Accounting System. The revolution of information technology has been brought about by electronic devices such as computers and fax machines. With the advent of computers, one can just place an order through the computer or if one needs an information, all one has to do is surf through the internet. The same is true with the computerized accounting information system. With the computer, the processing from journalization to the preparation of financial statements could be done I a very short period of time. in fact it is possible to just enter the transaction once and the computer will do the processing from journalizing to preparation of the financial statements. This is called integrated accounting system. This system consists of different components such as (1) the general ledger module where the transactions are processed from journalizing, posting, preparation of the trial balance and preparation of their financial statements; (2) the accounts receivable module where the transaction in the first module is simultaneously posted to the customer’s subsidiary ledger; (3) the accounts payable module where the transaction also in the first module is simultaneously posted to the supplier’s subsidiary ledger; (4) inventory module where the transaction in the first module is poste to the stockcard; (5) financial statement analyses module where the information in the first module are translated into ratios and percentages for financial analysis. These different modules are not entered separately but are integrated as one just by simply encoding the transactions in the first components or module. Advantages of computerized accounting system: a) The processing can be done in a shorter period of time. b) It rarely makes mistakes and if any error takes place error messages are displayed to inform the user. c) The account balances are always up to date and current d) Financial reports can be promptly prepared. e) Only a handful of personnel are needed and this could offset the cost of acquiring maintaining and upgrading the computer. Financial statement analysis Financial statement analysis is the process of assessing the financial condition, operating performance and viability of the enterprise. It is a powerful effective measurement tool which will assist all statement users to make informed judgment and decision. In analyzing the financial statements, the accountants get to know the profitability, liquidity and solvency of the company. Profitability is not just simply earning more revenues than cost and expenses. Profitability is the ability of the business to earn a satisfactory rate of return on owner’s or investor’s capital. It is the objective of profitability to make sure that profit is maximized. Profitability in business is very important for it is a ticket to business growth and expansion. Liquidity enhances financial position of the business with reference to its ability to manage its working capital and pay for its short term obligations. Solvency or stability is long term liquidity which also enhances financial position of the company with reference to how it manages all its resources and pay for its long term obligations. Resources of the business are primarily finance by the owner/investor. But the company may resort to borrowings when they need more resources which the owner/investor is incapable of investing. In analyzing the figures contained in the financial statements, to make them meaningful the accountant standardized the raw figures by reducing them into ratios, turnovers, and percentages. Only then can these ratios/percentages be compared against the previous year’s ratios/percentages or against the competitor’s ratios/percentages. A ratio is measure of the relationship of one item against another item such as net income against net sales. Rules/procedures used to perform ratio analysis: 1. Ratios and percentages were determined 2. Two or more date should be use. 3. The figures used to form a ratio did not come only from financial statements. Since the data are interrelated it should use data from the income statement and the balance sheet to form a ratio. 4. To make analysis and interpretation more meaningful a comparison was made between two competitors. Through the use of ratios, percentage and turnover it will enable one to: 1. Determine whether or not the company is efficient in its operation which is the greatest contributing factor to its profitability. 2. Determine whether or not the company’s financial position is strong considering liquidity and solvency. 3. Determine whether or not the company is efficient in using its resources which is also a contributing factor to its profitability and liquidity. 4. Spot trends, weaknesses and potential problems. 5. Use the analysis to forecast expectation on company’s future performance 6. Create new plans or revise old plans in accordance to ones goal or objective depending on whether you are the owner, manager, potential investor, creditor, supplier or customer. Comparative Financial Statements Comparabiliyt is/one of the qualitative characteristics of financial statement which makes the information more relevant. With the increases or decreases in the financial data, one is taking place in the company between two competing companies or the changes taking place in the company between two periods. There are three tools used in analyzing financial statements – horizontal Analysis, Vertical Analysis and Financial Ratio Analysis. In this case, I used the Vertical Analysis and the Financial Ratio Analysis. Vertical Analysis This tool is used in evaluating the importance of individual items to the specific base item which is the gross sales, the total assets and the total equity. The base item is expressed as 100%. It there are sales return, allowances or sales discount, then we use net sales as the base item. Over time, when preparing a comparative analysis, it shows changes in the relative size of each item to the specific base and whether it is good or not depends on its effect on the sizes of the expenses have grown against the size of the revenue; this will adversely affect net income. It meant that the company is spending mush for expenses but is not generating more to the specific base. Interpretation of the Balance Sheet – Vertical Analysis There is a shift of proportion in the assets; current assets decreased form 10.29% to 5.53% while property and equipment increased form 73.45% to 74.82%. Receivables increase from 6.19% to 9%, Inventories decrease for 1.9% to 1.37%. Plant, property and equipment decreased in size primarily because of the provision for depreciation. Total liabilities likewise decreased in size form 47.67% to 41.78% primarily because of the payment of loans and decrease in accounts payable. Shareholder’s equity decreased in size from 50.7% to 49.3%. This means that less resources are coming from the shareholders which is not good for the creditors as this serves as a threat to them. We will test the attractiveness of investment by computing for return on equity and efficiency in using borrowed funds to enhance net income when we prepare the financial ratio analysis. Interpretation of the Income Statement – Vertical Analysis The income statement shows unfavorable proportions in 2010 compared to 1009. Revenues increased from 49.86% to 50.14%. But there wasn’t an efficient control of expenses as it increased its size at an average of 4%. Although the operating expenses did not practically change in proportion the effect of the increase in expenses lowered the size of operating income and resulted to a loss. Again, it signals decrease in efficiency requires a review of pricing policy of the company. Profitability has gone slightly lower from 12.12% to 8.94%. Financial Ratios Liquidity is the ability of the business to efficiently manage working capital and ensures that there are adequate assets to cover for its current obligations as they fall due. Liquidity is arrived at by comparing the current assets and the current liabilities and computing for: Working Capital, current ratio and acid test ratio. Working Capital is the difference between assets by the current liabilities. Current ratio is determined by dividing the current assets by the current liabilities, the ideal ratio of which is 2:1. A stricter measurement of liquidity is the acid test ratio. It is similar to the current ratio except that only quick assets like cash and cash equivalents, receivables and marketable securities are used instead of all current assets. The ideal ratio is 1:1. The liquidity of the firm is used by a creditor in evaluating the safety of a loan. Working Capital: Current Assets – Current Liabilities 2010 P326,829,222 – P 853,162,282 = P – 490,333,060 2009 P 389,878,074 – P 781,410,834 = P – 391,532,760 Working Capital is lower in 2010 at -490,333,060 against -391,532,760 in 2009. Current Ratio: Current Assets/ Current Liabilities 2010 P326,829,222/P 853,162,282 =0.425:1 2009 P 389,878,074/P 781,410,834 = 0.449:1 This mean of that the business has P 0.425 of current assets to pay for a peso of current liability in 2010 while P 0.449 current assets available to pay for a peso of current liability in 2009. The rule of thumb 2:1. Both periods show that the company is not liquid. Note that having so much current assets is not good for the company unless it is building up resources in preparation for growth and expansion. Non-productive or idle assets will not contribute to the company’s profitability. This will be proven when we go to the quality use of assets. Quick Ratio or Acid Text Ratio: Quick Assets/ Current Liabilities 2010 P234,000,903/P 853,162,282 =0.274:1 2009 P 272,906,082/P 781,410,834 = 0.349:1 This means that the business has 0.274 quick assets in 2010 to pay for a peso of current liability, whereas in 2009 quick assets was 0.349 for a peso of current liability. As the rule of thumb is as 1:1 ratio, based on its quick assets the company is not liquid. Turnover Rates Complementing the liquidity ratios are the turnover rates. It signifies efficiency in using the resources. Turnover gives you the number o times resources are used to generate revenue. Inefficient use of assets can adversely affect liquidity. The receivable turnover is a measure of efficiency in collection which would greatly affect the liquidity position of the company. The inventory turnover is a measure of efficiency in using the merchandise which would also greatly affect liquidity and profitability. The asset turnover is a measure of efficiency in using all company resources in generating revenue. The more turnovers, the more quickly cash is collected which in turn is used to buy more merchandise. The more merchandise is bought and old, the more times revenue is greater is generated. With more revenues generated, if costs and expenses are managed efficiently, the greater profit is obtained, and the higher is the return on owner’s equity. Business becomes more profitable. Profitability Profitability is the ability of the ability of the business to earn a satisfactory return on owner’s capital. The rate of return on owner’s equity or ROE must at least be equal to or greater than the bank’s prime interest rate if the investors’ money is placed in some other profitable venture such as the bank’s time deposit. Profitability is also determined by computing for the profit margin ratio or the return on sales ratio which is computed by dividing net income by the revenues earned. Operating margin ratio measures efficiency in operating the business while return on total assets or ROA is a measure of profitability of the firm. The manager’s ability to successful direct operation through its profitable performance is also evaluated using the operating margin ratio. Return on Sales: Net Income/Revenues 2010 P125,536,643/P 1,552,875,572 x 100 =8.08% 2009 P 73,660,503/P 1,543,925,733 x 100 = 4.77% This measures the proportion of revenue going to profit. In 2010, 8.08% of revenue earned went to profit while 2009 slightly lower at 4.77%. or for a P1 revenue, the business earns P0.0808 profit in 2010 and P0.0477 profit in 2009. The higher the ratio the more profitable the business is. Operating Ratio: Operating Income/ Revenue 2010 P119,416,077/P 1,552,875,572 x 100 =7.69% 2009 P 70,596,132/P 1,543,925,733 x 100 = 4.57% This measures the efficiency of the company to control cost and expenses. In 2010, 7.69% of the revenue earned went to profit after cost and expenses while in 2009 it was a bit lower at 4.57%. the higher the ratio the more profitable the business and it also shows efficiency of management to control its cost and expenses. Return on Total Assets: Net Income/Average Total Assets Average Total Assets 1,661,169,820+1,656,939,535/2=1,656,054,678 (2010) 1,656,939,535(2009) 125,536,643/1,656,054,678x100= 7.57% (2010) 73,660,503/1,656,939,535x100= 4.45% (2009) This shows the rate of return the business earned for a peso of investment. A high rate means that the assets are being used profitably by the business. In 2010, the rate of return on assets or net income earned by using the assets was 7.57% compared to 4.45% in 2009 Rate on Return Equity: Net Income/Average Owner’s Equity Average shareholder’s equity 633,620,338+759,459,301/2=696,539,819.5(2010) 759,459,301(2009) 125,536,643/696,539,819.5x100=18.02% (2010) 125,536,643/759,459,301x100= 16.53% (2009) This means that the firm in 2010 earned 18.02% on invested capital compared to 16.53% in 2009 Leveraging Firms resort to borrowed funds for growth and expansion purposes on when investors cannot meet the firm’s capital requirement. The use of borrowed funds is not inappropriate for as long as the borrowed funds are used to enhance firm’s profitability. Leveraging or trading on equity is a gain or a positive leverage when the borrowed funds are used efficiently to enhance net income and increase ROE. To determine if firm is leveraging at a gain compare the interest rate to the rate of return on assets. Positive leverage also occurs when rate of return on owner’s equity is higher than rate of return on assets. Stability Stability or long-term solvency is the ability of the business to stand pressure and operate indefinitely or for a long period of time. The assets must be sufficient to meet long-term obligations. This is determined by computing for the debt ratio. Alternatively, the equity ratio may be computed by dividing the owner’s equity by the total assets. The debt ratio shows the proportion of the assets provided by the creditors whereas the equity ratio shows the proportion of the assets invested by the owner. A balanced financial structure shows an equal proportion of debt and equity shows over the assets. A conservative position is marked by a high equity ratio than the debt ratio and this is favored by the creditors because the owners’ or investors’ contributions serve as protection for them. The lower the ratio, the lower is the risk of non-payment of bankruptcy of the business. A high debt ratio is favored by the owner/investor as it means more return on borrowed funds used. Another computation used in the time interest earned which is determined by dividing net income before interest and taxes by the interest and is measure by the number of times interest is being earned by the business. The higher the frequency the ore stable is the business. Long-term creditors, owner and potential investors are interested in these ratios. Debt Ratio: Total liabilities/Total Assets 2010 2009 707,549,482/1,611,169,820x100= 43.91% 897,480,234/1,656,939,535x100= 54.6% Equity Ratio: Owner’s Equity/Total Assets 633,620,338/1,611,169,820x100=39.33% 759,459,301/1,656,939,535x100=45.84% These ratios indicate a more balanced financial structure in 2009, as 54.6% of the assets were provided by the creditors and 45.84% were provided by the investors. In 2010, the financial structure leaned more toward a more conservative policy as 39.33% of the assets were provided by the investors and 43.91% were provided by the creditors. Conclusion For Liquidity, the Working Capital of the Sofitel is lower in 2010 at -490,333,060 against -391,532,760 in 2009. Using the Current Ratio the business has P 0.425 of current assets to pay for a peso of current liability in 2010 while P 0.449 current assets available to pay for a peso of current liability in 2009. Using the Quick Ratio Acid Test the business has 0.274 quick assets in 2010 to pay for a peso of current liability, whereas in 2009 quick assets were 0.349 for a peso of current liability. As the rule of thumb is as 1:1 ratio, based on its quick assets the company is not liquid. In terms of profitability of Sofitel, using the Return on sales method, in 2010, 8.08% of revenue earned went to profit while 2009 slightly lower at 4.77%. or for a P1 revenue, the business earns P0.0808 profit in 2010 and P0.0477 profit in 2009. Using the Operating Ratio, in 2010, 7.69% of the revenue earned went to profit after cost and expenses while in 2009 it was a bit lower at 4.57%. Using the Return on Total Assets method, in 2010, the rate of return on assets or net income earned by using the assets was 7.57% compared to 4.45% in 2009. Using the Rate of Return on Equity, the firm in 2010 earned 18.02% on invested capital compared to 16.53% in 2009. In terms of Stability, it shows a more balanced financial structure in 2009, as 54.6% of the assets were provided by the creditors and 45.84% were provided by the investors. In 2010, the financial structure leaned more toward a more conservative policy as 39.33% of the assets were provided by the investors and 43.91% were provided by the creditors. Recommendations A business should be able to generate sufficient cash from operating activities so that obligations may be paid including extinguishments of loans and cash withdrawals or dividends distribution to investors. It is good for the business to generate more cash from operating activities rather than from the financing and investing activities. Revenues should easily be converted into cash so that disbursements could easily be paid. For short run planning, management strictly monitors cash to ensure that there are no cash shortage nor overage. This can be done with the right balance b planning how and when cash will be obtained and use. The company should make use of average figure for the balance sheet accounts when the formula makes use of balance sheet and an income statement account such as ROE and ROA. There is no need to compute the percentage when there is no amount in the preceding year. Learning Experience I learned that from this special case project that there are two basic tasks that one must accomplish in accounting; processing transactions and preparing reports. I learned that transactions must undergo series of steps in accounting, form analyzing to summarizing, before the reports are prepared. The reports generated in accounting are useful for decision making and are distributed not only to the owners and managers but also to the government agencies, creditors, customers and suppliers, as well. Although accounting is financial in nature, because of the varied financial reports it generates, it is used not only by business organizations but also by other organizations such as the government civic organizations, religious institutions, and educational institutions, to name a few. It is therefore important that the system of processing the transactions must be efficient and must generate reliable financial information that re relevant to various users. I learned that there are 2 types of accounting system, the manual accounting system and the computerized accounting system. The manual accounting system, all documents and records are prepared by hand with the use of a typewriter and a calculator. The transactions are journalized, posted and summarized practically by hand. Given the scenario, the company has to hire as many clerks as are needed and the work could not the done as fast one wants to be considering the number of personnel involved and the human factors as well such as the health and disposition of the workers. While a computerized accounting system, with the use of computer, the processing from journalization to the preparation of financial statements could be done in a very short period of time. in fact, it is possible to just enter the transaction once and the computer will do the processing from journalizing to the preparation of financial statements. This is called integrated accounting system. I also learned that when you analyze the financial statements, you get to know about the profitability, liquidity and solvency of the business. . Profitability is not just simply earning more revenues than cost and expenses. Profitability is the ability of the business to earn a satisfactory rate of return on owner’s or investor’s capital. It is the objective of profitability to make sure that profit is maximized. Profitability in business is very important for it is a ticket to business growth and expansion. Liquidity enhances financial position of the business with reference to its ability to manage its working capital and pay for its short term obligations. Solvency or stability is long term liquidity which also enhances financial position of the company with reference to how it manages all its resources and pay for its long term obligations. Resources of the business are primarily finance by the owner/investor. But the company may resort to borrowings when they need more resources which the owner/investor is incapable of investing. In analyzing the figures contained in the financial statements, to make them meaningful the accountant standardized the raw figures by reducing them into ratios, turnovers, and percentages. Only then can these ratios/percentages be compared against the previous year’s ratios/percentages or against the competitor’s ratios/percentages. A ratio is measure of the relationship of one item against another item such as net income against net sales. I also learned that there are three tools used in analyzing financial statements – horizontal analysis, vertical analysis and financial ratio analysis. The horizontal analysis is important because it enables one to draw a picture on what changes are taking place in the financial activities of an enterprise. The vertical analysis is used in evaluation the importance of individual items to the specific base item which is the gross sales, the total assets and the total equity. And the financial ratios provide means of measuring and evaluating company performance and financial position. One must know how to use the formulas to draw out ratios and percentages and identify relevant relationships among financial data. The ratios, trends and figures are only indicators. These are not absolute measure of performance hence care must be exercised in passing conclusion and recommendations. And lastly, I learned that the concept of cash as provided in PAS 7.6 covers not only ash but also cash equivalents. Cash includes cash on hand and demand deposits. Cash equivalents include treasury and commercial bills short-term highly liquid investments such as time deposits readily convertible into cash within three months from acquisition date.