Constructing Statement of Cash Flows and Analyses - Term Paper

The Metropolitan Hotel in Vancouver, British Columbia, Canada, is one of the best hotels in the area. The hotel has friendly and helpful staff, rooms of good size that are well maintained, and is quite and very comfortable. The current management of the hotel needs to assess its performance so as to come up with efficient ways to improve its operations. The assessment will consist of a full absolute and percentage comparative horizontal analyses of the balance sheet and income statements, preparation of the cash flow statement, and summary of the financial position and performance achievement of the hotel.

Absolute and Percentage Comparative Horizontal Analysis

Balance Sheet

	Period		Change
	Year 2	Year 1	Absolute	Percent
Current Assets
Cash	$1,032,204	$470,880	$561,324	119.21
Inventories	$1,779,525	$1,285,792	$493,733	38.40
Accounts Receivable	$1,030,806	$1,000,357	$30,449	3.04
Restricted Cash	$191,828	$983,098	$(791,270)	(80.49)
Cash from Borrowing	$88	$63,550	$(63,462)	(99.86)
Total Current Assets	$4,034,452	$3,803,676	$230,776	6.07
Long Term Assets
Building Property & Equipment	$35,000,000	$35,000,000	–	–
Plus: Building Capital Additions	$2,956,000	$2,156,000	$800,000	37.11
Less: Building Depreciation	$3,735,137	$2,489,440	$1,245,697	50.04
FF&E Property & Equipment	$5,000,000	$5,000,000	–	–
Plus: FF&E Capital Additions	$3,299,500	$1,239,500	$2,060,000	166.20
Less: FF&E Depreciation	$1,267,815	$773,205	$494,610	63.97
Net Long Term Assets	$41,252,548	$40,132,855	$1,119,693	2.79
Total Assets	$45,287,000	$43,936,532	$1,350,468	3.07
Current Liabilities
Accounts Payable	$253,098	$251,653	$1,445	0.57
Taxes Payable	$0	$0	–	–
Total Current Liabilities	$253,098	$251,653	$1,445	0.57
Long Term Liabilities
Bank loan	$14,744,182	$15,111,487	$(367,305)	(2.43)
Total Long Term Liabilities	$14,744,182	$15,111,487	$(367,305)	(2.43)
Owners’ Equity
Share Capital	$15,000,000	$15,000,000	–	–
Retained Earnings	$15,289,721	$13,573,392	$1,716,329	12.64
Total Owners Equity	$30,289,721	$28,573,392	$1,716,329	6.01
Total Liabilities & Equity	$45,287,000	$43,936,532	1,350,468	3.07

Income Statement

	Year 2	Year 1	Absolute	Percent
Revenue
Rooms	$10,442,567	$10,278,614	$163,953	1.60
Food & Beverage	$3,678,007	$3,717,675	($39,668)	(1.07)
Other Departments	$1,164,806	$1,199,649	($34,843)	(2.90)
Total Revenue	$15,285,379	$15,195,938	$89,441	0.59
Departmental Expenses
Rooms	$3,072,862	$2,702,012	$370,850	13.72
Food & Beverage	$2,713,515	$2,643,836	$69,679	2.64
Other Departments	$742,402	$549,636	$192,766	35.07
Total Expenses	$6,528,779	$5,895,484	$633,295	10.74
Total Departmental Profit	$8,756,600	$9,300,453	($543,853)	(5.85)
Undistributed Expenses
Marketing & Sales	$1,700,580	$1,424,370	$276,210	19.39
Administrative & General	$1,799,419	$1,798,288	$1,131	0.06
Property Operations & Maintenance	$562,350	$546,075	$16,275	2.98
Total Undistributed Expenses	$4,062,349	$3,768,733	$293,616	7.79
Gross Operating Profit	$4,694,251	$5,531,720	($837,469)	(15.14)
Less: Management Fee
Base Fee	$305,708	$303,919	$1,789	0.59
Incentive Fee	$328,598	$387,220	($58,622)	(15.14)
Income Before Fixed Charges	$4,059,946	$4,840,581	($780,635)	(16.13)
Fixed Charges
Property Taxes	$240,000	$240,000	–	–
Insurance	$120,000	$120,000	–	–
Property Depreciation Building	$1,245,697	$1,241,387	$4,310	0.35
Property Depreciation FF&E	$494,611	$394,500	$100,111	25.38
Total Fixed Charges	$2,100,307	$1,995,887	$104,420	5.23
Net Operating Income	$1,959,638	$2,844,693	($885,055)	(31.11)
Other Income	$328,800	$204,800	$124,000	60.55
Total Income	$2,288,438	$3,049,493	($761,055)	(24.96)
Income Tax	$572,110	$762,373	($190,263)	(24.96)
Net Profit	$1,716,329	$2,287,120	($570,791)	(24.96)

Comparative Vertical Analysis

Balance Sheet

	Year 2	Percent	Year 1	Percent
Current Assets
Cash	$1,032,204	2.28	$470,880	1.07
Inventories	$1,779,525	3.93	$1,285,792	2.93
Accounts Receivable	$1,030,806	2.28	$1,000,357	2.28
Restricted Cash	$191,828	0.42	$983,098	2.24
Cash from Borrowing	$88	0.00019	$63,550	0.14
Total Current Assets	$4,034,452	8.91	$3,803,676	8.66
Long Term Assets
Building Property & Equipment	$35,000,000	77.29	$35,000,000	79.66
Plus: Building Capital Additions	$2,956,000	6.53	$2,156,000	4.91
Less: Building Depreciation	$3,735,137	8.25	$2,489,440	5.67
FF&E Property & Equipment	$5,000,000	11.04	$5,000,000	11.38
Plus: FF&E Capital Additions	$3,299,500	7.29	$1,239,500	2.82
Less: FF&E Depreciation	$1,267,815	2.80	$773,205	1.76
Net Long Term Assets	$41,252,548	91.09	$40,132,855	91.34
Total Assets	$45,287,000	100	$43,936,532	100
Current Liabilities
Accounts Payable	$253,098	0.55	$251,653	0.57
Taxes Payable	$0	–	$0	–
Total Current Liabilities	$253,098	0.55	$251,653	0.57
Long Term Liabilities
Bank loan	$14,744,182	32.56	$15,111,487	34.39
Total Long Term Liabilities	$14,744,182	32.56	$15,111,487	34.39
Owners’ Equity
Share Capital	$15,000,000	33.12	$15,000,000	34.14
Retained Earnings	$15,289,721	33.76	$13,573,392	30.89
Total Owners Equity	$30,289,721	66.88	$28,573,392	65.03
Total Liabilities & Equity	$45,287,000	100	$43,936,532	100

Income Statement

	Year 2		Year 1
	Amount ($)	Percent	Amount ($)	Percent
Revenue
Rooms	10,442,567	68.32	10,278,614	67.64
Food & Beverage	3,678,007	24.06	3,717,675	24.47
Other Departments	1,164,806	7.62	1,199,649	7.89
Total Revenue	15,285,379	100	15,195,938	100
Departmental Expenses
Rooms	3,072,862	20.10	2,702,012	17.78
Food & Beverage	2,713,515	17.75	2,643,836	17.40
Other Departments	742,402	4.86	549,636	3.62
Total Expenses	6,528,779	42.71	5,895,484	38.80
Total Departmental Profit	8,756,600	57.29	9,300,453	61.20
Undistributed Expenses
Marketing & Sales	1,700,580	11.13	1,424,370	9.32
Administrative & General	1,799,419	11.77	1,798,288	11.83
Property Operations & Maintenance	562,350	3.68	546,075	3.59
Total Undistributed Expenses	4,062,349	26.58	3,768,733	24.80
Gross Operating Profit	4,694,251	30.71	5,531,720	36.40
Less: Management Fee
Base Fee	305,708	2.00	303,919	2.00
Incentive Fee	328,598	2.15	387,220	2.55
Income Before Fixed Charges	4,059,946	26.56	4,840,581	31.85
Fixed Charges
Property Taxes	240,000	1.57	240,000	1.58
Insurance	120,000	0.79	120,000	0.79
Property Depreciation Building	1,245,697	8.15	1,241,387	8.17
Property Depreciation FF&E	494,611	3.24	394,500	2.60
Total Fixed Charges	2,100,307	13.74	1,995,887	13.13
Net Operating Income	1,959,638	12.82	2,844,693	18.72
Other Income	328,800	2.15	204,800	1.35
Total Income	2,288,438	14.97	3,049,493	20.07
Income Tax	572,110	3.74	762,373	5.02
Net Profit	1,716,329	11.23	2,287,120	15.05

Statement of Cash Flow

Metropolitan Hotel
Statement of Cash Flows
For the End of Year 2
Cash Flows from Operating Activities
Net Profit		1,716,329
Property Depreciation Building	1,245,697
Property Depreciation FF&E	494,611
Increase in Inventories	($493,733)
Increase in Account Receivables	($30,449)
Accounts Payable	$1,445
Net Cash from Operating Activities		1,217,571
Cash Flows from Investing Activities
Building Capital Additions	($800,000)
FF&E Capital Additions	($2,060,000)
Net Cash from Investing Activities		($2,860,000)
Cash Flows from Financing Activities
Bank Loan	(367,305)
Net Cash from Financing Activities		(367,305)
Total Cash Flow		(293,405)
Plus: Cash at the End of Year 1	1,517,528
Cash at the End of Year 2		1,224,123

Business Liquidity

The Metropolitan Hotel had a negative cash flow since the cash at the end of Year 2 is less than the cash at the end of year 1. The negative cash flow resulted in a reduction of the liquidity and hence the financial flexibility of the business. A positive and stable cash flow is needed for regular payment of the salaries of employees, payments of dividends to shareholders, timely payment of taxes and insurance premiums, and payment of loan interest and principal without any disruption. Thus, a negative cash flow may result in financial failure of the business. Moreover, failure of the business to realize its liquidity and financial flexibility status may cause significant problems such as bankruptcy. Thus, the statement of cash flow is important in ensuring that the business becomes aware of its liquidity status hence make accurate decisions concerning its ability to meet its short-term obligations.