Financial Analysis of ABC Hotel

The study analyzed the investment project of ABC hotel, calculating its payback period (PP) and discounted payback period (DPP). The results showed that the project takes a very long time to re-earn its initial investment. The conclusion emphasized the importance of budgeting in estimating expenses and the effectiveness of investment appraisal techniques in examining proposal feasibility. The study found that budgeted income statement, cash budget, and balance sheet can assist ABC hotel in making future decisions. Additionally, capital budgeting techniques indicated the investment option is feasible, and financial techniques allowed the business unit to effectively decide its future course of action.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
TASK 2............................................................................................................................................4
(a) Cash budget............................................................................................................................4
(b) Budgeted income statement...................................................................................................6
(c) Budgeted statement of financial position...............................................................................6
TASK 3............................................................................................................................................7
CONCLUSION..............................................................................................................................10
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INTRODUCTION
Management accounting is referred to as the process of preparing management reports as
well as accounts that offer accurate and timely information relating with finances and statistics
(Gill and Biger, 2013). This is required by the business to make day to day as well as short term
decisions. In the present study, management accounting has been discussed in context of ABC
hotel. The report involves the need for budgeting. Further, it includes preparation of documents.
In addition to this, the present study also involves techniques of investment appraisal so that
determination can be made regarding selection of the most suitable investment project.
TASK 1
Carrying out business operations requires the owners to plan and review their finances.
There is greater need for budgeting within the organization that has been enumerated below: Facts: This is related with representing detailed analysis of the ways in which business is
expected to spend money in future time span (Grier, 2007). Several organizations develop
budget annually so that expected needs of every department can be outlined within the
firm. Limit expenditures: A major advantage of using business budget relates with the ability to
limit the amount that needs to be spent on certain operations (Nikbakht and et.al, 2006).
The role of budget is effective in determining the expenses in order to ensure that capital
is not wasted on items that are not essential. Plan for future growth: The need for budgeting can be greatly viewed towards planning
for the future growth of business and expansion (Hansen and Otley, 2003). Budgeting
regarding future growth opportunities makes sure that firms possess capital on hand when
quick decisions are required to be made in relation to the expansion of business
operations.
Process of preparing budget
There is a certain process followed in preparation of budget. This includes the following: Obtaining estimates: It includes obtaining of the sales, production levels, expected costs
as well as availability of the resources for every sub division. The discussion regarding
3

this can be informal or written reports of plan that is submitted to the budget committee
for approval. Coordinating estimates: Another step relates with the evaluation of different plans
submitted by several organizational units in order to determine the potential plan in the
entire interest of the business. Communicating budget: Communication of the budget to the responsible managers and
concerned departments is another step (Harris and Mongiello, 2012). After that, budget
plan is being approved in the light of organizational goals and availability of resources. It
is being communicated to the departments and responsible managers. Implementing the budget plan: The final budget is being presented to the manager and is
adopted as a plan of operation for coming budget period. Reporting interim progress towards budgeted objectives: In accordance with the
feedback in budgeting process, performance reports are being prepared by firm so that
departmental managers can be informed regarding the performances achieved in relation
with budgeted figures (Milisn, 2009).
Limitations
 Inaccuracy: The process of budgeting is based upon lots of assumptions that are related
with the estimation of expenses and revenues. They are on the basis of trends and
scenario of market that exist while making budget (Nobanee, Abdullatif and AlHajjar,
2011). Further, they are based upon predictions made for the coming year by taking into
account data available at the time of budgeting.
TASK 2
(a) Cash budget
Cash Budget for the period of 6 months
Particulars
Pre-operating
year
Janua
ry
Febru
ary March April May June Total
Cash revenues
Cash sales 80000 81600 83232 85728.
96
88300.
8288
90949.
85366
50981
1.6424
4

4 64
Bank loans 2500000
25000
00
Owner's capital 2500000
25000
00
Total cash inflow 5000000 81600 83232
85728.
96
88300.
8288
90949.
85366
4
55098
11.642
464
Cash payments
Construction of
hotel 2000000
20000
00
Furniture purchase 100000
10000
0
Office equipments 50000 3000 53000
Legal formalities 35000 35000
Repayment of loan 21000 21000 21000 21000 21000 21000
12600
0
Interest paid 16667 16667 16667 16667 16667 16667
10000
0
Cost of sales 20000 20400 20808 21432 22075 22737
12745
2.9106
16
Electricity charges 2400 4080 4161.6
4286.4
48
4415.0
4144
4547.4
92683
2
23890.
58212
32
Office stationery 800 816 832.32
857.28
96
883.00
8288
909.49
85366
4
5098.1
16424
64
Advertisement 3200 3264 3329.2 3429.1 3532.0 3637.9 20392.
5

8 584 33152
94146
56
46569
856
Workers salary 12000 12240
12484.
8
12859.
344
13245.
12432
13642.
47804
96
76471.
74636
96
Taxes
20803.
04782
176
20803.
04782
176
Consultation
services 50000 50000
Building insurance 2000 2000 2000 2000 2000 2000 12000
Miscellaneous
payments 4000 4080 4161.6
4286.4
48
4415.0
4144
4547.4
92683
2
25490.
58212
32
Total cash outflow 2235000
82066.
66666
66667
84546.
66666
66667
85444.
26666
66667
89817.
59466
66667
88232.
12250
66667
11049
2.1340
03627
27755
99.451
17696
Net cash flow
(Surplus or deficit) 2765000
-
82066.
66666
66667
-
2946.6
66666
6667
-
2212.2
66666
6667
-
4088.6
34666
6667
68.706
29333
33
-
19542.
28033
96267
27342
12.191
28704
Opening cash
balance 0
27650
00
26829
33.333
33333
26799
86.666
66667
26777
74.4
26736
85.765
33333
26737
54.471
62667
26542
12.191
28704
Closing cash
balance 2765000
26829
33.333
33333
26799
86.666
66667
26777
74.4
26736
85.765
33333
26737
54.471
62667
26542
12.191
28704
53884
24.382
574
The above table presents the cash budget of ABC hotel for six months. This begins from
January to June. The closing cash balance in all the respective months is positive. This presents
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that inflow of cash is greater that cash outflow. Thus, it can be determined that above budget can
be effective for the business. As such with this hotel can attain its pre-determined targets in an
effective manner.
(b) Budgeted income statement
Profitability statement for the period of 6 months
Particulars Amount
Total sales 509811.642464
Less: Cost of sales (30%) 127452.910616
Gross profit (70%) 382358.731848
Less: operating expenses
Electricity charges 23890.5821232
Office stationery 5098.11642464
Advertisement 20392.46569856
Workers salary 76471.7463696
Building insurance 12000
Depreciation on furniture and equipment 5000
Depreciation 10000
Miscellaneous payments 25490.5821232
Total payments 178343.4927392
Earnings before interest and taxes 204015.2391088
Interest 100000
Earnings before taxes 104015.2391088
Taxes 20803.04782176
Net profits 83212.19128704
The above table reflects budgeted income statement of the hotel for 6 months. Net profit
of the company is 83212.19. Thus, business is effectively carrying out its operations with the
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available resources. The above budgeted income statement presents that it is the most suitable for
the organization as it reveals that company is making greater profitability.
(c) Budgeted statement of financial position
Balance sheet
Particulars Amount
Current assets
Building 2000000
Less: Depreciation 10000
Net Building 1990000
Furniture and equipment 100000
Less: Depreciation 5000
Net furniture 95000
Cash balance 2737424.38257408
Preliminary expenses written off 134787.81
Total Assets 4957212.19257408
Loans 2500000
Less: Repayment of loan 126000
Net loan balance 2374000
Owners capital 2500000
Retained earnings 83212.19128704
Total liabilities & equity 4957212.19128704
The above table presents the budgeted financial position of ABC hotel. Balance sheet
involves assets and liabilities of the company on a particular date. The statement of financial
position is effective for the hotel as with this, it can attain its set targets in an effective manner.
Along with this, it is important in assessing the financial position of company to a greater extent.
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TASK 3
The feasibility of investment project can be determined with the assistance technique
such as capital budgeting. Investment appraisal technique is regarded as a process that makes
evaluation as well as analysis of the investment proposal in a significant manner (Shim and
Siegel, 2008). It is considered as the most common approach that assists manager in developing
effective decision regarding future contingencies. Techniques of investment appraisal that can be
used by hotel are enumerated in the manner below:
Proposal information
Year Project A (000)
Initial Investment £5000
1 £800
2 £824
3 £848.72
4 £874.18
5 £900.40
6 £927.41
7 £955.24
8 £983.89
9 £1013.41
10 £1043.81
Residual value £3200
Net present value (NPV)
It is considered as the approach that is being used most commonly with an aim to make
analysis of the suitable proposal for investment that is available with management of
organization for future investment. Under this tool, present value is discounted in order to gain
insight to the future value of cash flow (Walton, 2012). This is for the sake of taking accurate
decision regarding selection of the best investment option for the business. Investment option
that has higher as well as positive NPV can be selected by the hotel. On the contrary, proposal
9

with negative and lower net present value needs to be rejected as it would not yield maximum
return in future course of time.
Year
Cash flow of Project A
(£ 000) Discounting rate 7%
Present Value (£
000)
1 800 0.935 748
2 824 0.873 719.35
3 848.72 0.816 692.56
4 874.18 0.763 667.00
5 900.40 0.713 641.99
6 927.42 0.666 617.66
7 955.24 0.623 595.12
8 983.90 0.582 572.63
9 1013.42 0.544 551.30
10 1043.82 0.508 530.30
Residual value 3200 0.508 1625.60
Total present value (£) 6335.86
Initial investment (£) 5000
Net present value (£) 1335.86
Interpretation: From the calculation carried above, it can be interpreted that net present
value of investment proposal is 1335.8. This implies that NPV is positive; thus manager can
decide on investing in such proposal so that it can yield maximum profitability.
Payback period
It refers to the time period in which investment proposal will recover its initial cash
outflow. It is a very simple method of capital budgeting as it is very easy to calculate. Selection
criteria of this method says that hotel business has to adopt such investment proposal which takes
lower the time period and vice versa. However, weakness of this method is that it does not
consider the time value of money (Weygandt, Kimmel and Kieso, 2015). Moreover, it ignores
profitability beyond the payback period. However, it might be possible that investment project
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which takes higher time period to recover initial investment but provides greater post pay back
profitability seems to be more beneficial for the hotel business.
Year Cash flow of Project A (£ 000) Cumulative cash flow
Initial Investment -5000 -5000
1 800 -4200
2 824 -3376
3 848.72 -2527.28
4 874.18 -1653.098
5 900.41 -752.69
6 927.42 174.73
7 955.24 1129.97
8 983.89 2113.87
9 1013.42 3127.28
10 1043.82 4171.10
Residual value 3200 7371.10
Payback period 5.81 years
Discounted payback period
It overcomes the limitations of payback period method. It is because the method
considers the time value of cash flow through using an appropriate discount rate. It determines
discounted cash flow to compute project recovery period of initial cash outlay. As per the
method, hotel business is using 7% cost of capital for determining future value of the net cash
flows. Thus, this technique will be considered more superior than pay back period method (Zhu,
Sarkis and Lai, 2012). However, limitation of this method is that it avoids post profitability after
receiving the initial investment. As per the method, hotel has to select investment proposal which
takes lower discounted payback period than others.
Year
Cash flow of Project
A (£ 000)
Discounting rate
7%
Present Value
(£m)
Cumulative cash
flow
Initial Investment -5000 -5000
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1 800 0.935 748 -4252
2 824 0.873 719.35 -3532.64
3 848.72 0.816 692.56 -2840.09
4 874.18 0.763 667.00 -2173.09
5 900.40 0.713 641.99 -1531.10
6 927.42 0.666 617.66 -913.44
7 955.24 0.623 595.12 -318.32
8 983.90 0.582 572.63 254.30
9 1013.42 0.544 551.30 805.60
10 1043.82 0.508 530.26 1335.86
Residual value 3200 0.508 1625.6 2961.46
Discounted Payback
period 7.55 years
Interpretations: As calculated above, PP and DPP of the investment project are 5.812
year and 7.55 year respectively. Thus, it can be said that project takes very long period to re-earn
initial investment of 5000£.
CONCLUSION
It can be concluded from the report that there is greater importance of budgeting in
assisting the business to make an estimation of its expenses to a greater extent. It has been
inferred that the role of investment appraisal technique is effective in examining the feasibility of
investment proposal in an effective manner. Thus, this results in assisting the firm to gain deeper
insight to the profitability of proposal in future course of time. The budgeted income statement,
cash budget as well as budgeted balance sheet have been developed with an aim to assist ABC
hotel in estimating the amount of expenses. It can conclude from the study that budgeted income
statement, cash budget as well as statement of financial position are the best suited for the
business. It is seen that hotel unit is forecasted to earn adequate amount of profits in duration of
six years. Capital budgeting techniques also indicate that the investment option is feasible in
nature. Further, it can be said that business unit is able to effectively decide future course of
12

action through application of financial techniques. In present case, ABC hotel is considered to be
profitable option for the investment purpose.
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