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CHAPTER 14
FINANCIAL GOALS AND INFORMATION SYSTEMS
INTRODUCTION
This final chapter has two major sections. The first covers financial goals and the various types
of financial goals that a firm may select from as well as other goals. The second part of the
chapter covers information systems and decision making. In many ways, the information system
section in this chapter pulls together many of the preceding chapters in the text and shows how
the information flowing from the accounting system provides the foundation on which rational
decisions can be made to help a business reach its financial goals.
TRUE OR FALSE QUESTIONS
(Correct answer indicated by T for True and F for False answers)
1. Regardless of the type and size of a hospitality enterprise, financial management will
be an ongoing aspect of the overall management of the business.
T
2. The concepts of financial management are basically the same for both profit and non–
profit organizations.
T
3. Another term for a company’s statement of business purpose is a mission statement.
T
4. An organization’s statement of business purpose and its objectives define what the
organization wants to achieve. Its action plan shows how it is going to get there.
T
5. Funds raised through proper financial management should never be invested in assets
such as food and beverage inventories.
F
6. A definition of financial management is that it is concerned with the mix of inflow
sources and mix of outflow uses of funds.
T
7. Profit maximization, as a financial goal of a business, will always lead to
maximization of stockholder wealth.
F
8. Profit maximization as a financial goal means making the most amount of money in
the shortest possible time.
T
9. One of the advantages of profit maximization as a financial goal is that it takes into
consideration every possible risk.
F
10. One of the advantages of profit maximization as a financial goal is that it emphasizes
short-run over long–run profitability.
F
11. Maximization of percentage return on investment is a variation of the profit
maximization financial goal.
T
12. With maximization of percentage return on investment, no investment is made if the
return is less than the cost of financing.
T
13. Most successful larger companies try over time to maximize stockholder wealth.
T
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14. Maximization of stockholder wealth has as its objective, the combination of the
highest dividend payments and increasing the market value of the company’s shares.
T
15. With maximization of stockholder wealth as a financial goal, net income is more
important than earnings per share.
F
16. Maximizing earnings per share may not be the same as maximizing market price per
share.
F
17. A company can maximize its earnings per share by never paying dividends.
T
18. With maximization of stockholder wealth as a financial goal, the company can control
the market price of its stock, and that price cannot be influenced by external economic
factors.
F
19. Market price of a company’s shares may not reflect a hotel’s true wealth if it has real
estate holdings.
T
20. A company’s overall financial goal may be reflected in secondary goals set by the
organization’s department heads.
T
21. Management by exception is the establishment of secondary goals set by the
department heads of the business organization.
F
22. An alignment of an organization’s overall financial goals and the secondary goals of
its department heads is known as goal congruence.
T
23. Management by objectives is contradictory to goal congruence.
F
24. The four levels in the decision making process are data production, data sorting,
information production, and variance analysis.
F
25. Data are converted into information when they acquire meaning.
T
26. A manager’s task is to make decisions and not be involved in establishing the
information gathering system.
F
MULTIPLE CHOICE QUESTIONS
(Correct answer indicated by asterisk)
1. Another term for a company’s statement of business purpose is a:
(a) Strategy statement
(b) Tactical statement
2. A company’s statement of business purpose can:
(a) Provide guidelines for allocating resources
(b) Indicate where future growth will occur
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3. Which of the following is not an objective of financial management?
(a) Establishing goals
(b) Deciding on the sources of needed funds
4. Which of the following is not true of having profit maximization as a financial goal?
(c) A company may become too highly levered
(d) It generally tends to emphasize short-run profits
5. The market price of a company’s shares is established by a number of factors. Which of the
following is not one of those factors?
(a) An assessment by purchasers of the risk of equity ownership
(b) The company’s earnings per share
6. One of the following is not a disadvantage of having the maximization of stockholder wealth
as a financial goal:
(a) The price of the company’s shares may be influenced by factors outside the control of its
management.
(b) The general manager may be tempted to maximize his own wealth rather than the
stockholders’.
7. Which of the following is not a characteristic of management by objectives (MBO)?
(c) Department heads participate in determining how they will be measured in attaining
secondary goals
(d) The measurement of secondary goals is established in quantitative terms
8. Which of the following is not an example of a social goal?
(c) Maintaining equitable hiring practices
(d) Supporting further education and training of employees
9. In proper sequence, starting at the bottom of the pyramid, the four levels in the decision
making process is:
(a) Decision making, information production, data sorting, and data production
(b) Information production, data sorting, data production, and decision making
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10. Which of the following is not a true statement about the manager’s responsibility in the
decision making process?
(c) Involvement in establishing the information gathering system
(d) Deciding what information is relevant to a decision
11. Relevant information normally increases the decision maker’s knowledge, but:
(a) Can quickly lead to a situation known as information overload
(b) Consequently must result in a correct decision
12. The decision making process normally involves the following sequence of steps:
(c) Selecting alternatives, defining variables, taking action, and evaluating results
(d) Examining the problem, identifying relevant information and taking action
13. Which of the following is not true of information in the decision making process?
(a) It must be relevant
(b) It must be timely
14. Management by exception is:
(a) Another name for management by objectives
(b) Never part of the management by objectives process
Problem Solutions
P14.1 No solution is offered because each student’s response will be different.
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P14.2 That this is not a fair method can be demonstrated in a variety of ways, but consider the
following possibility:
Sales revenue Net income Average
Motel percent increases percent increase percentage
1 10% 20% 15%
2 15% 15% 15%
3 30% 0% 15%
In this situation, Motel 1 did not achieve a 15% sales revenue increase and would not be
eligible for the trophy, even though it contributed the highest proportion of increased net
income (20%) to the chain’s overall profitability.
P14.3 a. In this objective, the phrase “top–quality menu items” is subjective and difficult to
define despite its importance. There is no quantitative measure and no time frame in
this objective. A suggested alternative or objective might be: “Through documented
customer surveys conducted over the next 90 days, achieve a customer satisfaction
30, from visitors who live within a 50-mile radius of the hotel.”
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P14.4 a. The total budget for the 6 periods was $454,500 and total actual results were
2 $1,000 + (2% × $1,000) = $1,020
3 1,000 + (2% × $4,000) = 1,080
6 1,000 + (2% × $ 500) = 1,010
Total $3,110
1 $80,000 $82,000 $2,000 Unfavorable
2 $79,500 $79,000 $ 500 Favorable
3 $74,500 $74,000 $ 500 Favorable
4 $74,500 $74,000 $ 500 Favorable
5 $73,500 $73,000 $ 500 Favorable
6 $72,500 $72,000 $ 500 Favorable
For the six periods, the overall budget is still favorable at $500, but the maintenance
manager has now added two more months where a $1,000 bonus would be awarded.
b. From the perspective of the general manager, it would probably be preferable to
eliminate the lump-sum bonus, and change to an increased bonus percentage since
P14.5 The hotel has two uniquely different markets that it is trying to serve: the family trade
and the group meeting segments. It has decided on a marketing strategy that has not
tailored its product to complementary market segments. Further, it has only one
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P14.6 Defining the Identifying Accumulating Making the
Problem Alternatives Information Decision
a. X
b. X
P14.7 a. Current ratio: $11,700 / $19,200 = 0.61:1 ($0.61 for each $1 of current debt)
Quick ratio: $8,700 / $19,200 = 0.45:1 ($0.45 for each $1 of current debt)
b. The following would be additional useful information:
1. Breakdown of present sales revenue between rooms and trailer pads.
2. Present average rates for rooms and for trailer pads.
3. Proposed rates for new rooms and trailer pads.
CASE 14 SOLUTION