Farm Management and Finance Practice Exam Flashcards

Comprehensive vocabulary flashcards covering farm financial management, risk assessment, taxation, and investment analysis based on lecture quiz results.

Internal Rate of Return (IRR)

The discount rate that makes the Net Present Value (NPV) equal to zero.

Custom Hire

A machinery acquisition method that is generally cheaper when machinery use is low.

Net Present Value (NPV)

The sum of discounted net cash flows minus the initial investment, representing discounted benefits minus costs.

Land

A capital asset that differs from machinery because it has a fixed supply.

Subjective Probabilities

Best estimates based on information, experience, and judgment.

Capital Gains Income

Income from selling an asset above its tax basis, generally taxed at lower rates than ordinary income and considered business income.

Coefficient of Variation

A statistical measure useful because it removes units; it cannot be computed when the mean equals zero.

Self-employment Tax

A tax that specifically funds Medicare and Social Security.

Annual Percentage Rate (APR)

The measure used to best compare the true cost of borrowing.

Marginal Tax System

A system where increasing taxable income slightly only affects taxes owed at the margin (each dollar earned) rather than shifting all income to a higher bracket.

$$n$$

The variable in financial formulas that determines how many periods compounding or discounting occurs.

Ordinary Income Tax

In a farm context, this tax applies to net farm profit.

ROA (Return on Assets)

A ratio that measures profitability relative to assets and is preferred over net farm income when comparing farms of different sizes.

Management Quality

The factor that best explains why differences in net farm income persist among farms with similar technologies and prices.

Farm Efficiency Measures

Assessments that measure output relative to inputs.

Safety-First Decision Rule

A decision-making strategy focused primarily on avoiding the worst possible outcome.

Solvency Measures

Indicators that relate most directly to a farm's long-term financial health.

Depreciation

A non-cash, tax-deductible expense.

Benchmark Comparison

A comparison of performance against similar farms.

Maximum Expected Value Rule

A decision rule that selects the option with the highest expected return.

Cash Rent Lease

A lease arrangement where the tenant typically bears the risk for both price and yield.

Weighted Average

An average that places greater emphasis on more recent observations.

Diversification

A strategy to reduce risk by spreading outcomes.

Discounting

The process of adjusting future values to today’s dollars.

Asset Turnover Ratio

A ratio that measures how effectively a farm uses assets to generate revenue.

Tax Management

The practice of continuously evaluating tax effects of decisions to maximize after-tax income, requiring accurate records.

Liquidity

A farm's ability to meet short-term obligations; a common indicator of a problem is a strong current ratio paired with a high debt-to-asset ratio (liquid but financially risky).

Timeliness Costs

Costs that arise from delayed field operations that reduce yields.

Raised Breeding Livestock

Assets that typically have a zero tax basis when sold by cash-basis farmers.

Risk

Distinguished from uncertainty because it involves known or estimable probabilities.

Compounding

The process of growing financial amounts over time.

Payback Period Method

An investment analysis method whose major limitation is that it ignores returns after the payback period.

Working Capital

Calculated as current assets minus current liabilities.

Annuity

A series of equal periodic payments.

Standard Deviation

A statistical measure of the variability of outcomes or total risk.