Farm and Agribusiness Management ACEC 3423 - Exam 2

Profit is estimated by which financial statement?

income statement

report of revenue and expenses over the accounting period

income statement

enterprise budget

provides an estimate of potential revenue, expenses, or profit for a single enterprise

each type of crop or livestock is an enterprise

how to construct a crop enterprise budget

revenue: all cash and non-cash (inventory) revenue from the crop

operating or variable expenses: all costs that would be incurred only if the crop is produced

ownership or fixed expenses: costs that muse be paid even if no crop is produced

profit: represents a return to all resources that were not charged in the budget (usually management)

when constructing a livestock enterprise budget

the unit may change based on type of livestock, several budgets can be made for different sizes of the same enterprise, time period is usually one year but may be longer in some cases

Production activities

accounting transitions involving activities related to the production of crops and livestock (government payments, custom work, feed, fertilizer)

Investment activities

related to the purchase, depreciation, and sale of long-term assets (land, equipment, or breeding livestock)

Financing activities

relate to obtaining and repaying capital, and paying the interest and principles on loans

Overlapping activities

involve a combination of activities that require intermittent and/or concurrent attention

account payable

the amount a company owes to suppliers or vendors for goods or services that have been received but not paid for

account receivable

money a business is owed by customers for goods or services that haven't been paid

accrued expense

cost a business acquired but not paid (wages, utilities, interest on loans)

asset

resources a business owns or controls

credit

represents an increase in liabilities, equity, and revenue or decrease in asset or expense

debt

refers to amount of money that a company/individual owes to creditor

expense

refers to the cost incurred by a business in the process of generating revenue (rent, utilities, cost of goods sold)

inventory

goods and materials that a business holds for the purpose of resale, production, or use in its operations

liability

obligations or debt a business owes to external parties

Net farm income

financial measure used in agriculture to represent the profitability of a farming operation - what is earned after all cost have been deducted

Net Farm Income formula

total farm revenue-total farm expense

owner's equity

interest or value that owner(s) of a business have in the assets of the company after all liabilities

prepaid expense

An expense that has been paid in advance before the benefit or service received

profit

financial gain a business makes after subtracting all expenses from revenue

revenue

total amount of money a business earns from selling goods and/or services

What is the most basic accounting system?

cash

What are the basics of cash accounting?

revenue: recorded when cash is received for sale of product or service

expenses: recorded when the company is paid

What is the basics of accrual accounting?

revenue: recorded when item is produced

expenses: recorded when produced

income statement

report of revenue and expenses over the accounting period

Why is machinery depreciation not included on a cash flow budget?

It is a non-cash expense

Discuss the truth or falsity of the following statement: a cash flow budget is used primarily to show the profit from the business

False - cash flow is just showing cash inflow and outcomes

Why are the results from an accrual accounting system recommended for uses when making managing decisions?

Accrual accounting: accounts for inventory, which is much more accurate. Cash accounting is just dollars and can be misleading

FFSC

Farm Financials Standard Council

What is the purpose of a cash flow budget?

to estimate the amount and timing of future borrowing needs and the ability of the business to repay loans

What is in the Cash Flow Budget? 

all cash inflows not just revenues and expenses

Cash Inflows

cash from the sale of capital assets

proceeds of new loans

NOT inventory changes

Cash Outflows

principal payments on debt

purchase price cost of new capital items

NOT depreciation

Cash Flow Budget is not…

= to net farm income

What can you tell from a Cash flow budget

If the investment is financially feasible

What are the components in an Enterprise Budget

Profit, Fixed costs, Variable costs, and revenue

Cost of Production =

Total Cost / Expected Yield

Break-Even Yield =

Total Cost / Expected Selling Price