Farm and Ranch Exam 2

• Answer: 3) cost minus salvage value 

• Explanation: The total depreciation is the difference between the asset’s initial cost and its expected salvage value (residual value). 

The total depreciation over an asset's useful life is equal to

At the end of a depreciable asset's useful life, its book value will always equal its market value. T/F

False (The book value at the end of an asset’s useful life may not equal its market value, as market value depends on current conditions, and depreciation is based on accounting principles. )

A depreciable asset's book value will equal its salvage value: 

• Answer: 2) only at the end of its useful life 

Explanation: The book value will gradually decrease over time through depreciation and will reach the salvage value at the end of the asset’s useful life. 

150% declining balance is a faster depreciation method than straight line. T/F

True (Explanation: The 150% declining balance method is an accelerated depreciation method, meaning it depreciates assets faster in the earlier years than the straight-line method, where the asset depreciates evenly over time. )

At the end of a depreciable asset's useful life, its book value will equal its salvage value. 

True

Depreciation is a noncash expense which is included as an expense when using cash accounting. 

• Answer: 2) False 

• Explanation: In cash accounting, depreciation is not recorded because cash accounting focuses on actual cash flows (receipts and payments), whereas depreciation is an accrual-based expense. 

Any item of value is called a(n): 

Assest

A fiscal accounting period is one which: 

• Answer: 4) ends on any date other than December 31 

Explanation: A fiscal accounting period is a 12-month period used for accounting purposes, but it doesn't have to end on December 31. It can end on any date depending on the organization’s financial year. 

A prepaid expense is one where payment is made: 

• Answer: 3) in an accounting period prior to the one in which the item will be used to produce income 

Explanation: A prepaid expense is an expense paid in advance, before it is actually incurred (e.g., rent or insurance paid before it applies to the current period). 

Records are of no use when trying to obtain a new loan.

• Answer: 2) False 

Explanation: Financial records are crucial when applying for a loan, as they show the business's financial health, stability, and ability to repay the loan. 

An increase in prepaid expenses shows up on an income statement as:

• Answer: 2) a decrease in expenses 

• Explanation: When prepaid expenses increase, it reduces the current period's expenses because the cost is recorded as an asset until it is used in future periods.

Any difference between net farm income and net farm income from operations is due to

• Answer: 3) gain or loss on the sale of machinery or land 

Explanation: The difference between net farm income and net farm income from operations is typically caused by one-time events like the sale of machinery or land, which aren't part of regular operations. 

Net farm income less family living expenses and income taxes equals: 

• Answer: 4) retained farm earnings 

Explanation: Retained farm earnings represent the amount of profit left after expenses, taxes, and family living costs have been deducted from net farm income. 

How does the sale of an old tractor affect an income statement? 

• Answer: 2) increases (decreases) revenue by the amount of gain (loss) 

Explanation: When an old tractor is sold, any gain or loss from the sale (the difference between the sale price and the book value) is recorded as revenue or expense on the income statement. 

A gain on the sale of a depreciable asset implies: 

• Answer: 2) too little depreciation was taken over its life 

Explanation: A gain on the sale of a depreciable asset usually indicates that the asset's book value (after depreciation) was higher than its sale price, suggesting insufficient depreciation was taken over its useful life. 

If return on assets is greater than return on equity, the interest rate on borrowed money was

lower than return on assets 

Which of the following is not included in the revenue section of an income statement

4) an increase in the market value of land 

The purpose of a farm income statement is

to show revenue, expenses, and net farm income for an accounting period

The best return to management of the following would be

greater than the opportunity cost of management

Which of the following would not be included as an expense on an accrual income statement?

cost of a new farm pickup 

If a farm has zero liabilities and pays no interest, the ROA and ROE will be the same. T/F

True

The debt/asset ratio and the debt/equity ratio both measure the overall solvency of the farm business. T/F

True

The return on assets (ROA) is a good measure of the marginal return that can be expected from investing more capital in the business. T/F

False

Low profitability can be caused by: 

• Low yields or output levels relative to input use. 

• Unused machinery capacity with high levels of machinery ownership costs relative to output. 

• Poor marketing leading to low prices received. 

Answer: All of these can cause low profitability. 

A farm business would be considered "profitable" any year net farm income is positive. T/F

False

A cash flow budget should contain all of the following items except: 

Depreciation

When preparing a cash flow budget it is important to

Take into account the timing of cash inflows and outflows 

A cash flow analysis of an investment in a new capital asset should include projections for

Several years

Nonfarm income and expenses are not included on a cash flow budget

False 

The primary use of a cash flow budget is to estimate profit for the coming year. 

False

Cash accounting will always show a lower profit than accrual accounting.

T/F 

False-depends on the inventory are and accounts payable 

Which financial statement covers only a single point in time rather than a period of time? 

Balance sheet-as of today-how do we own and how much do we owe? 

The "cost" value of farmland can change due to 

The cost of non-depreciable improvements made, such as terraces and earthen dams 

The degree to which a farm's assets adequately cover or exceed it liabilities is referred to as 

Solvency

Which of the following can be used to give an indication of change in owner equity over a year? 

Change in deb/equity ratio from beginning of year to end of year 

A farm business would be considered "profitable" any year net farm income is positive. 

False 

“above 2 is profitable under 2 is not profitable” 

Working capital is one measure of solvency T/F

False

The primary purpose(balance of liabilities) of a balance sheet is to measure and record net farm income. Income statement T/F

False

Assume you purchase a new pickup on July 31 for a cost of $33,000.  You estimate a useful life on the truck of 7 years, with a salvage value of $5000.  Calculate the book value at the end of the first year, on January 1, using 150% declining balance.  

Assume you purchase a new pickup on October 1 for a cost of $26000.  You estimate a useful life on the truck of 6 years, with a salvage value of $5000.  Calculate the depreciation the first year using double declining balance.