Farm and Agribusiness Management ACEC 3423 - Exam 2

The financial condition of a business on a specific date, as if the business ended that day, is shown on the

balance sheet

what accounting equation is used to structure the balance sheet?

assets = liabilities + owners equity

measures the liabilities of the business relative to the amount of owner equity invested in the business

solvency

what two financial measures are used to determine the financial position of the business

solvency and liquidity

if assets are not greater than liabilities the business is

insolvent

measures the ability of the business to meet financial obligations as they come due without disrupting the normal operations of the business

liquidity

... measures the ability to generate cash needed to pay obligations

liquidity

report that shows the financial consition of the farm at a point in time

balance sheet

what is the purpose of a balance sheet

systematic organization of everything owned and owed and provides measures of solvency and liquidity

what does solvency tell you/how do you interpret these measures

measures the liabilities of the business relative to the amount of owners equity invested in the business

-provides an indication of the ability to pay off all the liabilties if all assets were sold

- if assets < liabilities, the business is insolvent

- if a > l -> solvent

-long term concept

what does liquidity tell you/how do you interpret these measures

-measures the ability of the business to meet financial obligations as they come due without disturbing the normal operations of the business

-measures the ability to generate cash needed to pay obligations

-generally measured over the next accounting period and is a short run concept

where do principal payments go on the balance sheet

current liabilities

current ratio formula

current asset / current liability

values greater than 1 are preferred

working capital

current assets - current liabilities

what you currently have to use, prefer positive number

debt to asset ratio

total liabilities / total assets

ratios greater than 1.0 indicate insolvency

equity to asset ratio

total equity / total assets

the higher the better, but cannot exceed 1

debt to equity ratio (leverage ratio)

total liabilities / owner equity

smaller is better, and it will approach 0 as liabilities approach 0

what approaches can a farmer use to place a value on assets

cost basis or market basis

lower of cost market

farm production cost

cost-less accumulated depreciation

cost basis balance sheet

has all assets valued following the cost, cost less depreciation, or farm production cost methods

market basis balance sheet

has all assets valued at market value less estimated selling cost

illustrate the format and structure of a balance sheet

arranged to reflect if the business ended that day, sold all assets and paid off all debt

separate into two different categories:

assets shown in top left, liabilities shown on right or below assets, and owner equity shown on balance sheet

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

balance sheet

report that shows the financial condition of the farm at a point in time

True or false: a business with a higher working capital will also have a higher current ratio?

False, the ratio doesn't tell you about the absolute amounts

What is the accounting equation that is used to complete a balance sheet?

assets = liabilities + owners equity

What is the purpose of a balance sheet? What does it tell us?

Health of a company's financial position - it captures the whole business. It tell us solvency (long run) and liquidity (short run)

What provides an indication of the ability to pay-off all financial obligations or liabilities if all assets were sold?

Solvency