Farm and Agribusiness Management Exam 3

Balance Sheet, Income Statement, Partial Sheet, and Whole Farm Analysis

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

balance sheet

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

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

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 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

What is the definition and purpose of an Income Statement?

Defined: the summary of revenues and expenses as recorded over a period of time

Purpose: measures a flow of income over time

How is the Income Statement linked to the Balance Sheet?

The income statement is revenues minus expenses which gives profit (NFI). Family living expenses and taxes are then taken from NFI which gives retained earnings. Retained earnings in theory are then put back into the business which is one of 3 ways owners equity is changed on the balance sheet.

What is the structure of the Income Statement?

Total revenues less total expenses equals Net farm income from operations (NFIO) plus or minus gain/loss on sale of capital assets equals net farm income (NFI)

What is the difference in NFI and NFIO?

NFI contains any gain or loss on the sale of capital assets while NFIO is JUST revenues minus expenses. NFIO is used for general management decisions.

What is the formula for adjusting inventory, accounts receivable, accounts payable, accrued expenses, accrued interest.

Ending minus Beginning

What is the formula for adjusting pre-paid expenses?

Beginning minus Ending

What is the definition of depreciation?

The annual loss in value of durable assets due to use, wear, tear, age and obsolescence.

A business expense that reduces annual profit.

A reduction in the value of an asset.

What determines if an asset is depreciable?

1. a useful life of more than one year

2. a determinable useful life but to an unlimited life

3. a use in business

Define straight line depreciation.

annual depreciation is found by subtracting the salvage value from the cost and dividing by useful life

Compare depreciation methods.

Impact on the income statement: faster depreciation results in lower estimated income

Impact on the balance sheet: faster depreciation results in lower estimated net worth

What are the uses of a partial budget?

Often the best way to analyze a change in operations involving several different enterprises.

Provides a formal and consistent method for calculating the expected change in profit from a proposed change in the farm business.

What is the Partial Budget Format?

Left Section: Additional Costs (cost incurred if change is made) and Reduced Revenue (revenue that will be lost if change is made)

Right Section: Additional Revenue (revenue received if change is made) and Reduced Costs (costs that will be eliminated if change is made)

What is Net Change in Profit?

Good things minus Bad things

Right Section minus Left Section

What are factors to consider when conducting a partial budget?

Costs may not change proportionally. Do not overlook opportunity costs. Unit of change must be consistent throughout the entire budget.

Define a sensitivity analysis

Involves computing the partial budget several different times, using different price and yield figures each time

What are the limitations of a partial budget?

It only focuses on small changes, not major ones. It also doesn't guarantee results and may overlook other important aspects of the business. It can only compare present management plans with one alternative at a time, while only using one set of prices and field expectations.

What are the 4 types of analysis?

1. Profitability - income statement, comparing income and expenses

2. Farm Size - enough resources to generate profits?

3. Financial - balance sheet, solvency liquidity and owner's equity

4. Efficiency - are we using our resources efficiently

What are the three basic standards of whole farm analysis?

1. Budgets: measures are compared against budgeted goals or objectives identified during planning

2. Comparative farms: measures are compared against actual results from similar farms

3. Historical trends: the manager looks for improvement over time

What does FFSC means and what does it encourage?

FFSC stands for Farm Financial Standards Council. It encourages the use of a set of standard financial statements, including balance sheets, income statements, cash flow statements, and balance sheets

What is the use of an income statement?

Summary of revenues and expenses recorded during a period of time. It shows the business how their income flows over a period of time

What is the use of a depreciation schedule?

Charts the loss in value of an asset over the time of its useful life.

What is the use of a partial budget?

Provides a formal and consistent method for calculating expected changes in a business

What is a whole farm analysis?

Managing a farm considering economic, environmental, and social risk factors (along with farm goals, resources, potential risks, and opportunities)

What are the measures of profit ($)

- Net Farm Income from Operations (NFIO)

- Net Farm Income (NFI)

- Return to labor and Management

- Return to Equity

- Return to Assets

- Operating Profit

What are the measures of profitability (%)

- Rate of Return on Assets (ROA)

- Rate of Return on Equity (ROE)

- Operating Profit Margin (OPMR)

Which of the following is a current asset?

Crop inventory held for sale

Which item is classified as a long-term liability?

Mortgage on farmland

Which does not change owner’s equity?

Taking out a new loan

Which financial ratio best measures a farm’s ability to pay bills this year?

Current Ratio

A farm harvests corn. How should the corn be valued while it is still in storage?

Market value

Straight-line depreciation:

 Is the same amount every year

The formula for declining balance depreciation is:

Beginning of year book value * Rate

Depreciation impacts the income statement by:

Reducing net farm income

Which depreciation method is most commonly used for simple farm financial statements?

Straight-line

The income statement measures:

Profitability over a period of time

The income statement includes all of the following except:

Ending net worth

Depreciation appears on the income statement as a:

Non-cash expense

Which statement best describes what ROA measures?

How efficiently the farm uses its assets to generate profit

The main purpose of a partial budget is to:

Measure profitability of a proposed farm change

Sensitivity analysis in partial budgeting is mainly used to:

Test the impact of price and yield uncertainty

Which item belongs under Reduced Costs?

Saving on fertilizer by taking land out of crop production

A major limitation of whole farm analysis is:

It requires more data and time to complete

Whole farm analysis includes all of the following except:

Partial budgeting of a single change