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AGRICULTURAL FINANCIAL MANAGEMENT - Exam 1 Study Guide (Sept 17, 2025)

Chapter 1: Financial Management Essentials (Agriculture)

  • Define financial management (essential idea): manage a firm's monetary resources to maximize value through planning, financing, and investing decisions that affect value creation.
  • Four life-cycle stages of a business firm:
    1. Start
    2. Growth
    3. Consolidation & maturation
    4. Transfer
  • Financial risk vs. business risk:
    • Financial risk: risk from use of borrowing and leasing
    • Business risk (agriculture): uncertainties from technology, price changes, performance, legal changes
    • Commonality: risks that can affect value or survival of the business
  • Six steps in the strategic management process:
    1. Defining and developing a firm's mission
    2. Formulating objectives
    3. Assessing the firm and evaluating the environment
    4. Building strategy
    5. Implementing strategy / an operational plan
    6. Evaluating performance and implementing corrective actions
  • Examples of information-flow sources and value to a business:
    • Internet
    • Colleges of Agriculture
    • Government agencies (e.g., USDA)
    • Communications agencies
  • Four main sources of loan funds in U.S. Agriculture:
    • Government agencies
    • Commercial Banks
    • Farm credit system
    • Life insurance companies
  • Key components of agricultural finance (and how it differs from other corporate firms):
    • High technology use (precision agriculture, biotech, genetics)
    • Information-intensive, but relationship-driven financing
    • Dependent on global exports
  • BONUS: risk in the strategic-management process – implementing strategy is itself a risk; performance evaluation is needed to adjust course

Chapter 2: Accounting, Financial Statements, and Basics

  • Two acceptable accounting methods and how they differ:
    • Cash basis accounting: facilitates tax management by shifting sales/expenses between years
    • Accrual accounting: matches income earned and expenses incurred within an accounting period
  • What is a financial statement?
    • A formal record of a business's financial activities and position over a specified period
    • Used to assess and monitor financial position and progress
  • Four forms of financial statements and their roles:
    • Income statement: summarizes revenue and expenses over a period
    • Balance sheet: lists assets and liabilities at a point in time
    • Statement of owner equity: reconciles changes in retained earnings, contributed capital, and market valuation
    • Statement of cash flows: summarizes cash inflows and outflows from operating, investing, and financing activities
  • Define a liability and give an example:
    • A liability is an obligation the business owes; example: a loan
  • Define a current asset and give an example:
    • Current assets are cash or near-cash expected to be realized or used within 12 months; example: Cash
  • Define a noncurrent asset and give an example (long-term):
    • Assets yielding services over several years; examples: Machinery & equipment, Land
  • Define a current liability and give an example:
    • Obligations payable within 12 months; example: Accounts payable, notes payable (short-term)
  • Define a noncurrent liability and give an example:
    • Obligations with maturity greater than 1 year; example: long-term notes payable
  • Net worth equation:
    ext{Net Worth} = ext{Total Assets} - ext{Total Liabilities}
  • The four parts of an income statement:
    1. Farm revenue
    2. Farm expenses
    3. Nonfarm adjustments
    4. Income taxes
  • Farm revenue: sources include cash receipts from sales, government payments, and changes in value of produced items not yet sold
  • Farm expenses (examples):
    • Seed, fertilizer, machinery repair, rent
    • Grouped as: cash operating expenses, noncash adjustments, interest on farm loans
  • Define and elaborate depreciation; depreciation formulas to memorize:
    • Depreciation: gradual loss of value of a fixed asset over time
    • Straight-line depreciation: ext{Depreciation}_{SL} = rac{C - SV}{N}
    • Double-declining balance depreciation: ext{Depreciation}{DB} = 2 imes rac{1}{N} imes BV{ ext{start of year}}
    • Sum-of-the-Years’-Digits depreciation: ext{Depreciation}_{SYD} = rac{(N - t + 1)}{S} imes (C - SV) ext{, where } S = rac{N(N+1)}{2}
  • Purpose of statements of owner equity and its two major components:
    • Reconciles changes in net worth from one period to the next
    • Components:
    • Change from retained earnings and contributed capital
    • Fluctuations in market valuation
  • How are the sections in the statement of cash flows separated?
    • By activity: operating, financing, and investing
  • Typical uses of cash outflows (examples):
    • Pay operating expenses
    • Make capital investments
    • Reduce debt
    • Support family withdrawals
    • Pay income taxes
  • BONUS: What is the most liquid asset? Cash
  • Define pro forma statements and their use:
    • Pro forma: accounting information prepared in advance to model hypothetical scenarios and their profitability
  • Major differences between cash flow budgets and pro forma income statements:
    • Pro forma cash flow: projection based on future assumptions
    • Cash flow statement: based on actual historical data
  • Five relationships between income statements and beginning/ending balance sheets:
    1. Changes in values
    2. Changes from beginning to ending balance sheet
    3. Depreciation charges
    4. Income taxes due on closing balance sheet
    5. How depreciable and fixed assets are evaluated
  • Define balance sheet and income statement (recap):
    • Balance sheet: assets and liabilities at a moment in time
    • Income statement: revenues and expenses over a period
  • Define current assets and noncurrent assets (recap):
    • Current assets: cash/near-cash expected to be realized or used within 12 months
    • Noncurrent assets: provide services over several years; often depreciated or replaced