AGBS 120 Test II

How does a manager monitor acounts recievable?

Aging Accounts Recievable % Change in Credit Sales Bad Debts % of Credit Sales Wage Efficiency Ratio

expenditure

An expenditure is incurred whenever the business acquires an asset, such as a truck, building, or fertilizer, whether it is used immediately or over the course of several years

Efficiency Ratios

Asset turnover ratio Inventory turnover ratio Days Sales in Accounts Receivable

Bad debts as a % of credit sales:

Bad debts are an agribusiness manager's nightmare. When the agribusiness sells products and then fails to collect the amount of those sales, it is far worse than not making the sale at all. Not only does the business suffer from the loss in gross margin, but it also has to chalk up the loss from the cost of the goods or service sold, plus the aggravation and cost of trying (usually unsuccessfully) to collect the debt. Credit sales have to be monitored very carefully or they can quickly consume all the profits a business is generating. Because the stakes are so high, a carefully conceived and executed credit program is necessary for any agribusiness and its management team.

Hence, the less accurate approach to reporting net income is the accrual approach.

False it is the most accurate.

It is important to note that breakeven does tell management "what to do." True or False.

False, The breakeven relationship simply begins to identify how changes (in this case, the addition of a new truck) have an impact upon the firm

Expenses and expenditure are the same. True or False.

False, they are different. Expenses (accounting period) Expenditures (used immeidlaty or over course of years).

The primary categories for statement of Cash Flows are:

(1) cash flows from operations; (2) cash flows from investments (disinvestments) made by the firm; and (3) cash flows from financing transactions, such as contributions from owners, borrowing and repaying debt.

job design can be thought of as comprising two major categories:

(1) the social or psychological environment (2) the physical environment.

Unique Issues with Agricultural Products

- Seasonality - Perishability - Bulk - Variability - Quality - Quantity - Value

Summary of Limitation of Financial Analysis Ratios.

1. Are indicators of performance, and cannot identify a specific cause. 2. comparisons must be made between genuinely similar firms. 3. Using cash basis of accounting causes many variations in ratios. Should use income statements with accrual basis. 4. changes in accounting methods. 5. Time factors also cause constraint as well. 6. including non-business activities in financial statements can distort assets and earnings. (especially if there are several owners). 7. Not including capital leases on balance sheet can understate assets and liabilities. Liquidity measure will overstate. 8. extraordinary items can distort the financial ratios of the firm. 9. Organizational structure and type can also impact financial measures. (example, treatment of salaries, are different from corporations and proprietorships. ) Will effect profitability and efficiency measures.

Why use ratio analysis?

1. Easy to calculate 2. Easy to make comparisons with previous years or other firms 3. Easily understood 4. Able to communicate a firm's financial performance to outside interested parties

Capacity Planning Decisions

1. Economies of scale: economies of scale principle, larger plants usually result in lower per-unit costs because fixed costs may be spread out over a larger quantity of output. Volume-cost analysis can be used to determine how much volume is needed to cover fixed costs.Economies of scale are often associated with firms utilizing large quantities of expensive processing equipment (such as large breweries) where large, bulk quantities are produced. 2.Flexibility: The focused factory concept holds that several smaller factories will improve individual plant performance because the operations manager can concentrate on fewer tasks and can more easily motivate a smaller workforce toward one goal. 3.Seasonality and other patterns of production: Manufacturers of farm inputs such as seed, fertilizers, and chemicals see heavy demand for their products in the spring. Grain elevators experience peak demand in the fall. On the food side, holiday items such as whole turkeys and cranberries see their demand peak in the weeks preceding Thanksgiving. 4.Fluctuating demand: manufacturing can be solved by building up inventory during slow demand periods. However, the perishability and bulkiness associated with agricultural products may prevent this option. (more checkout workers week before thanksgiving). 5.Multiple versus single shifts: Multiple shifts may be an alternative to operating a facility at maximum capacity—if the labor is available. Theoretically, it is possible to produce twice as much in a plant with double shifts, while limiting the need for space by spreading out the working hours.

Importance of Financial Statements

1. Information used internally for decision making. 2. Needed for financial reporting, such as financial performance.

Two Items Found on the Income Statement

1. Revenues 2. Expenses

Decision Tools Include

1. Volume Cost Analysis 2. Graphical Analysis

Decision Making Process Steps:

1. problem identification 2. summary of facts 3. Identifying Alternatives 4. Analysis 5. Action 6. Evaluation

Tenets for Scientific Management

1.A standardized set of procedures that were to be used for a job each time it was performed. 2.Determination of the most efficient procedures for each job through scientific comparison tests. 3.Careful screening, hiring, and training of workers to match them with the most appropriate job. 4.A functional division of labor that would allow each person to perform the most suitable task in the production process, with management and workers jointly devising the best system for the division of labor.

Location decisions for service businesses

1.Area employment: is important because the chain is targeting 20- to 45-year-old workers on lunch breaks. The chain also confirms that area firms allow workers to take lunch breaks off premises. 2.Retail activity: a lot of quick service eating is done on impulse by shoppers. 3.Proximity to successful competitors: Being near successful competitors is seen as an advantage because they signal that the area is a good market. 4.Traffic flow: important because most business is from people in cars. 5.Residential density: about 20,000 upper-middle class residents within a 2-mile radius is considered to be adequate to ensure weekend and evening business. 6.Accessibility and visibility: traffic direction, intersections, traffic backups during rush hour, and surrounding buildings and signs are important accessibility and visibility factors that are considered.

4 General Aspects of Process Design:

1.Capital intensity: is simply choosing which tasks humans will perform and which tasks machines will perform 2.Resource flexibility: can be defined as the ease with which employees and equipment can operate a wide variety of products, functions, and levels of output. 3.Vertical integration: is associated with owning some or all of the various steps that are taken to produce a product from start to finish (i.e., from raw materials to the delivery of the finished product). The more processes a firm in the chain owns, the more vertically integrated the firm is said to be. 4.Customer involvement: is the degree to which the customer is allowed to interact with the process. Particularly in service industries, customer contact is critical to customer satisfaction. Customer involvement can take the form of interaction with self-service options, product selection, product design, time, and location of service.

Uses of a Good Accounting System:

1.Determining the success of the business in terms of profitability during specific time periods or cycles. 2.Determining the general financial condition or health of the business at a given moment. 3.Predicting the future ability of the business to meet the demands of creditors, of change, and of expansion. 4.Analyzing the trends in performance as they relate to management's abilities and to the success or failure of the past decisions and achievements. 5.Choosing among the various possible alternatives for future use of resources within the firm. Summarized (Profit time periods, health at any moment, predicting to meet demands, analyze trends for success & failure, look for alternative for future resources).

Assumptions of Volume-Cost Analysis

1.Fixed costs are constant 2.Efficiency is unchanged 3.Input prices are fixed 4.Product mix is constant 5.Selling price is unchanged

Some important accounting principles It is important that agribusiness managers understand the following principles and ideas about financial accounting.

1.Only facts that can be recorded in monetary terms should be reported on the balance sheet and income statement. 2.Records or accounts are kept for business entities. Personal and business transactions must be carefully separated. 3.Accounting methods assume the business will continue to operate indefinitely. 4.Resources (called assets) owned by the business are ordinarily recorded at cost or market value—whichever is lower. This practice is called the cost basis of valuation. The amounts listed on the financial statement do not necessarily reflect the true market value of the asset. 5.Every accounting event is composed of two transactions: changes in assets and changes in liabilities and/or owner's equity. All assets are claimed by someone; therefore, claims against assets must always equal the assets listed for the firm. These claims can be found among banks, suppliers, owners, stockholders, etc. 6.Most accounting is handled on the accrual basis of accounting. The objective of the accrual-basis approach is to report revenue in the income statement for the period during which it is earned (regardless of when the cash payment is received), and to report an expense in the period when it is incurred (regardless of when the cash disbursement is made). This procedure more clearly reflects the profits of the business. 7.The format for the income statement must reflect the unique needs of the organization. To do this requires the continued help of competent financial professionals. 8.Once a format is developed, it is not sacred and should be changed as necessary to meet changing conditions. However, a degree of consistency should also be maintained to allow comparison on a historical basis to previous financial statements. 9.Finally, one of the major purposes of records and financial information is to provide the necessary information for informed decision-making on the part of agribusiness managers.

Problem Identification Defined

1.Problem identification: this is often the toughest part of decision-making. It is easy to confuse symptoms with the real problem. The problem may seem to be low profits, when low profits are simply the result of an inefficient, high-cost distribution system. Once the problem is clearly defined, it can usually be more easily addressed.

Factors affecting location decisions

1.Proximity to raw materials and suppliers: especially if one major raw material input is needed and that input is costly to ship in its raw state. 2.Location of markets: is especially important to retailers because customers will often not travel long distances to buy from a retailer. 3.Labor climate: One other such factor is the availability of qualified labor. Food and agricultural companies that require a great deal of research may find it advantageous to locate near a large land-grant university where highly skilled, technical resources are concentrated 4.Agglomeration: is the accumulation of business activity around a specific location. Firms often locate in close proximity to one another because they can increase the efficiency of services at the business, household, and social levels. 5.Taxes and incentives: states are using tax and incentive packages as part of an economic development package to attract industries. 6.Proximity to other company facilities: Food and agribusinesses may also locate new facilities considering their proximity to other company facilities.

Summary of facts defined:

2.Summary of facts: this step brings to the surface and highlights information pertinent to the problem and its solution. It may be critical to note overall company goals, the impact of the problem on the business, environmental factors limiting possible solutions, or technical facts that affect the outcome.

Identifying alternatives defined

3.Identifying alternatives: this step identifies and lists feasible alternative solutions, exploring various possibilities. Only feasible solutions should be considered.

Analysis defined

4. Analysis: this step may require rigorous examination, weighing the costs and benefits of each alternative. Analysis considers both short- and long-term company goals. Although analysis should be objective, the final selection process should include some subjective evaluation of alternatives.

Action defined:

5.Action: one of the most critical steps in the decision-making process involves implementing the chosen alternative. Often this requires careful planning prior to the execution, but it is a critical step. Management responsibility goes much further than just deciding: it requires execution and results.

Evaluation defined:

6.Evaluation: the final step in this process occurs some period of time after action has been taken. Management must evaluate whether or not the firm is better off by the action taken. If the situation has improved, no further action is necessary. However, if the action taken has not caused the desired results, management must go through this process again and seek new action alternatives.

How statements are used for management decisions:

Balance sheet: Both assets and liabilities are broken down into several classes to provide a useful financial picture of the business. Income Statement: The format of the income statement emphasizes gross margin, or revenue left after the cost of goods sold has been covered. The gross margin represents dollars left to pay operating expenses and the interest expense, which are generally itemized on this report, and the remaining amount is net income or profit. The statement of owner's equity and the statement of cash flows: are useful in helping understand changes in these two key areas. The two statements help managers understand why changes occurred in those two areas on the two corresponding balance sheets. Pro forma statements: are projections, based on careful forecasts of key variables. Such statements help managers use financial data to make decisions that will impact the future of the organization. Agribusiness managers must be familiar with the intricacies of all of these statements, both actual and pro forma, since these statements become the core of many management decisions.

Significance, Limitations of Financial Ratio Analysis

Because financial ratio analysis is being used extensively today, there is a potential for misuse of the technique. In spite of their advantages, financial ratios are merely indicators of performance. If a particular facet of the business is headed for trouble, a change in a ratio can only sound a warning. Even a drastic change in a given ratio may not isolate and identify the actual cause of the problem. More often than not, additional analysis is required before the appropriate corrective action can be taken.

CTO Defined

CTO (contribution to overhead) is the heart of volume-cost analysis and an important figure for many management decisions. It shows the portion of each unit of sales that remains after variable costs are covered and that can be applied toward paying or covering fixed or overhead costs. Each time a unit of product is sold, the variable costs must be covered first. Anything that remains makes a contribution to overhead.

Capacity Planning Defined

Capacity planning includes the activities that are undertaken to determine what the appropriate size of a manufacturing plant or service location should be, so that a certain quantity can be produced over a specific time period. A food or agribusiness firm must balance the cost of having excess capacity against the potential of lost sales due to too little capacity.

Liquidity Ratios

Current Ratio and Quick Ratio

Current Ratio

Current ratio: total current assets divided by total current liabilities. The current ratio is probably the most popular liquidity ratio. a current ratio somewhere around 2.0 signifies ample liquidity for the firm. There is concern among many financial analysts that the current ratio may have some limitations as an indicator of a firm's ability to meet current obligations. The need to quickly liquidate inventories, accounts receivable, marketable securities, etc. to raise cash may cause a sharp decrease in their value.

Days Sales in Accounts Receivable Ratio

Days sales in accounts receivable ratio: accounts receivable divided by net sales, and the result multiplied by 360 days. Another measure of efficiency is found in the average collection period of accounts receivable. An extended period for collection of accounts receivable could indicate that profits might be reduced because of added collection costs, interest on funds needed to support the accounts, and bad-debt losses. too low a figure could indicate that an overly strict credit policy was causing lost sales. Two important criteria should be used; generally, the calculated collection period (1) should match that of others in the industry (2) should be at least equal to the time extended by suppliers or vendors of the firm For example!!! that the collection period should not exceed the regular payment period by more than one-third. If, for example, the credit policy states that accounts are due in 30 days, the calculated collection period (days sales in accounts receivables) should not exceed 40 days. Since the time is overdue must reavluate collection strategies of AR.

Debt to asset ratio

Debt-to-asset ratio: total liabilities divided by total assets. The third solvency ratio is used to determine the proportion that lenders are contributing to the total capital of the firm Low= opportunity to grow. high= no growth. The upper limit lenders assign to this ratio is usually 0.50 or less, which corresponds to a 1-to-1 upper limit to the debt-to-equity ratio. At 50 percent both outsiders and insiders have equal investments in the firm.

Profitability Ratios

Earning on Sales Return on Sales: Return on Equity: Return on Assets: Gross Margin Ratio:

Financial Statements

Financial statements are summarized statements of the financial condition of a business, usually prepared as a summary of accounts from the ledger. The length of the accounting period and the dates for issuing financial statements are particularly important in agribusinesses that are highly seasonal in nature. Consequently, the agribusiness manager must understand why variations in financial statements are inescapable in highly seasonal agribusinesses. Previous years' financial statements often provide a more valid comparison than a simple month-by-month comparison.

pro forma statements

Financial statements can be prepared for a future period. Such statements are called pro forma statements.

FIxed assets include:

Fixed assets are typically used to produce or sell other goods and services. Equipment, Depreciation

Fixed Cost Defined

Fixed costs are those costs in which the total amount does not fluctuate with the volume of business. Examples of fixed costs would be depreciation, interest, and insurance.

Production Costs Affecting Quality

From a cost standpoint, defective products or services can increase the costs of production. Production costs related to quality include the following: 1. Prevention costs are the costs associated with stopping defects before they happen. 2. Appraisal costs are incurred in monitoring the quality level of products and services during the course of production. 3. Internal failure costs are the costs that are generated during the production and/or reworking of defective parts and services. 4. External failure costs are incurred when the product or service fails once it is in consumer hands.

Use of Graphical Analysis

Graphical illustration of volume-cost relationships is quite useful for many managers as a means of visualizing how changes in price, various costs, or volume impacts profit.

Inventory Turn Over Ratio

In most firms, the inventory turnover ratio is of great concern. A significant portion of a firm's assets may be tied up in inventory. The rate of inventory turnover indicates how successfully working capital has been managed. If capital is being tied up in inventory, a higher margin will be required on sales, because too much stock is on hand. Poor inventory management can also add a severe burden, interest expense, if short-term financing at a high rate of interest is being used to finance the investment in inventory. Alternatively, a high rate of inventory turnover could indicate a lost opportunity for sales because of out-of-stock conditions or inability to meet delivery requirements. Agribusiness managers must also consider discounts for early delivery and match these against current interest rates.

The bottom line means

Income after all expenses have been deducted from revenues (i.e., PROFIT) This figure represents a composite of how the firm, and its management, has performed over the past year. It is a guideline to measure the relative success or failure of the firm over this period of time. Found at the bottom of the income statement. Summarized: (means profit, the performance of the past year, measure of success or failure, income statement)

Special problems in cost classification:

Incremental costs not constant. Lumpiness. Allocating Cost. Length of Time Period.

Three ways to keep a good social environment is:

Job Rotation Job Enlargement Job enrichment

Job Design Defined:

Job design can be defined as the broad set of activities that determine the tasks and responsibilities of each employee's job, the employee's surrounding work environment, and the detailed order of operations that will be used to complete the tasks required to meet production requirements. The objectives of job design are two-fold: (1) meet the production and quality goals of the organization; (2) make jobs safe, satisfying, and motivating for the employees.

Process Design Defined

Process design is selecting the specific inputs, operations, and methods that are to be used to produce the good or service. Decisions concerning process design are very important because of their implications on cost of production, level of personalized customer service, convenience, and flexibility.

Layout Planning

Layout planning refers to the specific design of the physical arrangement within a facility.The goal of layout planning is to allow both the workers and equipment to run the operation in the most efficient and effective manner. There are four basic categories of facility layout: 1.Process layout: arranges activities by function. 2.Product Layout: is geared specifically to the continuous production process because it produces one product at a time, step by step, with one function following another in sequence as the product is assembled, and with many fewer variations in product. 3.Hybrid Layout: combines the process and product layouts to balance the advantages of each. Managers may choose this form of layout when introducing flexible manufacturing systems. In group technology applications, different machines are brought together to produce a group (or family) of similar parts in an assembly-like fashion. 4.Fixed position: is used in the construction of large items such as farm buildings and silos. A fixed-position layout eliminates or minimizes the number of times that a product must be moved, and it is often the only feasible layout solution.

Liabilities Balance Sheet

Liabilities consist of money that the business owes to "outsiders" Current & Longterm Liabilities

Liquidity

Liquidity refers to the ability of the firm to meet financial obligations as those obligations come due. Hence the focus of liquidity ratios is on assets that can be easily converted to cash, and liabilities that must be paid in the short term, which is often defined as one year but could be a month or quarter. Liquidity ratios are another comparison tool in financial ratio analysis that can be used to help agribusiness professionals more clearly determine short-term cash flow problems.

long-term liabilities

Long-term liabilities: Outsiders' claims against the business that do not come due within one year are called long-term liabilities or non-current liabilities. If paid due within the year it is considered current.

Operating Expenses Three Types:

Marketing expenses, including: Sales, wages, salaries and commissions •Administrative expenses, including: Auditing fees •General expenses (overhead), including: Depreciation & Insurance

Operations Management defined

Operations management refers to the direction and control of the processes used by food and agribusiness firms to produce goods and services. Operations management for food and agribusiness firms can be broken into two distinct areas: (1) production planning (2) supply chain management

Uses of volume cost analysis

Profit planning. Volume-cost relationships are useful for much more than just calculating the breakeven point. They can also be used to determine the volume of business necessary to generate certain levels of profit, which is an essential part of profit planning. Used to determine the additional sales necessary to reach a given profit level Changes in costs. Volume-cost analysis also helps answer questions about how changes in the cost structure will affect profit levels. Another use of breakeven analysis is to determine the effect of changes in variable costs. Changes in price. Volume-cost analysis is also very useful in analyzing the impact of changing prices. Since CTO is selling price per unit less variable cost per unit, then any change in selling price directly impacts the CTO.

What areas require analysis?

Profitability Liquidity Solvency Efficiency

Types of ratio analysis:

Profitability: Profitability ratios include several different indicators that help assess a firm's profitability and record of performance. Liquidity Solvency Efficiency

Assets - Balance Sheet

Resources that are controlled by a business. Three Classes: Current assets: cash/checking or assets that will be converted to cash during one normal operating cycle of the business (usually one year). Fixed assets: items that the business owns that have a relatively long life. Other assets (r).

Return on Assets

Return on assets: net income after taxes plus interest expense divided by total assets. A slightly different profitability ratio is called the return on assets ratio. this ratio is more inclusive than the ROE ratio discussed above. It measures net returns relative to both outsider and insider investment in the business.

Return on Equity

Return on equity: net income after taxes divided by owner's equity This ratio is probably the most widely used profitability ratio and takes the investor's point of view of the firm. The return on equity ratio, which determines the return on investor ownership, is particularly valued by owners when comparing investment opportunities. It can be invaluable in encouraging additional investment of equity capital if greater cash flow is needed in the business. Stockholders also use this ratio as an indicator of the relative value of their stock.

Return on Sales

Return on sales: net income after taxes divided by net sales. Managers often find it helpful to look at income after all business expenses, including interest and taxes. The return on sales ratio is:

Income Statement Format

Sales: Sales represent the dollar value of all the products and services that have been sold during the period specified on the income statement. COGS: Cost of goods sold represents the total cost to the agribusiness of goods that were actually sold during the specified period. Gross Margin: Gross margin or gross profit represents the difference between net sales and total cost of goods sold. The gross margin is the money that is available to cover the operating expenses and the interest expense, and still leave a profit. If the gross margin is not large enough to cover operating expenses and the interest expense of the business, losses, and not profits, will be the result. Operating Expenses: Operating expenses represent the costs that are associated with the specific sales transacted during the time period designated on the income statement. Net Operating Income: net operating income is the amount left over when total operating expenses (v) are subtracted from the gross margin or gross profit (c). The net operating income is affected by the same factors that influence gross margins, plus the factors associated with business operating expenses. Net Income Before Taxes: Net income before taxes is the amount that remains after taking into account any non-operating revenue or expenses. Non-operating revenue would include any revenue derived from other sources, such as interest or dividends earned on outside investments (x). Local cooperatives may include patronage refunds from their regional cooperative in other revenue. Net Income After Taxes: Net income after taxes, or net profit as it is sometimes called, simply takes into account the federal business profits tax (aa). The rate of tax depends on many factors, including the size of the profits, the amounts of profit in previous years, type of business organization, and several complicated tax regulations.

Owner's Equity

The owner's equity or net worth section details the claims of the owners against the business's assets. It is a summation of the accounts that report owner equity. Assets-Liabilities = Owner's Equity

Solvency Defined

Solvency is related primarily to a firm's ability to meet all of its claims over the long run or total liabilities. Solvency ratios pinpoint the portions of a business's capital requirements that are being furnished by owners and by lenders. Evaluation of solvency ratios gives an indication of the likelihood that lenders will incur problems in recovering their money.

Solvency Ratio

Solvency ratio: owner's equity divided by total net assets. This solvency ratio (Equation 10) shows the relationship between what the owners are contributing toward supporting the firm and the total net assets of the firm. There is no exact standard for every business, but usually if owners contribute less than 50 percent of the total net assets of a firm, one is more likely to find solvency problems developing and to experience difficulty in securing more long- and short-term credit. So this ratio typically needs to be greater than 0.5.

Volume-Cost (Breakeven) Analysis

Step 1: Classify fixed and variable costs. Step 2: Summarize fixed and variable costs. Step 3: Calculate the contribution to overhead. CTO (contribution to overhead) Step 4: Calculate the breakeven point.

Operations management involves a system of interrelated activities and players such as:

Suppliers provide the inputs to the system. Timely delivery of high-quality inputs influences all activities in the system. Inputs consist of the human resources (skilled workers and managers), capital (equipment), materials, information, and energy required to produce the desired outputs. The conversion or transformation of inputs into outputs involves the system of facilities, processes, and procedures by which goods and services are produced. Customers purchase the outputs from the system, and their feedback to the rest of the system is essential in generating and designing new products and services. Finally, managers make decisions and obtain feedback on those decisions to make the total production system flow smoothly. One key distinction is that production management focuses on optimizing the management of the firm's conversion process, while supply chain management seeks to optimize activities among the value chain, from the suppliers to the customers

accounting period

The accounts in the ledger are summarized on a predetermined regular basis called the accounting period. The accounting period typically represents a one-year time span in the operation of the business. This may be a calendar year (January-December) for some firms or a fiscal year (July-June) for other firms. Many agribusinesses are seasonal in nature. A calendar year accounting period may not make sense for a seed corn firm since this really cuts across two different production and marketing seasons. Hence, firms tend to report financial information for one year that includes a single production period. Management in medium and large firms typically request updated monthly and/or quarterly financial statements. These updates represent summaries of the accounts in the ledger and help generate the key financial statements for the firm.

Contribution Margin Defined

The amount remaining from sales revenues after all variable expenses have been deducted.

Asset turnover ratio

The asset turnover ratio can be used to determine the intensity with which a businesses assets are used, as measured by the number of times assets 'turn over' in a period. Management strategies that affect this ratio are primarily focused on increasing sales volume, using assets more effectively, increasing prices, reducing ineffectively used assets, reducing accounts receivable or inventory, or choosing better alternatives for use of available cash.

Accounting Cash Versus Accrual Basis

The cash-basis approach to preparing an income statement implies that revenues and expenses occur when cash is received or paid. Many agricultural producers and some small agribusiness firms use this approach. The accrual-basis approach says that revenues and expenses truly exist whenever earned or incurred regardless of when the cash transaction occurs. The accrual-basis approach is a more accurate approach for reporting net profit for a firm, because it more closely matches the expenses incurred during a period to the revenue earned.

Earning on Sales (EOS)

The earnings on sales (EOS) ratio (Equation 1) focuses on management decisions that reflect operating efficiency and pricing policy. Earnings may be increased by changes in pricing policy. Low prices may generate increased sales, but could produce zero profits, while higher prices might reduce sales significantly. Sales forecast can assist with this area in improving sales projections. Low EOS bad, High EOS Good

Gross Margin

The gross margin ratio shows how much BF&G has left from each dollar of net sales to pay operational and other business expenses plus make a profit. This ratio is crucial. Any drop in gross margin is a signal for immediate managerial action. Small changes here have a great impact on the bottom line.

Income Statement

The income statement is a summary of business operations over a certain period, usually the period between the dates of two balance sheets. It could be compared to a video of the firm that details the financial activities as those activities occurred over a period of time. The income statement is also known as the operating statement, the profit and loss statement, or simply the P&L statement.

Significance of income statement

The income statement provides a primary measure of business profitability; therefore, it is a key financial statement for operating managers.

What is the Income Statement?

The income statement summarizes revenue and expenses during a specific period of time and demonstrates the profit or loss that results from the deduction of expenses from revenue. For these reasons, this financial statement is most commonly known as the income statement.

The social environment is:

The non-physical or behavioral issues in the workplace are included in the social or psychological environment. Items such as training, the proper level of supervision, job expectations and responsibilities, and performance feedback are all subsets of an employee's social environment. In particular, employee motivation to consistently perform at high levels is the result of a positive social environment

The physical environment

The physical environment for employees can have substantial effects on employee morale, productivity, health, and safety. The physical environment in job design consists of such items such as safe working conditions, lighting, noise, temperature, and ergonomics. Ergonomics, or human factors, is the study of the interaction among individuals and their workstations, tools, and equipment. The objectives of ergonomics are to improve human performance by increasing speed and accuracy, reduce fatigue, reduce accidents due to human error, and improve user comfort and acceptance.

Statement of Owner's Equity

The statement of owner's equity is usually the shortest and least complicated of the financial statements. It details the changes that affect the owner's equity accounts. The primary change is usually a change in retained earnings resulting from a net income or loss. Other changes could occur due to contributions made or distributions withdrawn from the owner's invested capital. In addition, stock could be issued by the agribusiness.

Quick Ratio

Therefore, managers often use a second ratio that more clearly delineates a firm's ability to meet immediate cash needs the quick ratio is used. For most firms a quick ratio between 0.8 and 1.0 signifies sufficient strength in liquidity. This ratio is of great interest to lenders of short-term funds. These funds may be needed because any change in value for marketable securities and for accounts receivable could result in their immediate cash values being lower than the ratio indicates.

Efficiency Defined

This area, in particular, offers the greatest opportunity for management to develop unique, meaningful ratios that will be of greatest value to its business in the efficiency or operations area. ratios tend to be highly tailored to fit the specific type of business being evaluated, and the efficiency ratios needed to monitor a retail farm equipment dealership are very different than those used by a soybean processor.

Use of a Balance Sheet:

This financial statement provides a great deal of information. It illustrates what the business owns and what claims exist against these resources. Managers need this information to help them decide what actions they should take in running the business. Outsiders seek this information to determine, among other things, the creditworthiness of the firm. Owners utilize this information to judge the performance of the management team.

Semi-Variable Cost Defined

This is a cost that is partly fixed and partly variable, such as the electricity costs Best way to handle is to estimate the fixed portion and incremental portion with each additional sale. These types of cost behavior can and should be considered in volume-cost relationships.

Statement of Cash Flows

This statement is basically a way to show the cash inflows and outflows of the firm for a period of time. It can be tabulated at the end of a period, like the balance sheet and income statement, to help interested parties see what happened.

The profitability analysis model

Three fundamental measures of how well the business is being managed are (1) return on sales (2) return on assets, and (3) leverage. The combination of these very important financial relationships into a single ratio, return on equity or ROE, provides one of the most useful financial tools available to measure the performance of the agribusiness and to assess the skill and ability of the management team. Many sophisticated managers, bankers, investors, and boards of directors depend on this conceptual measure as the primary gauge of a business's success.

Decision Making Process Elements (Three):

Three necessary elements are part of the decision-making process. First, decision-making is built around facts. The less relevant factual information there is available, the more difficult the decision-making process. Second, decision-making involves analysis of this factual information. Analysis may be a highly rigorous statistical treatment using large computer spreadsheets, or it can be simply a logical thinking process. In either case, decision-making requires careful examination of facts. Finally, the decision-making process requires an element of judgment, a subjective evaluation of the situation based on experience and common sense

While comparing two balance sheets can indicate the changes in the position of the company for a particular accounting period, the income statement details how this change took place during that same period. True or False.

True

Big data analytics takes advantage of technological advances in data collection from GIS and apps, low cost data storage, and more sophisticated computing models, to turn information into insights. True or False.

True, Big Data is a benefit.

The key question in classifying costs into these two categories is whether the cost is directly affected by how much is sold. True or False.

True, Fixed are present regardless of sales, Variable are the amount of expenses after the sale.

Both debt to asset and debt to equity ratios are used to report the solvency position of a firm. True or False?

True, both ratios are used to report the solvency position of the firm.

The balance sheet is set up to portray two aspects of each entry or transaction recorded. For each resource of value, or asset, there is an offsetting claim against that asset. True or False.

True, dual aspect concept. Leads to the accounting equation Assets = Liabilities + Owner's Equity

Bankruptcy results when a firm is unable to pay its bills as they come due, so the liquidity area is one of fundamental concern for agribusiness managers. True or False.

True, fundamental concern.

Detailed job design follows process design and is distinguished by the focus on the individual operator. True or False.

True, job follows process.

One word of caution about price changes: lowering the price may increase sales only temporarily. True or False.

True, lowering cost to earn sales only works for a short period of time.

Fitness for use and conformance to specifications provide the fundamental basis for managing operations to produce quality products. True or False.

True, managers must take into place the consumers perspectives to market products.

Financial analysis is a fundamental tool for the agribusiness manager. Although it is not a substitute for good judgment, financial analysis gives the manager important insights for improved decision-making. True or False.

True, not a substitute for judgement but provides insights.

Caution must be used in evaluating the receivables ratio, because accounts receivable may vary from time to time or due to seasonality in a firm because of the nature of its business or general economic conditions, and these factors should always be taken into consideration when interpreting the ratio. True or False.

True, seasonality is a big influence on Accounts Receivable.

what type of breakeven analysis will you use if you are looking at the % in sales?

Use Breakeven Analysis in Sales Dollars

what type of breakeven analysis will you use if you are looking at variable cost in dollars?

Use Breakeven Analysis in Units.

1. A firm has fixed costs of $120,000 per year, a price per unit of $45 and variable costs per unit of $22. 2. What is the firm's break-even point? if the objective of the firm is to get 30% profit, how many additional units it has to sell? (6 points) Equations: BEP= FC / 1-VC% VC%= variable cost/price per unit BEP / price per unit= unit to breakeven

VC%= variable cost/price per unit = 22 / 45 = 0.488 * 100 = 48.8% BEP = 120,000 / (1-48.9) = 120,000 / 51.1% = $234,834 234,834 / 45 = 5,218 units 2. Amount of sales required = 120,000 / 1-(0.489+0.30) = 120,000 / (1-.789) = 120,000 / 0.211= 568,720, = 568,834 / 45 = 12,638 units Add Sales: 12,638 - 5,218 = 7,420 additional units

Variable Cost

Variable costs are those costs in which the total amount changes directly with the volume of sales. Examples would include the cost of goods sold, overtime, and commissions.

Volume Cost Analysis Defined

Volume-cost or breakeven analysis, as it is sometimes called, is a tool for examining the relationship between costs and the volume of business generated by the firm. This tool analyzes differences in the kinds of costs encountered by every agribusiness and how the volume of business affects them. Volume-cost analysis shows the level of business necessary to break even and/or to earn a specific amount of profit under various cost and price assumptions. Volume-cost analysis can show the impact of changes in selling price on the volume of business necessary to reach a certain profit level. It can reveal specifically how anticipated cost changes will affect profit levels. It can be useful in evaluating various marketing strategies, such as advertising and promotion expenditures, individual product pricing decisions, and the number of sales a new salesperson must generate to cover his or her salary and other costs. The basis for volume-cost analysis is the separation of costs into three categories: fixed, variable, semi-variable.

Wage efficiency ratio

Wage efficiency ratio: labor cost divided by net sales. A number of efficiency ratios can be developed by exploring relationships between costs and sales. These should be unique and meaningful to the individual business and to the type of industry. It is particularly important for management to monitor labor costs, especially if the business is expanding through new product lines or if new equipment is being added to the business. The ratio would then need to be compared across time for the firm or to the same measure calculated for similar firms in the industry.

Use this information to answer questions: (9 points) Fixed Expenses Rent $ 44,000 Utilities $ 40,000 Depreciation $ 6,500 Variable Expenses Cost of Goods Sold 34% of sales Sales Commissions 15% of sales What is the company's contribution margin percentage? What is the break-even point in dollars? If the company wants to earn a profit of $35,000 instead of breaking even, what is the amount of sales the company must achieve?

What is the company's contribution margin percentage? CM= [1-(0.34+0.15)] = 1-.49 = .51* 100 = 51% What is the break-even point in dollars? BEP= FC / CM = 44,000 + 40,000+6,500 / 0.51 = 177,451 If the company wants to earn a profit of $35,000 instead of breaking even, what is the amount of sales the company must achieve? 35,000/ .51 = $68, 627 Total Sales= 177,451 + 68,627 = $246,078

Balance Sheet

a balance sheet shows what a business owns, what it owes, and what investment the owners have in the business. It can be likened to a snapshot that shows the financial make-up and condition of the business at a specific point in time. Current Financial Position of the business.

Other assets include:

accounts for any investment of the firm in securities, such as stock in other private companies and bonds that are held for longer than one year. can be intangible, such as good will.

Elements of a Balance Sheet

assets, liabilities, equity

Current assets include:

cash, accounts receivable, inventory, prepaid expenses, other. Current assets can also be investments in stocks or bonds.

% Change in Credit Sales

credit sales for the current period divided by the credit sales for a previous period. This ratio can also be used to assist in monitoring changes in accounts receivable. In order to put the accounts receivable situation for the firm into a historical context, the percentage change ratio can be used to assess changes in credit sales volume from one period to another.

Types of Solvency Ratios

debt to equity ratio solvency ratio debt to asset ratio

Owner's __________ is referred to as net worth and represents the summation of several specific accounts.

equity

Expenses are...

expenditures that are incurred by the business during the accounting period being reported. Expenses directly affect owner's equity—higher expenses mean lower profit, which, in turn, dictates a lower addition to the firm's owner's equity Therefore, only as an asset is used up or sold does it become an expense to the business

The income ______________ , alternatively, demonstrates financial performance or the changes that have occurred since the last time a - _____________ ________ was prepared.

income statement, balance sheet.

The accounts in the ___________ are summarized on a predetermined regular ____________ called the ____________ period.

ledger, basis, accounting period.

Current liabilities include

notes payable: This category represents those loans from individuals, banks, or other lending institutions that fall due within a year. Also included in this category is the specific portion of any long-term debt that will come due within a year. accounts payable: represent the amount that the business owes to vendors, wholesalers, and other suppliers from whom the business has bought items on account. accrued expenses: account represents the aggregation of several individual accounts such as wages payable and taxes payable. Each may be reported separately or one account may include all of these obligations. Included are obligations the business has incurred for which there has been no formal bill or invoice advances: sometimes firms receive payment for goods in advance. A proper balance sheet will report the payments from customers as advances or deferred income.

Cash net income can,

overstate true accrual net profit to the extent that: •Revenue generated in prior years is converted to cash this year—as in the opposite of that discussed above •Expenses are incurred this year but paid in cash in a prior or later year—as in the opposite of what was discussed above

Debt to Equity Ratio

relationship between the owners equity and liabilites of the firm. Lenders tend to get nervous when their investment is greater than that of owners, which would result in a debt-to-equity ratio greater than 1.0. Changes in this ratio over a period of time can be of great significance in planning long-range financial programs

Aging of Accounts Receivable

reporting accounts receivable on a monthly basis in accordance with the number of days since the accounts receivable was charged to the customer. The most important tool in monitoring a credit program and accounts receivable is the monthly aging of accounts receivable.

Profit definition and significance.

the amount remaining from a sale after the cost of the product, operating expenses, and interest expenses have been paid—is often used as a historical benchmark to provide evidence of the skill and ability demonstrated by decision-makers within the organization -The importance of this figure over time can be related to the ability of the firm to grow, enter new markets, and introduce new products. Summarized: (Amount remaining after paying all expenses, benchmark, ability to grow.)

If a cash-basis income statement is used,

the net income reported can be misleading. Cash net profit can understate true accrual net income to the extent that: •Revenue is earned but not converted to cash—such as an increase in accounts receivable or an increase in the amount of product stored or held in inventory •Expenses are incurred during prior or later years but cash is paid this year. Examples are a decrease in accounts payable, a decrease in accrued expenses, an increase in prepaid expenses, or an increase in purchased supplies

The supply chain management function of operations management both production planning and supply chain management are integral parts of operations management, they must be considered in tandem. Supply chain management in operations management consists of an equally wide range of decisions and activities including:

•Aggregate production planning •Production scheduling •Purchasing of materials for production •Management of the various types of inventories •Transportation management •Distributing the finished goods or services

Production planning in operational management includes decisions and activities including:

•Devising a quality program •Locating a plant •Choosing the appropriate level of capacity •Designing the layout of the operation •Deciding on the process design •Specifying job tasks and responsibilities