Chapter 4: The Balance Sheet and its Analysis

What is the number range of the debt structure ratio?

0-1.0

What are intermediate assets?

1-10 years ex: machinery, equipment, perennial crops, breeding livestock

What are intermediate liabilities?

1-10 yrs ex: loans due w/in 10 years (to purchase intermediate. assets)

What is the minimum safe value of a net capital ratio?

2.0

What are fixed/ long-term assets?

>10 years ex: land & buildings

What are long-term liabilities?

>10 years mortgage

What are non-current liabilities?

Anything not due within next year Loans for equipment, machinery, breeding stock Principal not due within one year Interest is not included

Owner equity=

Assets- liabilities

What are 4 notes to be added on a balance sheet?

Basis of accounting (i.e., market vs cost) Nature of operation Depreciation method Additional details (i.e., inventory of machinery and other assets, etc.)

What are non-current assets?

Can be divided into intermediate and long-term ex: machinery & equipment, breeding livestock, buildings & land

What does the Statement of Owner Equity include?

Contributed/Withdrawn Capital Retained earnings (net farm income) Other contributions to/from business Valuation adjustment

What is farm production cost?

Cost = accumulated costs of production (excluding opportunity costs from production) Grain, hay, silage, and raised livestock

What are the two types of asset valuation?

Cost- basis Market- basis

What does liquidity measure?

Current ratio and working capital

What ratio represents the portion of assets owned by lenders?

Debt/ asset ratio

What ratio represents the financing from lenders v. owners?

Debt/ equity ratio

In working capital, what is the margin of safety measured in?

Dollars

What are current liabilities?

Due & payable within 1 year Accounts payable Operating loans (Principal and Interest due within the year) Payments due w/in 1 year Accrued expenses due within a year (income taxes, wages, employment taxes)

What ratio represents the portion of assets financed by the owner?

Equity/ Asset ratio

Who records production costs?

Farm Financial Standards Council

In terms of the debt/ equity ratio, what do very large values mean?

Increasing chance of insolvency

What can non-current assets and liabilities be divided into?

Intermediate assets and liabilities Long-term assets and liabilities

What is owner equity?

It is a liability that is owed to the owners/partners/stockholders. If all assets are sold & liabilities paid, how much money do you have left

When valuing raised breeding stock, what are the two acceptable formats?

Market-based balance sheet with cost info included as a footnote or shown in supporting schedules Double-column balance sheet (one column with cost values and the other with market values)

What is working capital?

Money available to purchase new inputs (in theory)

What does a larger current ratio mean?

More liquid

What ratio represents having "cash" to keep an operation active?

Net capital ratio

What does a balance sheet estimate?

Net worth or owner equity- not profit

Equity/ asset ratio=

Owner equity/ total assets

What does the Statement of Owner Equity reconcile?

Reconciles beginning and end

When should you value grain and market livestock at market value?

Reliable, determinable and realizable market price Small & known selling expense Ready for immediate delivery

What does farm production cost require?

Requires detailed set of books (enterprise accounts)

When valuing raised breeding stock, what is required?

Requires segregating & accumulating costs from birth to productive age

Where are assets shown at on a balance sheet?

Shown on left or top

Where are liabilities and owner equity shown on a balance sheet?

Shown on right or below assets

What does the balance sheet show?

Shows what is "owned" (assets) and what is "owed" (liabilities and owner equity)

What type of numbers are preferred in the debt structure ratio?

Smaller numbers

What do assets do?

They generate income, directly or indirectly

When you are valuing raised breeding stock, what is the alternative?

To use fixed base value. Record each age & type of breeding stock Approximate the cost of raising animal over time Change in total value only from change in # or age of animals

Net capital ratio=

Total assets/ total liabilities

What is market-basis asset valuation?

Uses current market price (net) Works best for items that could be sold in a short period of time Subtract out marketing costs (selling commissions, transportation and fees)

What are some cases when changes do not cause change in owner equity?

Using $10,000 in cash to purchase new equipment Less current, but more non-current assets If money is borrowed, then both assets and liabilities increase, but owner equity is unchanged

What is cost-basis asset valuation?

Valued at original cost value (land and recent purchases) Depreciating assets should not be valued in this manner Assets that are raised cannot be valued in this manner

Does depreciation impact owner equity?

Yes

What does a debt/ asset ratio of 1.0 mean?

Zero equity

What does an equity/asset ratio of 1.0 mean?

Zero liability to others

What is liquidity?

ability to meet financial obligations when due without disrupting business >ability to generate cash as needed

Current ratio=

current asset value/ current liability value

Total assets=

current assets + non-current assets

Working capital=

current assets - current liabilities

Total liabilities=

current liabilities + non-current liabilities

Debt structure ratio =

current liabilities/ total liabilities

What is ratio represents liquidity?

current ratio

What ratio represents solvency?

debt/ asset ratio

What does solvency measure?

debt/asset ratio, equity/asset ratio, debt/equity ratio, net capital ratio

What are liabilities?

debts and obligations

What do higher values in terms of net capital ratio mean?

greater solvency

What are long term liabilities?

have a "payoff" of more than 10 years

What does a debt/asset ratio of >1.0 mean?

insolvent

What does an equity/asset ratio of <0 mean?

insolvent

What does a debt/equity ratio of 1.0 mean?

lenders & owners provide equal share

Assets=

liabilities + owner equity

What is solvency?

liabilities relative to owner equity >ability of assets to pay off liabilities and stay "afloat"

Changes in owner's equity can occur from what?

profit or loss in business owner invests or withdraws capital assets change value

What are ratios?

relative comparison across size and time

What are intermediate liabilities?

those due between 1 and 10 years

Debt/ equity ratio=

total liabilities/owner equity

Debt/ asset ratio=

total liabilities/total assets

What are current assets (liquid assets)?

used or sold within 1 year ex: cash, checking & savings stocks & bonds, notes/accounts receivable, inventories of feed, grain, supplies & market livestock (not held for breeding)

Does the Statement of Owner Equity change over time?

yes

What does a net capital ratio of 1.0 mean?

zero equity (everything you own is committed to others)