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Contributed/Withdrawn Capital Retained earnings (net farm income) Other contributions to/from business Valuation adjustment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