FInal Exam

_____________ is the most liquid type of asset; it can be easily converted to cash without disrupting the business

Current asset

Depreciation is a cost associated with which of the following assets: a. Farm land b. Nitrogen fertilizer c. A machinery storage shed d. Corn silage stored in a silo

c. a machinery storage shed

The proper term for the value found by subtracting accumulated depreciation from the asset's original cost is a. salvage value b. market value c. book value d. use value

c. book value

asset turnover ratio

economic efficiency

Average price per bushel received from sale of soybeans

marketing skill

gross farm income per year

size or scale of the business

value of total farm assets

size or scale of the business

debt/asset ratio for financial analysis

smaller the better, below 0.5

The debt to asset ratio measures _____________ or the long-term financial strength of the business.

solvency

On a market based balance sheet net worth is $850,000. Value adjustment is $200,000 and contributed capital is $50,000. How much is retained earnings?

Retained earnings= Net worth - Value adjustment - Contributed capital 850,000 - 200,000 - 50,000 = 600,000

The three major components of a balance sheet are assets, liabilities, and owner's equity.

True

S.K. Doe runs a farm business. Her current ratio is 0.8. Her debt/asset ratio is 0.2. Her rate of return on assets is 5.5% and her rate of return on equity is 6.0%. She estimates she could earn 4% on investments off-farm. What is the financial situation on this farm?

Weak liquidity, good solvency, profitable

Working capital

current assets - current liabilities

Current ratio

current assets/current liabilities

What measures liquidity

current ratio and working capital

Working capital is one measure of solvency.

false

Current ratio for financial analysis

larger the better, more than 1

It is possible for an asset to have a $0 salvage value.

true

Marketable securities (stocks, bonds, etc.) and the cash value of life insurance are also easy to convert to cash and are considered liquid assets.

true

Net worth will change if outside capital is invested in a business.

true

Noncurrent assets have a useful life of more than one year.

true

On a cost basis balance sheet, machinery would be valued at cost less accumulated depreciation.

true

Physical efficiency measures do not take into account the prices paid to acquire resources.

true

Pounds of feed fed per pound of gain is a measure of physical efficiency.

true

Salvage value is the term used for what an asset is worth at the end of its useful life.

true

Straight line is a slower depreciation method than double declining balance.

true

The Farm Financial Standards Council recommends only two classes of assets, current and noncurrent.

true

The current ratio measures liquidity or the ability of the business to meet cash obligations as they come due without disrupting the business.

true

The debt/asset ratio and the debt/equity ratio both measure the overall solvency of the farm business

true

The difference in net worth on a cost-basis versus market-basis balance sheet is the valuation adjustment.

true

The lower the debt-to-asset ratio, the greater the solvency of a business.

true

J.K. Doe runs a farm business. His current ratio is 2.5. His debt/asset ratio is 0.7. His rate of return on assets is 1.5% and his rate of return on equity is 0.3%. He estimates he could earn 4% on investments off-farm. What is the financial situation on this farm?

Good liquidity, weak solvency, not profitable

21. Paying a seed dealer a sum of money in December to be applied toward seed to be delivered in the spring would show up on a balance sheet as: a. a prepaid expense b. an account receivable c. an account payable d. supplies on inventory

a. a prepaid expense

The total depreciation over an asset's useful life is equal to a. cost minus salvage value b. cost plus salvage value c. book value d. salvage value

a. cost minus salvage value

11. A ranch that just replaced a large number of fences and corrals would most likely see which of the following ratios increase? a. depreciation expense ratio b. interest expense ratio c. operating expense ratio d. net farm income from operations ratio

a. depreciation expense ratio

The depreciation method with the greatest depreciation in the first year is a. double declining balance b. 150% declining balance c. straight line d. all of the above have the same depreciation in the first year

a. double declining balance

If a business has working capital greater than $0, its current ratio will be a. greater than one b. equal to one c. less than one d. there is no relationship between the amount of working capital and the current ratio

a. greater than one

A trend analysis for a farm business could be performed using what kind of data for comparison? a. historical data from the same farm for the past five years b. data from comparable farms in the same region for the same year c. expected results from a whole farm budget completed at the beginning of the year d. historical data from similar farms in the same region for the past five years

a. historical data from the same farm for the past five years

If the debt/asset ratio is increasing, then the debt/equity ratio will be a. increasing b. decreasing c. constant d. indeterminate, need more information

a. increasing

An advantage of using the value of working capital instead of a cash flow budget to analyze a farm's liquidity: a. it is simpler to calculate b. it takes into account the timing of the cash flows c. it takes into account revenue to be received from the sale of products not yet in existence d. it takes into account future operating expenses as well as debt repayment

a. it is simpler to calculate

Which of the following is not a source of owner equity for a farm business? a. loans received to purchase land b. increases in the value of owned land c. profit retained in the business d. assets contributed to the business by the owner(s)

a. loans received to purchase land

Another term which has the same meaning as owner's equity is a. net worth b. net farm income c. total asset value d. total liabilities

a. net worth

Another name for a balance sheet is a. net worth statement b. income statement c. statement of owner equity d. statement of cash flows

a. net worth statement

If $50,000 cash on hand is used to pay a $50,000 operating loan then on the day of the transaction: a. net worth will not change but the current ratio will change b. neither net worth nor the current ratio will change c. net worth will increase but the current ratio will not change d. net worth will increase and the current ratio will change

a. net worth will not change but current ratio will change

10. Which of the following is not a general category of cash inflows and cash outflows in a farm or ranch business? a. Noncurrent b. Financing c. Operating d. Investing

a. noncurrent

10. Which financial measure shows how many dollars are left over after opportunity costs for equity capital and unpaid labor have been deducted from net farm income from operations? a. Return on assets b. Net farm income c. Return to labor and management d. Return to management

a. return on assets

The degree to which a farm's assets adequately cover or exceed it liabilities is referred to as a. solvency b. profitability c. liquidity d. working capital

a. solvency

The depreciation method with the smallest annual depreciation in the first year of life is a. straight line b. double declining balance c. 150% declining balance d. all depreciation methods have the same first-year depreciation.

a. straight line

The current ratio is a measure of a farm firm's: a. return on equity b. ability to pay short-term credit obligations c. return on investment in current assets d. level of total debt to total assets at the present time

b. ability to pay short-term credit obligations

10. The Statement of Cash Flows summarizes: a. Everything the business owns and owes as of a certain date b. All the sources and uses of cash in the business over a period of time c. All the income and expenses in the business over a period of time d. The change in owner equity in the business over a period of time

b. all the sources and uses of cash in the business over a period of time

Of the following, which is the most liquid asset? a. farm machinery b. balance in checking account c. breeding livestock d. feeder livestock

b. balance in checking account

Which of the following items on a balance sheet would not be considered when making accrual adjustments to net income? a. accrued interest b. change in market value of land c. inventories of market livestock d. pre-paid expenses

b. change in market value of land

Which of the following is a measure of economic efficiency? a. net farm income b. gross revenue per year of labor utilized c. change in owner equity d. net cash flow

b. gross revenue per year of labor utilized

A farm's asset turnover ratio measures: a. how often they replace machinery and equipment b. how much gross revenue is generated for each dollar invested in farm assets c. how many years it takes to pay for machinery and buildings d. how much debt the farm has for each dollar of assets

b. how much gross revenue is generated for each dollar invested in farm assets

11. Economic efficiency is a combination of all of the following except: a. physical efficiency b. solvency c. selling prices d. input prices

b. solvency

The degree to which a farm's assets adequately secure its debts is referred to as: a. liquidity b. solvency c. efficiency d. profitability

b. solvency

The "cost value" shown on a balance sheet for an asset such as a tractor is equal to a. the original purchase price b. the original purchase price less depreciation expense take to date c. the original purchase price plus cost all repairs to date d. the cost of a new tractor of the same size

b. the original purchase price less deprecation expense take to date

Which of the following ratios does not analyze the solvency of the farm business? a. debt/asset ratio b. turnover ratio c. debt/equity ratio d. equity/asset ratio

b. turnover ratio

A "contingent" or "deferred" income tax liability is one that a. is owed but not yet paid b. would be owed if and when an asset is sold c. represents delinquent taxes from past years d. would be due under cash accounting but not accrual accounting

b. would be owed if and when as asset is sold

Two similar farms could have the same return to management but different net farm income due to: a. differences in prices received for products sold b. differences in prices paid for inputs purchased c. differences in amount of unpaid labor and equity capital contributed d. differences in physical efficiency

c. differences in amount of unpaid labor and equity capital contributed

When the value of livestock production per $100 feed fed is greater than 100 it means that: a. the livestock enterprise had a positive profit b. the livestock enterprise had a negative profit c. feed costs were less than gross revenue adjusted for inventory changes and livestock purchases d. $100 per hundredweight was the breakeven sale price

c. feed costs were less than gross revenue adjusted for inventory changes and livestock purchases

Which of the following best describes a balance sheet? a. it shows changes in assets and liabilities over the last accounting period b. it shows changes in assets and liabilities over a period of time c. it shows assets and liabilities at a point in time d. it shows profit for the last accounting period

c. it shows assets and liabilities at a point in time

Which of the following is an example of a noncurrent liability? a. farm machinery b. loan on feeder livestock c. loan on farm machinery d. prepaid expense

c. loan on farm machinery

A depreciable asset's book value will equal its salvage value a. only on the purchase date b. only at the midpoint of its useful life c. only at the end of its useful life d. every year of its useful life

c. only at the end of its useful life

A farm's physical efficiency can be measured by: a. dollars of gross income generated per dollar of total assets (asset turnover ratio) b. total fertilizer cost per acre c. pounds of feed required to produce a pound of gain in livestock d. total dollars received from soybean sales divided by the bushels of soybeans sold

c. pounds of feed required to produce a pound of gain in livestock.

Which of the following assets would have the same value using either a cost or a market basis valuation? a. land b. machinery c. prepaid expenses d. purchased breeding livestock

c. prepaid expenses

10. Which of the following is not included as an expense on the net farm income statement? a. depreciation b. interest payments made on loans c. principal payments made on loans d. the cost of supplies used but not yet paid for

c. principal payments made on loans

The "cost" value of farmland can change due to a. changes in the selling price of farmland b. accumulated depreciation c. the cost of nondepreciable improvements made, such as terraces and earthen dams d. increases in property taxes

c. the cost of nondepreciable improvements made, such as terraces and earthen dams

average value of cash rent paid per acre

cost control skill

Low profitability can be caused by: a. low yields or output levels relative to input use b. unused machinery capacity with high levels of machinery ownership costs relative to output c. poor marketing leading to low prices received d. all of the above can cause low profitability

d. all of the above can cause low profitability

Which financial statement covers only a single point in time rather than a period of time? a. income statement b. statement of owner equity c. statement of cash flows d. balance sheet

d. balance sheet

11. Which of the following farm business analysis measures is not a measure of efficiency (either physical or economic)? a. gross revenue generated per person (FTE) b. pounds of milk produced per cow per year c. value of crops produced per acre d. dollars received per ton of hay sold

d. dollars received per ton of hay sold

The best description of a business which has increased its debt/asset ratio is one which has a. purchased more assets b. sold some assets c. increased its debt d. increased its debt relative to total assets

d. increased its debt relative to total assets

Which of the following cannot be valued using the cost less accumulated depreciation method? a. tractor b. barn c. purchased dairy cow d. land

d. land

A lender would usually prefer to have farm assets valued at their ________ value on a balance sheet that is part of a loan application. a. cash b. accrual c. cost d. market

d. market

Which of the following is an example of a current asset? a. dairy cows b. farm buildings c. farm machinery d. none of the above

d. none of the above

19. Using $20,000 in cash and a new loan of $80,000 to purchase land for $100,000 will cause equity to a. increase by $100,000 b. increase by $20,000 c. increase by $80,000 d. not change

d. not change

A statement of owner equity shows a. a list of all assets and liabilities b. the valuation adjustment for owner equity c. owner equity for the past 20 years d. the sources and amounts of changes in owner equity

d. the sources and amounts of changes in owner equity

In general terms, efficiency refers to: a. the volume of resources utilized in the farm business b. the ratio of total liabilities to total assets in the business c. the net farm income generated by the farm business d. the volume or value of production generated per unit of resource utilized in the farm business

d. the volume or value of production generated per unit of resource utilized in the farm business

What measures solvency

debt to asset ratio and debt to equity ratio

A balance sheet using cost-based valuation will always have a higher owner equity than it would if market-based valuation methods had been used.

false

A farm business would be considered "profitable" any year net farm income is positive.

false

A tractor can be valued using the farm production cost method.

false

An increase or decrease in the value of crop inventories during the accounting year creates an adjustment to Expenses on the Income Statement.

false

Book value and market value will always be the same dollar amount.

false

Book value is equal to cost minus salvage value.

false

Borrowing $20,000 to purchase additional dairy cows will decrease owner equity.

false

Cash grain farms can usually operate safely with a lower current ratio than dairy farms.

false

Grain in storage can be valued using the cost less accumulated depreciation method.

false

Gross revenue per person-year is a measure of physical efficiency.

false

If total asset value increases, owner equity will also increase.

false

Lenders normally prefer a debt-to-asset ratio that is greater than 1.

false

Market livestock and inventories of stored grain are noncurrent assets on a balance sheet.

false

Market value is the most conservative valuation method to use during periods of inflation.

false

Market value will generally result in a lower value than other valuation methods, particularly during periods of high inflation.

false

Most of the information needed for analyzing profitability comes from the balance sheet.

false

On a cost basis balance sheet, owner equity will increase if land values increase.

false

The market value of an asset cannot be less than its book value.

false

The market value of an asset cannot be lower than its cost.

false

The primary purpose of a balance sheet is to measure and record net farm income.

false

The return on assets (ROA) is a good measure of the marginal return that can be expected from investing more capital in the business.

false

The statement of owner equity lists all assets and liabilities of a business at a point in time.

false

Total liabilities cannot be greater than total assets.

false

Total operating expenses include interest paid on outstanding loans.

false

Working capital is a good measure of the solvency of the farm business.

false

To be depreciable, an asset must have a useful life of a. more than ten years b. five years or more c. more than one year d. six months or longer

more than one year

tons of cotton harvested per acre

physical efficiency

debt to equity ratio

total liabilities/net worth

debt to asset ratio

total liabilities/total assets

150% declining balance is a faster depreciation method than straight line.

true

A current ratio of more than 2.5 indicates strong liquidity.

true

A current ration greater than two indicates a business has good liquidity.

true

A farm business that has good solvency but poor liquidity may be spending too much on nonfarm purchases.

true

A negative owner's equity indicates an insolvent business.

true

A ranch business with a debt/asset ratio of 0.20 would be in a relatively strong financial condition.

true

All depreciation methods will result in the same total depreciation over the full life of the asset.

true

Another name for owner's equity is net worth.

true

At the end of a depreciable asset's useful life, its book value will equal its salvage value.

true

At the end of an asset's useful life, accumulated depreciation is an amount equal to the asset's cost minus its salvage value.

true

Book value will equal salvage value at the end of the asset's useful life.

true

Cost less depreciation cannot be used to value purchased feeder livestock.

true

Current liabilities are debts which must be paid in full within one year from the date of the balance sheet.

true

Depreciation reflects the decline in values of an asset over time due to wear and tear, age and obsolescence

true

Double declining balance is a "fast" depreciation method.

true

If a depreciable asset is sold for exactly its book value, equity will not change.

true

If a farm has zero liabilities and pays no interest, the ROA and ROE will be the same.

true

If a new tractor is purchased by taking out a loan, the net worth will not change that day but the debt-to-asset ratio will change.

true

If the average borrowing rate for funds is 5% and the rate of return on equity is 6%, then the rate of return on capital will be less than 6%.

true

If the percent return on assets (ROA) is less than the percent return on equity (ROE), borrowed money is earning a profit on average.

true

In general terms, "efficiency" determines whether farms and ranches with the most resources also generate the most production.

true

Increasing livestock production by building up inventories of raised breeding stock and feed can cause temporary liquidity problems.

true

Inventories of grain and feeder livestock would be valued at market on either a cost or market basis balance sheet.

true