AREC 305 ~ FINAL EXAM

when finding the net present value of an investment considering inflation :

both of the above --> all cash flows should be increased by their expected rate of inflation, the discount rate should be a nominal rate

the future value of $10,000 placed in a savings account will depend on :

both the interest rate and the time it is left in the account

the depreciation method with the greatest depreciation in the first year is :

double declining balance

which of the following would not increase the net worth of a farm business?

loans received to purchase land

"doubling the number of acres farmed in 10 years" is an example of a

long-run goal

an equal total payment loan requires :

lower initial payments than an equal principal payment loan

one force that has helped cause US farms to become larger and fewer is :

lower production costs per unit by spreading fixed investment in technology over more units

"what managers do" is best described by which of the following?

make decisions

the internal rate of return is the interest rate that would :

make net present value just equal to zero

a lender would usually prefer to have farm assets valued at their ______ value on a balance sheet that is part of a loan application

market

on a partial budget which analyzes switching 120 acres from growing wheat to growing barley, which of the following costs should not be included on the budget?

property tax on the land

"outside equity" to increase the total resources of a farming operation can be obtained by :

securing funds from non-operator investors or limited partners

which phase of the strategic management process would be most influenced by a farm family's basic values and attitudes about agriculture?

setting goals

the degree to which a farm's liabilities are backed up by assets is known as :

solvency

the degree to which a farms assets adequately cover or exceed its liabilities is referred to as :

solvency

the depreciable method with the smallest annual depreciation in the first year of life is :

straight line

when preparing a cash flow budget it is important to :

take into account the timing of cash inflows and outflows

a tax credit reduces

the amount of tax owed

in linear programming to maximize farm profits, "shadow price" tells you :

the amount profit would increase if the operator had one more unit of a limited resource

A partial budget would be the most useful type of budget for estimating :

the change in profit from installing an irrigation system in one field

the "cost value" shown on a balance sheet for a asset such as a tractor is equal to :

the original purchase price less depreciation expense taken to date

in a farm partnership, net income is shared in proportion to :

the ownership share of each partner

the advantage of a "balloon payment" loan over a conventional loan repayment plan is :

the payments are smaller, except for the final one

in a loan payment schedule the ending outstanding principal balance for any period is found by taking the previous outstanding principal balance and subtracting :

the principal payment

"technical coefficients" for whole-farm planning refer to :

the quantities of resources needed to produce one unit of each enterprise being considered

net farm income represents a return to all of the following resources except :

borrowed capital (debt)

when computing the after-tax net present value of an investment

both cash flows and the discount rate need to be adjusted

which of the following would not be included as an expense on an accrual income statement?

cost of a new farm pickup

the process of finding of finding the present value of a future sum is called :

discounting

a $1,000 of income 5 years from now is worth the same as $1,000 of income today

false

a balance sheet using market-based valuation will always have a higher net worth than it would if cost-based valuation methods had been used

false

a borrower would pay more interest on a 10 year loan amortized under an equal principal payment plan than on the same loan amortized under an equal total payment plan

false

a cash flow budget contains exactly the same information as an income statement only it is shown by time period

false

a farm business that is in the consolidation stage of its life cycle will be looking for opportunities to grow, even if it means using debt capital

false

a farm business would be considered "profitable" in an economic sense any year net farm income is positive

false

a single partial budget can analyze up to four alternatives

false

an inventory increased is shown on a cash flow budget in time period it occurs

false

any investment that has a positive net present value will also be financially feasible

false

at the end of a depreciable asset's useful life, its book value will equal its market value

false

because principal payments in an equal principal payment loan are the sake every year, the interest paid is also the same

false

because total payments in an equal total payment loan are the same every year, the interest paid is also the same

false

because weather and prices are unpredictable, it is impossible to plan more than one year in advance

false

book value and market value will always be the same dollar amount

false

book value is equal to cost minus salvage value

false

change in profit is the only factor to consider when looking at the results of a partial budget

false

changes in fertilizer inventory would be reflected in the revenue section of the income statement because fertilizer is an asset

false

if money is amortized to be paid back over the same period at the same interest rate, an equal total payment loan will require more principal to be paid than an equal principal payment loan

false

in a loan payment schedule it is important to prorate interest for the first year because loan payments are always considered due on december 31st of each year

false

interest payments are included on a cash flow budget but principal payments are not

false

it is safe to assume that the input levels shown on published enterprise budgets are the profit-maximizing amounts

false

linear programming assumes that resources requirements per unit of an enterprise increase as more units of the enterprise are carried out

false

net income cannot be negative

false

net income from a farm partnership is taxed at a different rate than individual income

false

net income includes any annual gain in the market value of land owned

false

no management decision should be made until all possible information has been acquired

false

nonfarm income and expenses are not included on a cash flow budget

false

on a cost basis balance sheet, net worth will increase if land values increase

false

on a partial budget, costs and returns must be included for all enterprises on the farm

false

only cash expenses are included on an enterprise budget

false

only cash expenses are shown on a partial budget

false

only one person can provide the management in a sole proprietorship

false

partnerships pay income taxes on the partnership earnings

false

principal payment son noncurrent debts are needed for analyzing profitability, but not liquidity

false

purchasing capital assets with short-term loans will cause net worth of the business to decrease

false

section 179 expensing increases the total amount of deductions from the purchase of a depreciable asset over the long run

false

since farm managers are making the same basic types of decisions in the 21st century as they did in the previous century, they can rely on rules of thumb to guide their actions

false

strategic planning only needs to be done by someone just beginning their business

false

the "bottom line" in any enterprise budget estimated the pure profit to the firm for each unit of the enterprise

false

the first step in whole-farm planning is to prepare the whole farm budget

false

the income statement can be used to measure the long-run solvency of the business

false

the last step in the decision-making process us to implement the decision

false

the most accurate way to analyze the profitability of an investment is to compute the payback period

false

the primary purpose of a balance sheet is to record and measure profitability

false

the primary use for a cash flow budget is to estimate profit for the coming year

false

the salvage value of an asset is not used in determining a declining balance depreciation schedule

false

the shadow price for a resource in a linear programming solution shows how much total costs would increase if one more unit of the resource were available

false

the simple rate of return and the internal rate of return will be the same for any investment

false

the terms "capital asset" and "depreciable base" mean the same thing

false

total liabilities cannot be greater than total assets

false

if a business has working capital greater than $0, its current ration will be :

greater than one

of the following, the best return to equity would be :

greater than the opportunity cost of equity

in whole farm planning the implicit assumption is that when ___________ is maximized, total profit is maximized

gross margin per unit

an amortized loan repayment plan with a "balloon" payment :

has more principal due in the final payment than in the others

an advantage of linear programming is :

it can quickly analyze a large number of activities and resources

which of the following best describes a balance sheet?

it shows assets and liabilities at a point in time

which of the following is not a depreciable cost?

land

which of the following was not used as a category in our discussion of "Loan Types" :

lender type

which of the following shows the proper sequence of management functions as they would be applied to a specific problem?

planning, implementation, control

which of the following assets would have the same value using either a cost or a market basis valuation?

prepaid expenses

which of the following is not used to calculate the interest that ha accrued on a loan?

principal payment

the rate of return on assets measures business :

profitability

a business should generally structure its debt to avoid needing to sell productive assets to meet short-term financial commitments

true

a cash flow budget for a whole farm can be prepared on an annual, quarterly or monthly basis

true

a cash flow budget should include the total amount of cash received from the sale of a tractor

true

a corporation is the most convenient form of business organization for dividing and transferring ownership

true

a negative owner's equity indicates an insolvent business

true

a partial budget includes only those costs and revenues which will change if the proposed alternative is adopted

true

a person requiring only a 6 percent return could pay more for an investment than someone requiring an 8 percent return

true

all depreciation methods will result in the same total depreciation over the full life of an asset

true

an advantage of the cash method of computing taxable income is flexibility in the amount of taxable income reported in each tax year

true

an increase in accrued interest will increase total farm expenses for the year on an accrual basis

true

any accrual but unpaid expense is included as an expense when computing net farm income on an accrual basis

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

borrowing operating funds under a "line of credit" agreement requires less communication between borrower and lender than borrowing the same amount in several separate loans

true

both principal and interest payments on noncurrent debt are included on a cash flow budget

true

changes in inventory value are needed to compute an accurate net farm income

true

depreciation information (such as useful life or salvage value) is irrelevant when calculating a loan payment schedule

true

depreciation is a noncash expense but is included on a cash basis income statement

true

depreciation is not included when computing the net cash flows from an investment

true

even choosing the best alternative action will sometimes produce undesirable results

true

family living expenses and principal payments on loans should be included on a cash flow budget but never on an income statement

true

goals must be known before management decisions can be made

true

goals should have written, specific, measurable, and have a timetable

true

if a loan is amortized to be paid back over the same period at the same interest rate, an equal total payment loan will require more money to be paid in total than an equal principal payment loan

true

if a positive rate of inflation is expected, the real discount rate is smaller than the nominal discount rate

true

if a resource in a linear programming formulation is not used up entirely by the selected activities, then the shadow price on the resource constraint will be zero

true

if the shadow price on a labor constraint in linear programming is $40.00 (per hour) and labor can be hired for $10 per hour, profits would be increased by hiring more labor

true

in whole-farm budgeting only gross margin is multiplied by the number of units each enterprise because fixed costs are assumed to be constant when the number of units of an enterprise changes

true

income taxes can affect the profitability of an investment

true

inventories of grain and feeder livestock would be valued at fair market value on either a cost or market basis balance sheet

true

it is possible for a shareholder in a farm corporation to also receive a salary from the corporation and/or rent property to it

true

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

true

more time should be spent on irrevocable decisions than on those which can be easily reversed

true

one of the most important areas in which advances in electronics can help farm managers is in collecting the raw data needed to make better decisions

true

one way that goals other than profit maximization can be included in whole farm planning is by restricting the types of enterprise considered

true

profit and loss statement is another name for an income statement

true

sales of crops and feeder livestock are usually taxed as both ordinary income and self employment income

true

sensitivity analysis in whole-farm budgeting looks at how net income and cash flow would be affected by changes in key prices or production rates

true

some cash inflows may be taxed at different rates than others

true

some enterprises may have more than one source of revenue

true

straight line is a slower depreciable method than double declining balance

true

the MACRS tax depreciation method assumes a zero salvage value for depreciable assets

true

the beginning cash balance for one time period should be the same as the ending cash balance for the previous time period

true

the cash method of reporting taxable income has the potential for wide changes in income if the crop production from two years in sold in the same tax year

true

the equation for break even yield is total cost divided by selling price

true

the higher the interest rate the smaller the annual payment needed to accumulate a given amount 10 years from now

true

the term "depreciable base" refers to the amount of depreciation that will be taken over the remaining useful life of an asset

true

the three major components of a balance sheet are assets, liabilities, and net worth

true

when developing a whole-farm plan the inventory of resources should include labor and management skills as well as physical resources

true

when they are different, cash expenses are entered on a cash flow budget in the time period the bill, will be paid and not in the time period the item was purchased

true

when developing a whole farm plan and no more enterprises can be added because one resource is exhausted, it may still be possible to increase gross margin by replacing enterprise with another enterprise that has a higher gross margin per :

unit of limiting resource

ownership or fixed costs for farm buildings include all of the following except :

utilities

If an acre of alfalfa requires $75 of operating capital and 5 hours of labor, and a farm has 70 acres of land, 400 hours of labor, and $4,500 of operating capital available, the maximum acres of alfalfa that can be grown is:

60

an increase in prepaid expenses shows up on a income statement as :

a decrease in expenses

a limited liability company combines the legal aspects of :

a partnership and a corporation

the ______ basis income statement provides the most accurate depiction of the profitability of a business

accrual

By forming strategic alliances, small and medium sized farmers and ranchers can :

achieve marketing advantages that larger operations enjoy

which of the following are the profit decreasing changes on a partial budget?

additional costs and reduced revenue

a cash flow budget can be used to :

all of the above --> estimate when excess cash may be available so plans can be made to invest it, e

which of the following is not included in the revenue section of an income statement?

an increase in the market value of land

a series of periodic payments is called a (n) :

annuity

sensitivity analysis looks at the change in total profit caused by :

any of the above --> a change in the price of a key input, a change in yields, a change in selling prices

interest is included as a variable cost on a enterprise budget :

as an opportunity cost on variable costs regardless whether borrowed or equity capital will be used

which of the following is NOT one of the budgeting types that will be covered in this course?

balanced budget

which of the following is an example of a tactical decision?

balancing a livestock ration

the adjusted tax basis on a depreciable asset is its :

beginning basis less accumulated depreciable

the proper term for the value found by subtracting accumulated depreciation from the asset's original cost is :

book value

if a farmer buys land for $100,000 and five years later sells it for $125,000, what value should be reflected on the income statement?

capital gain of $25,000

the purpose of liquidity analysis is to estimate if :

cash inflows will be sufficient to meet expected cash outflows

a cash flow budget can be used to monitor the farm business by :

comparing actual cash inflows and outflows to the budgeted monthly cash flows

standardization of farm financial ratios and accounting practices will help farm managers :

compete with nonfarm businesses for capital

the process of finding the future value of a present sum is called :

compounding

the total depreciation over an asset's useful life is equal to :

cost minus salvage value

which of the following financial measures is an indicator of solvency?

debt-to-asset ratio

using a higher discount rate will cause the present value of a future amount to :

decrease

an accrual adjustment reflecting an increase in prepaid expenses over the year would :

decrease expenses for the year

a cash flow budget should contain all of the following items except :

depreciation

which of the following would appear on an income statement but not a cash flow budget?

depreciation

which of the following is an example of a strategic decision?

determining what type of business/legal organization to use

a partial budget is designed to analyze the effect of a proposed change on :

economic profit

a whole-farm budget contains :

estimated costs, returns, and resource needs for a specific set of enterprises

the last step in constructing a cash flow budget should be :

estimating how much new current debt will be needed and can be repaid each month

a net present value of zero means the investment has an internal rate of return :

exactly equal to the discount rate

when comparing several long-range whole-farm budgets with different quantities of major fixed resources such as owned land or permanent labor, the prices used to estimate gross income should be :

expected average prices over the next several years

the term describing how much time is available to make a decision is :

imminence

an advantage of making accrual adjustments to a cash net income statement is :

income will be included in the year commodities were produced rather than the year in which they were sold

the best description of a business which has increased its debt/asset ratio is one which has :

increased its debt relative to total assets

how does the sale of an old tractor affect an income statement?

increases (decreases) net income by the amount of gain (loss)

if the debt/asset ration is increasing, then the leverage ration will be :

increasing

which of the following would not appear on a cash flow budget?

inventory change

long-term capital gains income :

is currently taxed at a lower rate than ordinary income

to be depreciable, an asset must have a useful life of :

more than one year

a financial feasibility analysis looks at the :

net cash flows resulting from the investment and its financing

another term which has the same meaning as owners equity is :

net worth

if $50,000 cash on hand is used to pay a $50,000 operating loan then on the day of the transaction :

net worth will not change but the current ration will change

which of the following is an example of a current asset?

none of the above --> dairy cows, farm buildings, and farm machinery

using $20,000 in cash and a new loan of $80,000 to purchase land for $100,000 will cause equity to :

not change

the values in a crop enterprise budget are normally for :

one acre

a depreciable asset's book value will equal its salvage value :

only at the end of its useful life

the values shown on a partial budget are :

only changes in revenues and expenses

when a taxpayer is in the "25 percent tax bracket" :

only ordinary income in excess of the bottom range of the bracket is taxed at this rate

which of the following terms, if used on an enterprise budget, would be considered the same as variable cost?

operating cost

estate planning is most concerned with passing on the __________ of the farm to the next generation

ownership

the goal of income tax management should be :

to maximize long-run, after-tax net income

the purpose of an income statement is :

to show revenue, expenses, and net income for an accounting period

a gain on the sale of a depreciable asset implies :

too much depreciation was taken over its life

cost of production is computed from the equation :

total cost divided by output

in a joint operating agreement, gross income is generally shared in proportion to each person's contribution to :

total costs

a projected negative annual cash flow before any new borrowing is considered indicates :

total debt will be higher at the end of the year than at the beginning

"capital" includes machinery and livestock as well as cash

true