Financial Statements

Budgets

A list of anticipated revenues and expenses associated with a business operation. There are several different types of budgets, including enterprise budgets, whole farm budgets, partial budgets, etc. Budgets generally include the following sections:

Owner's Equity

Also known as Net Worth, can be calculated by subtracting total liabilities from total assets, and represents the portion of assets owned by the business owners.

Expenses

Costs that have been incurred to produce revenue.

Asset Valuation Changes

If market information is included on a balance sheet, asset valuation changes on the statement of owner equity would include the changes in the market value of business assets.

Non-Current Assets

Include assets that are utilized in the business on an ongoing basis and will not be converted to cash during the year. Examples of this would include machinery, equipment, breeding livestock, land, buildings, etc.

Current Assets

Include cash and assets that can easily be converted to cash and will either be used or converted to cash during the year. Examples of this would include cash, checking and savings account balances, accrued interest earned, crops and feed inventory, feeder livestock, government payments, prepaid expenses, accounts receivable (money owed to the business due within 12 months), etc.

Liabilities

Include everything that the business owes. this is separated into two categories, current and noncurrent _____. Something that is Payable.

Assets:

Include everything the business owns. It is separated into two categories, current and non-current_____.

Non-Current Liabilities

Include must be paid but are not due within the next 12 months. Examples of this would include any loans for land, machinery, equipment, breeding livestock, and so on that are not due in the next 12 months excluding the portion of the loan due within the next 12 months.

Current Liabilities:

Include obligations that must be paid within the next year. Examples of this would include, accounts payable (money the business owes due within 12 months), credit card balances, accrued interest and taxes, short-term loans (12 months), portions of long-term loans due within the next 12 months, etc.

Cost vs. Accrual

Income statements can be prepared on either a cash or an accrual adjusted basis. A cash-basis income statement measures revenue when it is received and expenses when they are paid. An accrual adjusted income statement measures revenue when it is earned and expenses when they are incurred. Often an accrual adjusted income statement is prepared by beginning with a cash-basis income statement and adding accrual adjustments to the revenue and expenses of a cash-basis income statement.

Net Income

Is calculated on the income statement for the given year.

Net Income

Is equal to Revenue - Expenses .

Accrual Adjusted Net Income

Is equal to revenue (including accrual adjustments) minus expenses (including accrual adjustments).

Expense Accrual Adjustments

May include costs incurred during the income statement period but not paid during that period. These adjustments would show up on the balance sheet as increases in current liability accounts such as accounts payable. Depreciation would also be considered an expense accrual adjustment on the income statement.

Revenue Accrual Adjustments

May include the value of products produced during the income statement period but not sold during that period or products that have been sold but for which payment has not been received. These adjustments would also be reflected on the balance sheet as changes in current asset accounts such as accounts receivable, market livestock inventory, crops inventory, etc.

Liquidity

Measured the business' ability to meet the ongoing financial obligations of running the operation. This deals with the relationship between assets and liabilities and operational cash flow.

Equity/Asset Ratio

Measures of how much of the farm's assets are financed by the owner compared with the debt-to-asset ratio which shows how much of the farm's assets are financed by creditors. A debt-to-equity ratio above 0.50 means the owner has more money in the business than creditors. The equity-to-asset ratio is calculated from information on the balance sheet, as follows: Equity/Asset Ratio = Total Farm Equity / Total Farm Assets

Repayment capacity

Measures the ability to repay debt.

Solvency

Measures the amount of borrowed capital compared to capital invested by owners. Solvency shows the ability of the business to repay all debt if all assets were sold. Solvency measures include:

Working Capital

Measures the amount of capital that would be available for use to purchase inputs after all current assets are sold and all current liabilities are paid. In general, a positive working capital is desirable. Working capital is calculated from information on the balance sheet, as follows: Working Capital = Total Current Farm Assets - Total Current Farm Liabilities

Financial efficiency:

Measures the efficiency of the use of financial inputs to create output.

Operating Expense Ratio

Measures the how efficiently farm operating expenses are used to create revenue and is calculated from information on the income statement as follows: Operating Expense Ratio = (Total Farm Operating Expenses - Depreciation Expense) / Gross Farm Revenues

Labor Productivity Ratio

Measures the how efficiently labor is used to create revenue and is calculated from information on the income statement as follows: Labor Productivity Ratio = Gross Farm Revenues / (Labor Expenses + Value of Unpaid Operator and Family Labor and Management)

Asset Turnover Ratio

Measures the how well or efficiently farm assets are used to create revenue and is calculated from information on the balance sheet and income statement as follows: Asset Turnover Ratio = Gross Farm Revenue / Average Total Farm Assets

Profitability

Measures the profits of the business relative to the labor, management, and capital used in the operation.

Return on Assets (ROA)

Measures the rate of return on farm assets and is calculated using information from the income statement and the balance sheet as follows: Return on Assets = (Net Farm Income from Operations + Farm Interest Expense - Value of Unpaid Operator and Family Labor and Management) / Average Total Farm Assets

Return on Equity (ROE)

Measures the rate of return on the owner's equity and is calculated using information from the income statement and the balance sheet as follows: Return on Equity = (Net Farm Income from Operations - Value of Unpaid Operator and Family Labor and Management) / Average Total Farm Equity

Current Ratio

Measures the relationship between current assets and current liabilities. The higher the current ratio, the more liquid the business is. In general, a current ratio above 1.5 is desirable, but a current ratio too high may reduce the profitability of the business. The current ratio is calculated from information on the balance sheet, as follows: Current Ratio = Total Current Farm Assets / Total Current Farm Liabilities

Debt/Equity Ratio

Measures the relationship between farm debt capital and equity capital. Ratios less than 1 are preferable and mean that creditors have less money in the business than the owner. The debt-to-equity ratio is calculated from information on the balance sheet, as follows: Debt/Equity Ratio = Total Farm Liabilities / Total Farm Equity

Operating Profit Margin Ratio

Measures the returns to capital relative to gross farm revenue and is calculated from the income statement as follows: Operating Profit Margin Ratio = (Net Farm Income from Operations + Farm Interest Expense -Value of Unpaid Operator and Family Labor and Mgmt.)/ Gross Farm Revenues

Statement of Owner Equity

On the balance sheet, owner equity (or net worth) is calculated by subtracting liabilities from assets. On the statement of owner equity, net worth is calculated differently and should equal the calculation from the balance sheet if all accounts are reconciled correctly. Like the balance sheet, the statement of owner equity is generally prepared once a year along with the balance sheet. Unlike the balance sheet, the statement of owner equity also identifies the source of changes in net worth for the year period. On the statement of owner equity, net worth is calculated as follows: Ending Net Worth = Beginning Net Worth + Net Income + Non-Business Cash Inflows - Owner Withdrawals + Asset Valuation Changes + Contributed or Distributed Capital

Debt/Income Ratio:

Ratio measures farm debt relative to income and is calculated from information on the balance sheet and income statement as follows: Debt/Income Ratio = Average Total Farm Liabilities / Net Farm Income from Operations

Non-Business Cash Inflows

Represent any money put into the business from outside sources, such as owner contributions.

Owner Withdrawals

Represent any money taken out of the business by the owners including for family living expenses.

Receipts

Represent the income received for the production of a commodity or product.

Contributed or Distributed Capital

Represents any increases in capital that came from an outside source, or any distribution of capital to an outside source.

Enterprise budgets

Show the anticipated expenses and revenues associated with one production process for a specific period of time, typically a year or other production period.

Balance Sheet

Shows a snapshot of your company's financial situation at a point in time. It measure assets, liabilities, and owner's equity and is based upon the accounting equation: Assets = Liabilities + Owner's Equity. A balance sheet represents this equation by listing the business' assets on the left side and liabilities and owner's equity on the right side.

Partial budgets

Shows anticipated expenses and revenues associated with a change in the farm business operation.

Debt/Asset Ratio

Shows farm liabilities relative to farms assets. The higher the debt-to-asset ratio the more money creditors have in the business relative to the owner and the higher financial risk the farm business faces. In general, a debt-to-asset ratio below 0.50 is desirable. The debt-to-asset ratio is calculated from information on the balance sheet, as follows: Debt/Asset Ratio = Total Farm Liabilities / Total Farm Assets

Whole farm budgets

Shows the anticipated revenues and expenses for all farm activities and production processes (i.e. all enterprises) for a specific period of time, typically a year

Statement of Cash Flows

Shows the inflows and outflows of cash on the farm business for a period of time. Historical cash flows statements show past inflows at outflows of cash for a certain time period, often a month or a year. Cash flows projections can be prepared based on historical cash flows statements and expected future business activity help managers ensure that the business will have enough cash inflows to cover the cash outflows and maintain a successful business operation. This is separated into three catagories.

Income Statement

Shows the net income, or profit, of a business over a period of time, usually a year. This also measures revenue and expenses.

Operating Costs

The costs associated with the production of the commodity or product.This would include seed, fertilizer, fuel, labor, repairs, operating interest, feeder animals purchased, feed, medicine, supplies, marketing, etc.

Fixed Costs

The costs that must be paid regardless of whether or not the farm is operating.This would include property taxes, depreciation on machinery and buildings, property insurance, interest, etc.

Revenue

The income earned for the production of the business commodity or output.

Cash flows from operating activities

This section captures the inflows and outflows of cash necessary for the operation of the farm enterprise. For example, inflows from the sale of produced commodities or outflows for payment of expenses such as seed, fuel, feed, and other operating expenses would fall under this section.

Cash flows from financing activities

This section captures the inflows and outflows of cash relative to financing activities. For example, inflows from acquired operating or term loans or outflows for repayment of loans would fall under this section. Dividends paid to owners would also be included in this section.

Cash flows from investing activities

This section captures the inflows and outflows of cash relative to investment activities. For example, outflows for the purchase of productive assets such as breeding livestock, machinery, farm land, etc. or inflows from the sale of such assets or returns from other investments would fall under this section.

Net Farm Income:

While not considered a ratio, This shows the revenue associated with the expenses of production and is a dollar figure of the profitability of the farm operation. Net income is calculated on the income statement, as follows: Net Farm Income = Revenue - Expenses