Transcript Financial Statements - Agricultural economics

Financial Statements
Strategy
Finance
Personnel
Business
Plan
Operations
Marketing
Financial statements?
What?
Where?
When?
Why?
How?
Who?
Can You Answer These Questions?
 Is the business headed in the right direction?
 Does it provide enough income to:
Show a profit?
Cover your loan payments?
Pay family living expenses?
 What are your production costs?
 What price do you need to receive for your
product to break even?
Measuring Financial Position and
Performance
 Liquidity
 Ability to pay bills as they come due and cover unanticipated
events
 Solvency
 Ability to cover all debts if the business were sold
 Profitability
 Returns to labor and management generated by the
operation
 Financial efficiency
 Efficiency with which assets generate income
 Repayment capacity
 Ability to repay term debt in a timely fashion
Business Analysis
 Financial statements
 Historical
 Projected
 Multi-year
 Spending plan (budget)
 Enterprise analysis
 Cow/calf
 Crop
 Custom work
 Partner shares
 Break-even analysis
 Marketing plan
 Investment analysis
 Risk assessment
Financial statements
AGEC751
Cash flow statement
Income statement
•Cash income
•Cash income
•Cash expenses
•Cash expenses
•Changes in assets
AGEC791
792
752
Balance sheet
•Changes in liabilities
•Assets
•Net farm income,
accrual adjusted
(profit)
•Liabilities
•Net worth (owner
equity)
http://pods.dasnr.okstate.edu/docushare/
AGEC753
Balance Sheet
 Summary sheet of items owned and owed.
Assets
 Current
 Non-current
Liabilities
 Current
 Non-current
Net Worth = Assets - Liabilities
 Done at the beginning and end of each fiscal
time period.
North Central Oklahoma
http://agecon.okstate.edu/oklandvalues/
Which Method to Use?
 Market Value
 Typically used by most lending institutions
 Easiest to determine
 Easiest to over or under estimate
 Due to rapidly changing markets, could overstate or
understate net worth.
 Cost Basis
 Must have good records
 Must know depreciation of assets
 Gives a truer picture of the value of the business
Current Assets
Current assets are assets that will be used up
or sold during the next twelve months.
Examples include:
 Cash, checking accounts, savings
 Investments
 Accounts receivable
 Prepaid expenses
 Cash investments in growing crops
 Inventories
Market livestock, stored crops, purchased feed, supplies
Non-Current Assets
Non-current assets are assets that have a useful life of
more than 1 year.
Examples include:
 Breeding livestock
 Machinery, equipment
 Vehicles
 Investments in capital leases
 Land
 Buildings and improvements
Current Liabilities
 Accounts payable
 Notes payable
 Current portion of term debt
 Accrued interest
 Taxes payable
 Deferred taxes
Non-current Liabilities
 Notes payable, non-real estate
 Notes payable, real estate
 Deferred taxes
Net Worth
 Net worth of the business is the difference
between the total value of the assets and the
total value of the liabilities.
Current Assets
+ Non-current Assets
– Current Liabilities
- Non-current Liabilities
= Net Worth
Balance Sheet Exercise
Cash Flow Statement
Cash Inflows
 Operating receipts
 Crop and livestock
sales, government
payments, other farm
income
 Capital sales
 Contributed capital
Cash Outflows
 Operating expenses
(feed, fertilizer, etc.)
 Capital purchases
 Family living and
other withdrawals
Uses of a Cash Flow Statement
 Establishes target levels for income and
expenses which can be used in monitoring
progress towards goals
 Points out potential problems in meeting
financial obligations
 Indicates when cash is available for new
investments
Cash Flow Exercise
The Accrual Adjusted Income
Statement
 Net Farm Income, Accrual Adjusted =
Gross Farm Revenues
- Total Operating Expenses
- Total Interest Expense
+/- Gain/Loss on Sale of Farm Capital
Assets
The Accrual Adjusted Income
Statement
 Revenues
Livestock and crop sales
Government payments & other farm income
Plus….
Changes in Inventories
 Market livestock
 Raised crops/feed inventories
Accrual Adjustments (Assets)
Change in:
 Accounts receivable
 Prepaid expenses
 Cash investment in growing crops
 Supplies
 Contracts and notes receivable
 Investment in cooperatives
Gains/Losses on Sale of
Farm Capital Assets
 Difference between the value for which the
items is sold and the adjusted basis (cost
minus depreciation taken)
Gains/Losses on Sale of
Culled Breeding Livestock
 Purchased breeding stock: subtract cost
basis from the sale proceeds
 Raised breeding stock: subtract base value
from the sale proceeds
Change in Value Due to Change in Raised
Breeding Livestock Numbers
 Number of head transferring from one
classification to another, e.g., replacement
heifers to cows
 Differences in base values of the two
classifications
The Accrual Adjusted Income
Statement
 Expenses
Purchased market livestock
Cash operating expenses
Accrual adjustments
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Purchased feed inventories
Accounts payable
Ad valorem taxes
Employee payroll withholdings
Accrued expenses
Accrued interest
Depreciation
Different methods of depreciation
 Tax
 Farmer’s Tax Guide at
http://www.irs.gov/publications/p225/index.html
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Methods Modified Accelerated Cost Recovery System (MACRS)
General Depreciation System (GDS)
Alternative Depreciation System (ADS)
Which one depends type of property
Economic

Straight Line Depreciation:
Cost – Salvage Value
Years of Life
Difference Between Cash Flow and
Income Statement
Cash flow statement does not include:
 Depreciation
 Changes in inventory, other accrual adjustments
 Gains/losses on capital asset sales
Income statement does not include:
 Capital sales and contributed capital
 Principal payments
 Family living expenses
Income Statement Exercise
Financial statements
AGEC751
Cash flow statement
Income statement
•Cash income
•Cash income
•Cash expenses
•Cash expenses
•Changes in assets
AGEC791
792
752
Balance sheet
•Changes in liabilities
•Assets
•Net farm income,
accrual adjusted
(profit)
•Liabilities
•Net worth (owner
equity)
http://pods.dasnr.okstate.edu/docushare/
AGEC753
Measuring Financial Position and
Performance
 Liquidity
 Ability to pay bills as they come due and cover unanticipated
events
 Solvency
 Ability to cover all debts if the business were sold
 Profitability
 Returns to labor and management generated by the
operation
 Financial efficiency
 Efficiency with which assets generate income
 Repayment capacity
 Ability to repay term debt in a timely fashion
What does business analysis offer?
 Cold, hard facts
 Ability to compare to benchmarks
 Insights into strengths/weaknesses,
problem identification
 Direction for maximizing the returns to
owned resources
 Documentation to obtain/maintain credit
Communication
 Business partners
 Lenders
 Landlords
 Heirs
 Family
IFMAPS
 A free, confidential service assisting
Oklahoma farmers and ranchers with financial
planning since 1985
 Trained financial specialists work with families
one-on-one to develop financial statements
and evaluate alternative plans
 Contact the local Extension office, an area
Agricultural Economics specialist, or call the
IFMAPS office in Stillwater at 1-800-522-3755
Damona’s 30 + 1 plan
 Spend 30 minutes each week maintaining
and using records
 Take one step each month to improve your
record-keeping system and financial
summaries
Just do it!
References:
 OSU Ag Econ Department,
http://agecon.okstate.edu/websites.asp
 OSU Extension publications, www.osuextra.com
 National Ag Risk Management Library,
http://www.agrisk.umn.edu/
 Annie’s Project,
http://www.extension.iastate.edu/feci/annie/
 Business Planning Guidebook, Minnesota Institute
for Sustainable Agriculture,
http://www.misa.umn.edu/vd/bizplan.html