financial statements annie’s project january 30, 2007 coweta oklahoma
TRANSCRIPT
What are financial statements?Financial statements are the written reports on
the financial condition of a business.
There are three major types of financial statements.
Types of Financial Statements1. Balance Sheet
A statement that shows the wealth of the business at a given date.
2. Cash Flow StatementA summary of the cash inflows and outflows for a business over a given time period.
3. Income StatementA summary of income and expenses for a business over a given time period.
Balance Sheet
A balance sheet is a summary sheet of everything that is owned and owed by the operation.
A balance sheet should be done at the beginning and end of each fiscal time period.
A balance sheet can be done using the market value or cost basis methods.
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 Probably gives a truer picture of the value of the business
Parts of a Balance Sheet
A balance sheet has three components
1. Assets – what is owned
Current and non-current
2. Liabilities – what is owed
Current and non-current
3. Net Worth – Assets minus Liabilities
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 payableNotes payableCurrent portion of term debtAccrued interestTaxes payableDeferred 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.
Net (Current Assets + Non-current Assets)Worth − (Current Liabilities + Non-current Liabilities)
=
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
A cash flow statement is a summary of cash inflows and outflows divided into equal time periods usually monthly.
Uses of a Cash Flow StatementEstablishes 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
Income Statement
There are two methods of doing an income statement.
1. Cash Cash receipts and expenses are recorded when the
they are paid. Most non-cash expenses are not included.
2. Accrual Records receipts and expenses when they occur. Inventory changes are included.
Difference Between Cash Flow and Income Statement
Income statement does not include: Capital sales and contributed capital
Principal payments
Family living expenses
Cash flow statement does not include: Depreciation
The Accrual Adjusted Income Statement
RevenuesLivestock and crop salesChanges in inventoriesGovernment payments & other farm incomeGain/loss from sale of culled breeding stockChange in value due to change in raised breeding
livestock numbersAccrual adjustments in asset accounts
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
Accrual Adjustments (Assets)
Change in:Accounts receivablePrepaid expensesCash investment in growing cropsSuppliesContracts and notes receivable Investment in cooperatives
The Accrual Adjusted Income Statement
ExpensesPurchased market livestockCash operating expensesChanges in feed inventoriesAccrual adjustments for liability accountsDepreciationCash interest paidChange in accrued interest
Accrual Adjustments
Changes in:Purchased feed inventoriesAccounts payableAd valorem taxesEmployee payroll withholdingsAccrued expensesAccrued interest
DepreciationThere are different methods of depreciation. Modified Accelerated Cost Recovery System
(MACRS)
General Depreciation System (GDS)
Alternative Depreciation System (ADS)
Which one depends type of property
Straight Line Depreciation
Cost – Salvage Value
Years of Life
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
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)
Measuring Financial Stress 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
2 1
Measuring Liquidity
Current ratio =
Total current farm assets
Total current farm liabilities
Low Stress High Stress
Measuring Solvency
Debt/asset ratio =
Total farm liabilities
Total farm assets
40% 70%Low Stress High Stress
Measuring Profitability
Net Farm Income =
Gross farm revenue
- all farm operating expenses incurred to create those revenues
+/- gains/losses on sale of capital assets
Low Stress High Stress
Measuring Profitability
Rate of Return on Farm Assets =
(Net farm income from operations
+ farm interest expense
- value of unpaid labor & management)
(Average total farm assets)
5% 1%Low Stress High Stress
Measuring Profitability
Rate of Return on Farm Equity =
(Net farm income from operations
- value of unpaid labor & management)
(Average total farm equity)
10% 5%Low Stress High Stress
Measuring Efficiency and Repayment CapacityInterest Expense Ratio =
Total farm interest expense
Gross farm revenues
10% 20%Low Stress High Stress
Measuring Efficiency
Asset Turnover Ratio =
Gross farm revenues
Average total farm assets
40% 20%Low Stress High Stress