Junior and Senior level Ag Bus.
Colorado Agriscience Curriculum
Section:
Advanced Agribusiness
Unit:
Agricultural Business Records
Lesson Title:
Balance Sheets
Colorado Ag
Education
Standards and
Competencies
Colorado Model
Content
Standard(s):
AGB11/12.03 - The student will be able to formulate
and analyze financial records and use the
information for evaluation and planning.
Complete and analyze cash flow projections, income
statements, and balance sheets.
Math Standard 3: Students use data collections and analysis, statistics, and probability
in problem-solving situations and communicate the reasoning used in solving these
problems.
Math Standard 6: Students link concepts and procedures as they develop and use
computational techniques, including estimation, mental arithmetic, paper-and-pencil,
calculators, and computers, in problem-solving situations and communicate the
reasoning used in solving these problems.
English Standard 4: Students apply thinking skills to their reading, writing, speaking,
listening, and viewing
English Standard 5: Students read to locate, select, and make use of relevant
information from a variety of media, reference, and technological sources.
Student Learning
Objectives:
Time:
Upon completion of this lesson the student will be able to:
1.
Define what a balance sheet is.
2.
State the three kinds of analysis to use on a balance sheet.
3.
State the three areas a balance sheet financially analyzes.
4.
Compile a balance sheet from a real farm business.
50 minutes
Unit 1, Lesson 4: Balance Sheets
1
Resource(s):
2005 National Farm Business Management Test
Farm and Ranch Management, John Deere
Instructions, Tools,
Equipment, and
Supplies:
Italicized words are instructions to the teacher, normal style text is suggested script.
*1 copy/student of the scenario found in the unit 4-6 scenario. It might even be helpful to make
single sided copies so that a student can analyze several bits of information at one time.
*Blank piece of paper for interest approach.
*Projector and whiteboard with markers.
*Blank balance sheet forms attached at the end of this lesson.
Interest Approach:
Have students pick a certain farm or ranch scenario familiar to your community. Once students
have decided on a scenario hand out a blank piece of paper to each student. Once each student
has a blank piece of paper in front of them, have them write/draw an asset or liability that would be
familiar to the type of business they have picked. Each item must be stated and have a value. For
example 10 head of cows - $9,000. Operating note at bank – $20,000. The interest approach will
proceed from here.
Hello students!! Today we are going to explore the wonderful world of balance sheets. I know you
may remember these from previous years, but we are going to go into more detail to make sure
you really know this skill for your own business needs one day. First, when I say go, I need you,
as a class, to come up with a farm business or ranch scenario that is familiar to this community.
For example, if you all want to work with a wheat farm scenario all you have to is say wheat farm.
If there are several ideas we will put them on the board and vote. I am going to give you 1 minute.
Go.
Stop. Now that we have an idea, I am going to pass out a blank piece of paper to each of you.
Once you have your piece of paper and I say go, you will have 1 minute to come up with an asset
or liability that would be familiar to the farm business you have picked. For example your piece of
paper may say 10 head of cows - $9,000 or operating note at bank - $20,000. If you have time
you may draw a picture of your asset or liability. Are you ready? You have one minute, go.
Stop. Now, when I say go, I need you all to stand up and I need you all to divide yourselves into
asset and liability groups. The assets need to gather on one side of the room and the liabilities on
the other. When I say go, you have 15 seconds. Go.
Review and discuss why each is an asset or liability. (See if students break into the right groups
and use this teachable moment to reinforce the information)
Great now that you are all divided, when I say, “divide further,” I want you to, as a group, to divide
into current and non-current entities. Do not mix assets and liabilities still stay separate. When
you are complete we should have 4 groups. You have 2 minutes, “Divide further.”
Stop student and review and discuss why each is asset or liability is current or non-current. Make
corrections as you go.
Great!
Now when I say, “Do your math,” you have 2 minutes to add your group’s total.
Unit 1, Lesson 4: Balance Sheets
2
Remember there should be four totals when we are done. “Do your math.”
Stop. Now that you have done your math, when I say go I need a representative to write their
groups total on the board. Make sure you label which group you are from. Go.
Great! Now I need you all to sit down at your desk and each figure the net worth of this business
for me. Remember the equation for net worth is assets – liabilities. You have 2 minutes, go.
Stop. Let’s discuss your answers. Let’s also discuss why we have to divide assets and liabilities
into current and non-current portions.
What answers did you all get? Great, now I bet your wondering why we have to divide the
balance sheet into current and non-current portions. You will see later today that several financial
analysis procedures need to have current and non-current portions divided in order to tell what a
business is doing right and what a business could do better. Let’s get out our notebooks so we
can review further.
Objective 1:
Define what a balance sheet is.
Utilize PowerPoint through lesson as it directly aligns with all note taking sections so you don’t
have to write as much information on the board.
I.
What is a balance sheet?
A.
A balance sheet or commonly called “net worth statement” is a snapshot of a
financial situation that lists assets, liabilities, and net worth. The accounting
equation states that net worth = assets – liabilities.
B.
A balance sheet is further divided into current assets, current liabilities, noncurrent assets, and non-current liabilities in order to analyze a farm or ranch
financially.
C.
Remember that current assets are those that have a useful life of one year.
Example: Hay for cows. Current liabilities are those that are due within the
current year. Example: Portion of term loan due this year.
D.
Remember that non-current assets are those that have a useful life of more
than one year. Example: Tractor. Non-current liabilities are those that are due
beyond the current year. Example: Portion of term loan due beyond this year.
State the three kinds of analysis to use on a balance sheet.
Objective 2:
I.
What are the three kinds of analysis to use on a balance sheet?
A. Comparative analysis – Comparison of figures from the same dates each year to
determine if the business equity is growing or shrinking.
B. Projected analysis – This consists of making balance sheets for the future for
expected farm situations and analyzing them to see probable trends.
C. Ratio analysis – A tool to measure the financial condition of one farm business
against another--using financial ratios.
State the three areas a balance sheet financially analyzes.
Objective 3:
Unit 1, Lesson 4: Balance Sheets
3
I.
What are the three areas a balance sheet financially analyzes?
A. Liquidity – The ability of a business to generate enough cash to pay bills without
disrupting business. Liquidity measures determine the ability to meet short term
debt and other obligations from available cash. Ratios that help determine liquidity
are as follows:
1.
Current ratio = Current assets/Current liabilities. Therefore a ratio of
$3.85:$1.00 means that there would by $3.85 worth of current assets for
every $1.00 of current debt. This means that a business with this type of
ratio would be liquid.
2.
Working capital = Current assets – current liabilities. Therefore a
business that has $62,550 worth of current assets and $16,254 worth of
current liabilities would have a working capital of $46,296. This is also a
reflection of a business that is liquid.
3.
Debt Structure = Current Liabilities/Total Liabilities. The higher this
percentage the more current assets will have to be used to service debt.
B. Solvency – Measures the ability of all assets, if sold at market value, to cover all
debts. A business is solvent if there are more assets than liabilities. Ratios that help
determine solvency are as follows:
1.
Debt-to-Asset ratio = Total liabilities/Total Assets. Lenders usually prefer
to provide loans that are equal to or less than 50% of assets. Therefore
a ratio of .50:1 or less is preferred.
2.
Debt to Equity ratio = Total liabilities/Net Worth (Owner’s Equity).
Lenders prefer a debt to equity ratio of less than one. This shows the
owners contribution is more than the borrowed funds.
3.
Equity to Asset ratio = Net worth/Total assets. A ratio of .50:1 would
mean that for every $1.00 of assets there is .50 in equity.
C. Equity – The owner’s share of the business.
Compile a balance sheet from a real farm business.
Objective 4:
Students will need to complete the beginning of the year balance sheet and end of the year
balance sheet in order to complete the following income statement lesson.
Now that we are through discovering the ins and outs of a balance sheet let’s get some hands on
experience compiling and analyzing balance sheets for Tucker Farms.
Use the attached forms to pass out and utilize in compiling balance sheets.
Review/Summary:
Application-Extended
Classroom Activity:
Close class with analyzing the ratios that were discovered in compiling the balance sheets. Ask if
the business is liquid and solvent. Ask what the business could do to improve.
Objective 4 works well as students are asked to compile a balance sheet from information
retrieved from the farm scenario previously presented.
Unit 1, Lesson 4: Balance Sheets
4
Application--FFA
Activity:
This information was pulled from the national farm business management exam. This
whole curriculum would be perfect to get a farm business management team started.
Application--SAE
Activity:
Have students look at and analyze their own financial sheets in their own record books.
Evaluation:
Use the beginning balance sheet for practice. Use the ending balance sheet for an
evaluation.
Evaluation Answer
Key:
Attached.
Unit 1, Lesson 4: Balance Sheets
5
Balance Sheets
2004
Tucker Farm Business
Assets
Current Assets
1/1/04
12/31/04
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Total Current Assets
_________________
__________________
Non-Current Assets
______________________________________________________________________________
Total Non-Current Assets
__________________
__________________
Total Farm Assets
______________
______________
Liabilities
Current Liabilities
_______________________________________________________________________________
Total Current Liabilities
_________________
__________________
Total Non-Current Liabilities
_________________
__________________
Total Farm Liabilities
_____________
______________
Net Worth (Equity)
_____________
______________
Non-Current Liabilities
Unit 1, Lesson 4: Balance Sheets
6
Balance Sheets
2004
Tucker Farm Business
Assets
Current Assets
1/1/04
12/31/04
Bank Balance________________________$99,661.00__________________________$117,793.00__
Savings and CD’s____________________ $56,176.00__________________________$50,000.00___
Accounts Receivable__________________$8,376.00___________________________$3,900.00____
Crops and Feed Inventory______________$163,010.00_________________________$127,965____
Market Livestock Inventory_____________$50,839.00__________________________$64,590.00___
Prepaid Expenses___________________ $19,234.00__________________________$8,257.00____
Total Current Assets
______$397,276___
_______ $372,505.00__
Non-Current Assets
Machinery, Buildings, and Land________$626,546.00_________________________ $659,201.00__
Total Non-Current Assets
______$626,546.00_________________________$659,201.00__
Total Farm Assets
_____$1,023,842.00_______________$1,031,706.00
Liabilities
Current Liabilities
Accounts Payable w/Merchants________$1,829.00__________________________$(50.00)________
Total Current Liabilities
______$1,829.00___
______$(50.00)________
Total Non-Current Liabilities
______$0.00_______
______$0.00__________
Total Farm Liabilities
____$1,829.00__
____-$50.00______
Net Worth (Equity)
____$1,022,013.00__
_____$1,031,756.00
Non-Current Liabilities
Unit 1, Lesson 4: Balance Sheets
7
Balance Sheet Ratios
1/1/04
12/31/04
Liquidity
Current Ratio_______________________________________________________________________
Working Capital_____________________________________________________________________
Debt Structure______________________________________________________________________
Solvency
Debt/Asset Ratio____________________________________________________________________
Equity/Asset Ratio___________________________________________________________________
Debt/Equity Ratio____________________________________________________________________
Is this business liquid?________________________________________________________________
Is this business solvent?______________________________________________________________
Unit 1, Lesson 4: Balance Sheets
8
Balance Sheet Ratios
1/1/04
12/31/04
Liquidity
Current Ratio_____________________________217.22:1_____________________7450.10:1______
Working Capital__________________________395,467______________________372,555________
Debt Structure_________________________________1:1__________________________1:1______
Solvency
Debt/Asset Ratio__________________________.002:1________________________.000:1________
Equity/Asset Ratio_________________________.998:1_______________________1.000:1________
Debt/Equity Ratio__________________________.002:1________________________.000:1________
Is this business liquid?____________________Yes____________________________________________
Is this business solvent?___________________Yes___________________________________________
Unit 1, Lesson 4: Balance Sheets
9