The BASICS of FINANCIAL STATEMENTS
For Agricultural Producers
EXERCISES
Authors:
James McGrann
Francisco Abelló
Doug Richardson
Christy Waggoner
Department of Agricultural Economics
Texas Cooperative Extension
Texas A&M University
May 19, 2003
The Basics of Financial Statements Exercises
Instructions
This section contains a series of questions and exercises used to gain a better
understanding of the basic concepts behind financial statements. The questions and
exercises addressed in this section focus on the four main financial statements: (1)
Balance Sheet; (2) Income Statement; (3) Statement of Cash Flows; (4) Statement of
Owner’s Equity. Each of these statements combine the tools that can be used to evaluate
the performance and provide other useful information to better guide decision making in
a farm or ranch business.
The first set of exercises is a list of multiple choice and fill in the blank questions
that help identify the main components of the four different financial statements. These
questions should also allow the user to understand what the differences and similarities
are between each of the statements and how this can serve as a basis for communication
about the performance of a business.
The second set of exercises allow the user to piece together an actual set of
financial statements by using the information provided from an example ranch business.
The West Texas Ranch, in this case, has a list of accounts associated with each of the
four main financial statements. It is required that the user places each account into its
proper classification within each financial statement. The last page of this exercise
contains the information necessary to calculate the performance ratios of the business.
The basic goal of this exercise is to be able to identify proper placement of each of the
accounts associated with their respective financial statements. If done properly, the
numbers used in calculating the financial ratios should match up with some of the ones
generated from the financial statements.
Multiple Choice and Fill in the Blank Questions
1) Complete the following sentences.
a) What the business has:
.
b) How much the business owes: ________.
c) What the business is worth: _________.
2) Circle each of the following equations that are correct. (A = Assets, L = Liabilities,
E = Equity)
a) E = A – L
b) A = E + L
c) A = E – L
d) E = A + L
e) L = A – E
Table 1.
Assets
Liabilities
Current
Non-Current
Accrued Expenses
Long Term Investments.
Accrued Interest - Non Real Estate Loans and Notes
Raised Breeding Stock
Investments in growing and finishing livestock
Government Payment Receivable
Credit Card/ Oper. Loan/ Curr. Note Payable
Purchased Breeding Stock.
Prepaid Expenses
Crops/Raised Feed for Sale.
Cash & Checking
Breeding Horses
Accounts Receivable.
Principal Due - Non Real Estate Loans and Notes
Savings and Time Deposits
Income Taxes Payable
Accounts Payable
Principal Balance- Non Real Estate Loans and Notes
3) In the table above, mark which of the accounts are assets or liabilities, and if they are
current or non-current.
4) How are assets displayed in the asset section of the balance sheet?
a) Ascending order of liquidity
b) Descending order of amount
c) Ascending order of amount
d) Descending order of liquidity
e) By order of practicality
2
5) Which account identifies money owed to the business but has yet to be collected.
a) Cash and Checking
b) Supply, Prepaid Expenses and Leases
c) Investments, Bonds and Securities
d) Accounts Receivable
e) Saving and Time Deposits
6) Circle each of the following that are included as Current Inventory Assets?
a) Livestock for Sale
b) Crops / Raised Feed for Sale
c) Purchased Breeding Stock
d) Vehicles, Machinery & Equipment
e) Raised or Purchased Feed, intended to be used in livestock production.
7) Which describes prepaid expenses?
a) Supplies Received
b) Bills paid, but services not yet received
c) Current Assets that can be turned into cash
8) Complete the following sentences that describe the Current Asset Cycle.
a) Inventory when sold becomes _______.
b) Accounts receivable upon collection becomes _________.
c) Cash buys inputs that produce ________.
9) Which of the following is the main characteristic that describes a non-current asset?
a) Represent a great amount of money for the business.
b) Converted into cash in less than 12 months.
c) Not converted into cash during the normal course of the business.
d) Assets that are intended for sale.
10) How is a non-current asset reported on the balance sheet?
a) Non Current Asset at cost – Year depreciation
b) Non Current Asset at market value – Year depreciation
c) Non Current Asset at market value – Accumulated depreciation
d) Non Current Asset at cost – Accumulated depreciation
11) Complete the following definitions.
a) ________ depreciation (on the balance sheet) is the _________ of all the
depreciation charges taken since the asset was _______ .
b) Depreciation charges taken in a period ________ profits for the period, but do not
_________ cash.
3
12) How are liabilities categorized for presentation on the balance sheet? (Circle all that
apply)
a) To whom the debt is owed.
b) Ascending order of liquidity
c) Descending order of liquidity
d) By order of practicality
13) Complete the following sentences. (Use increase or decrease)
a) Current liabilities decrease, and/or current assets increase, when working capital
________ in the normal course of the business.
b) Current assets decrease, and/or current liabilities increase, when working capital
________ in the normal course of the business.
14) Which of the following are components of owner’s equity? (Circle all that apply)
a) Retained Earnings
b) Capital Contributions
c) Land
d) Cash
15) Which of these equations is correct for Retained Earnings (RE)?
a) RE = Sum of all profits + Capital contributions – Capital Distributions
b) RE = Sum of all profits – Sum of all dividends or withdrawals
c) RE = Equity + Sum of all dividend
d) RE = Sum of all profits + Sum of all dividends or withdrawals
16) Complete the following sentences. (Use increase or decrease)
a) The value of owner’s equity ________ when the business makes a profit, thereby
increasing retained earnings; or assets ________ more than liabilities.
b) The value of owner’s equity ________ when the business has a _________ ,
thereby lowering retained earnings; or assets _______ more than liabilities.
17) Which of these statements are true about the income statement?
a) It includes cash and non-cash values.
b) Is calculated after taxes.
c) Used to measure the change of Owner Equity.
d) Used to measure Net Income.
e) Government payments would not be included
f) It enables the farm operator to know the sources of income.
18) How do we organize the income statement?
a) Assets and liabilities.
b) Currents and non current assets, and current and non-current liabilities.
c) Cash for operations, cash for investments and expenses.
d) Revenues and expenses
4
19) Complete the following equation. (Using +, - or =)
What is sold in the period
( )
What it cost to make
( )
General & Administrative expenses for the period
( )
Income for the period
20) Which of these items belong to the Cash Receipt Account? (Circle all that apply)
a) Inventory & Accounts Receivable Change
b) Raised Livestock Products
c) Steers transferred out to another business entity
d) Cash received from the sale of products
e) Vet services
f) Gain (Loss) on Sale/Death of Breeding Livestock
g) Agricultural Program Payments
h) Crops/Raised Feed Sales.
21) Which of these accounts would be included in calculating the total Operating
Expense? (Circle all that apply)
a) Inventory change (Expenses).
b) Gains or Losses from breeding stock.
c) Repairs and Maintenance.
d) Feed.
e) Depreciation
f) Accounts Receivable
22) Which of these equations is correct?
a) Net income from operations = Gross Revenue – Operating Expenses + Interest
b) Net income from operations = Gross Revenue – Operating Expenses + Capital
Gain or Losses – Taxes
c) Net income from operations = Gross Revenue – Operating Expenses – Interest
d) Net income from operations = Gross Revenue – Operating Expenses + Interest +
Capital Gain or Losses – Taxes
23) Which of these equations is correct on the Statement of Cash Flows?
a) Net cash from financing = New borrowings – Debt Payments – Interest Expense
b) Net Cash from operations = Receipts – Expenses – Interest Expenses – Taxes
c) Net Cash from investing = Sales – Purchases – Expenses
d) Net Cash from investing = Sales – Purchases – Depreciation
24) Complete the following equation with (+ / –) signs that are missing.
Cash on hand at the start of the period ( ) Cash received in the period (
Cash spent during the period = Cash on hand at the end of the period.
5
)
25) In which financial statements do non-cash transactions have an effect? (Circle all that
apply)
a) Balance Sheet
b) Income Statement
c) Statement of Cash Flows
d) Statements of Owner’s Equity
26) Based on the Statement of Cash Flows, label each of the followings as a source of
Cash Inflows (CI) or Cash Outflows (CO).
a) Receiving payments from customers. _____
b) Borrowing money. _____
c) Paying interest and principal on debt. _____
d) Paying for Supplies and employees. _____
e) Making major capital investment in long-lived productive assets like breeding
stock or farm machinery. _____
f) Paying Income Taxes. ______
g) Sales of breeding stock. ______
27) Cash receipts, cash expenses, cash interest expenses and cash tax expenses on the
Statement of Cash Flow must match data with which other financial statements?
a) Balance Sheet
b) Income Statement
c) Statement of Owner Equity
28) Complete the following sentence.
The Statement of Owner’s Equity reconciles the _______ and _______ owner’s
equity through determining the changes in _______ , and net change in capital
contributions and distributions.
29) “Beginning owner equity” on the Statement of Owner’s Equity must match data with
which other financial statements?
a) Balance Sheet
b) Income Statement
c) Statement of Cash Flows
30) The ending owner’s equity on the Statement of Owner’s Equity could be compared to
the owner’s equity calculated from the ….
a) Balance Sheet
b) Income Statement
c) Statement of Cash Flows
6
31) From which of the main financial statements give the data required to calculate the
following ratios?
a) Current Ratio _____.
b) Return on Equity _____.
c) Debt-to-Asset Ratio _____.
d) Equity-to-Asset Ratio _____.
e) Return on Assets _____.
32) The following definitions describe either profitability, liquidity or solvency. Label
each of the following definitions with the correct performance measure.
a) Ability of the business to generate sufficient cash to meet cash demands without
disturbing the on-going operation of the business. _______
b) Ability of the business to generate income in excess of expenses. _______
c) Ability to repay all financial obligations if all assets were sold and ability to
continue operations as a viable business after a financial adversity. _______
7
The West Texas Ranch
BASIC BALANCE SHEET
ASSETS
Current Assets
A
B
C
D
A+B+C+D=E
$
-
Net Non-Current Assets
F
G
H
(F - G) + H = I
$
-
Total Assets
E+I=J
$
-
K
L
M
N
K+L+M+N=O
$
-
LIABILITIES
Current Liabilities
P
Q
Non-current Liabilities
P+Q
Total Liabilities
O+P+Q=R
$
-
J-R=S
$
-
R+S=T
$
-
EQUITY
Owner's Equity
Total Liabilities & Equity
Accounts Payable
Accounts Receivable
Accrued expenses
Inventory
Non Current Liabilities
Land Debt
Current Portion of debt
Non Current Assets at cost
Cash
Accumulated Depreciation
Prepaid expenses
Land
Income Taxes Payable
West Texas Ranch
$
$
$
$
$
$
$
$
$
$
$
$
$
8
1,700.00
1,000.00
2,900.00
10,000.00
176,371.00
9,737.00
496,380.00
77,526.00
71,870.00
2,000.00
1,500,000.00
-
BASIC INCOME STATEMENT
GROSS REVENUE
TOTAL
Gross Revenue
A
B
C
A+B+C=D
$
-
E
F
G
H
I
J
K
E+F+G+H+I+J+K=L
$
-
M
D - (L + M) = N
$
EXPENSES
Total Operating Expense
Net Income from Operations
-
O
P
NET INCOME
N+O-P=Q
$
-
West Texas Ranch
Total
Utilities
Depreciation
Non Cash Transfer out
Capital Gains (Losses)
Labor
Veterinary
Taxes
$
$
$
$
$
$
$
10,193.00
32,870.00
48,000.00
(13,364.00)
48,000.00
5,825.00
10,500.00
Inventory Change (Expenses)
Interest Expense
Repairs and Maintenance
Cash Receipts
Feed
Inventory & Accounts Receivable Change
$
$
$
$
$
$
5,470.00
18,454.00
38,629.00
175,838.00
23,400.00
2,900.00
9
BASIC STATEMENT OF CASH FLOWS
CASH FROM OPERATIONS
TOTAL
Net Cash From Operations
A
B
C
D
A-B-C-D=E
$
-
F
G
F-G=H
$
-
I
J
I-J=K
$
-
$
-
CASH FROM INVESTING
Net Cash From Investing
CASH FROM FINANCING
Net Cash From Financing
L
M
NET CASH FLOW
E+H+K-L+M=N
West Texas Ranch
Total
Purchases
Debt Payments
Interest Expenses
Cash Contributions
Taxes
Cash Withdrawals
Sales
Expenses
$
$
$
$
$
$
$
$
28,000.00
8,933.00
18,464.00
10,500.00
34,636.00
131,517.00
New Borrowings
Receipts
$
$
175,838.00
10
BASIC STATEMENT OF OWNER'S EQUITY
RETAINED EARNINGS
TOTAL
A
B
A-B=C
$
-
E
F
G
E+F+G=H
$
-
Total
I
J
K
I+J+K=L
$
-
Net Change in Capital
H-L=M
$
-
N
C+M=O
N+O=P
$
$
-
Net Change in Retained Earnings
CAPITAL CONTRIBUTIONS
Total
CAPITAL DISTRIBUTIONS
OWNER EQUITY RECONCILIATION
Total Equity Change
Ending Owner Equity
-
West Texas Ranch
Total
Withdrawals
Beginning Owner Equity
Capital Distributions
Cash & Investment
$
$
$
-
Building, Machinery & Equipment
Land
Capital Contribuitons
Cash & Investment
Building, Machinery & Equipment
Land
$
$
-
$
$
$
30,000.00
-
Net Income
$
20,033.00
11
1,760,095.00
RATIOS
RETURN ON ASSETS (ROA)
Return on Assets
A
B
C
(A + B) / C = D
$
-
A
E
A/E=F
$
-
G
H
G/H=I
$
-
J
C
J/C=K
$
-
E
C
E/C=M
$
-
$
$
$
$
$
$
$
Total
83,426.00
11,437.00
197,808.00
2,007,936.00
1,810,128.00
80,897.00
18,454.00
RETURN ON EQUITY
Return on Equity
CURRENT RATIO
Current Ratio
DEBT-TO-ASSET RATIO
Debt-to-Asset Ratio
EQUITY-TO-ASSET RATIO
Equity-to-Asset Ratio
West Texas Ranch
Total Current Assets
Total Current Liabilities
Total Liabilities
Total Assets
Total Equity
Net Income from Operations
Interest Expenses
12
The BASICS of FINANCIAL STATEMENTS
For Agricultural Producers
ANSWERS
13
14
Answers
Multiple choice and fill in the blank questions.
1) a) assets
b) liabilities
c) equity
2) a, b, e
3)
Assets
Accrued Expenses
Long Term Investments.
Accrued Interest - Non Real Estate Loans and Notes
Raised Breeding Stock
Investments in growing and finishing livestock
Government Payment Receivable
Credit Card/ Oper. Loan/ Curr. Note Payable
Purchased Breeding Stock.
Prepaid Expenses
Crops/Raised Feed for Sale.
Cash & Checking
Breeding Horses
Accounts Receivable.
Principal Due - Non Real Estate Loans and Notes
Savings and Time Deposits
Income Taxes Payable
Accounts Payable
Principal Balance- Non Real Estate Loans and Notes
4)
5)
6)
7)
8)
d
d
a, b, e
b
a) Accounts Receivable
b) Cash
c) Inventory
9) c
10) d
11) a) Accumulated; sum; first acquired
b) decrease; decrease
12) a, c
13) a) increase
b) decrease
14) a, b
15) b
16) a) increases; increase
b) decreases; decrease
17) a, b, d, f
15
Liabilities
x
Current
x
x
x
x
x
x
x
x
Non-Current
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
18) d
19) (-), (-), (=)
20) b, d, g, h
21) a, c, d, e
22) c
23) b
24) (+), (-)
25) a, b, d
26) a) CI
b) CI
c) CO
d) CO
e) CO
f) CO
g) CI
27) b
28) Beginning; ending; retained earnings; contributed capital; distributed capital
29) a
30) a
31) a) Balance Sheet
b) Balance Sheet and Income Statement
c) Balance Sheet
d) Balance Sheet
e) Balance Sheet, Income Statement
32) a) Liquidity
b) Profitability
c) Solvency
16
The West Texas Ranch
BASIC BALANCE SHEET
ASSETS
Cash
Accounts Receivable
Inventory
Prepaid expenses
Current Assets
$
$
$
$
$
Non Current Assets at cost
Accumulated Depreciation
Land
Non Current Assets
Total Assets
$
496,380.00
$
71,870.00
$ 1,500,000.00
$ 1,924,510.00
$ 2,007,936.00
LIABILITIES
Accounts Payable
Accrued expenses
Current Portion of debt
Income Taxes Payable
Current Liabilities
$
$
$
$
$
1,700.00
9,737.00
11,437.00
Non-Current Liabilities
Land Debt
Total Liabilities
$
$
$
10,000.00
176,371.00
197,808.00
Owner´s Equity
Total Liabilities & Equity
$ 1,810,128.00
$ 2,007,936.00
17
77,526.00
1,000.00
2,900.00
2,000.00
83,426.00
BASIC INCOME STATEMEMT
GROSS REVENUE
Cash Receipts
Non Cash Transfer out
Inventory & Accounts Receivable Change
Gross Revenue
$
$
$
$
175,838.00
48,000.00
2,900.00
226,738.00
EXPENSES
Inventory Change (Expenses)
Repairs and Maintenance
Labor
Feed
Depreciation
Veterinary
Utilities
Total Operating Expenses
$
$
$
$
$
$
$
$
5,470.00
38,629.00
48,000.00
23,400.00
32,870.00
5,825.00
10,193.00
164,387.00
Interest Expense
Net Income from Operations
$
$
18,454.00
43,897.00
Capital Gains (Losses)
Taxes
NET INCOME
$
$
$
(13,364.00)
10,500.00
20,033.00
18
BASIC STATEMENT OF CASH FLOWS
CASH FROM OPERATIONS
Receipts
Expenses
Interest Expenses
Taxes
Net Cash From Operations
$
$
$
$
$
175,838.00
131,517.00
18,464.00
10,500.00
15,357.00
CASH FROM INVESTING
Sales
Purchases
Net Cash From Investing
$
$
$
34,636.00
28,000.00
6,636.00
CASH FROM FINANCING
New Borrowings
Debt Payments
Net Cash From Financing
$
$
$
8,933.00
(8,933.00)
Cash Withdrawals
Cash Contributions
NET CASH FLOW
$
$
$
13,060.00
19
BASIC STATEMENT OF OWNER EQUITY
RETAINED EARNINGS
Net Income
Withdrawals
Net Change in Retained Earnings
$
$
$
20,033.00
20,033.00
CAPITAL CONTRIBUTIONS
Cash & Investment
Building, Machinery & Equipment
Land
Total
$
$
$
$
30,000.00
30,000.00
CAPITAL DISTRIBUTIONS
Cash & Investment
Building, Machinery & Equipment
Land
Total
Net Change in Capital
$
$
$
$
$
30,000.00
OWNER EQUITY RECONCILIATION
Beginning Owner Equity
Total Equity Changes
Ending Owner Equity
$ 1,760,095.00
$
50,033.00
$ 1,810,128.00
20
RATIOS
RETURN ON ASSETS (ROA)
Net Income from Operations
Interest Expenses
Total Assets
Return on Assets
$
43,897.00
$
18,454.00
$ 2,007,936.00
3.1%
RETURN ON EQUITY
Net Income from Operations
Total Equity
Return on Equity
$
43,897.00
$ 1,810,128.00
2.4%
CURRENT RATIO
Total Current Assets
Total Current Liabilities
Current Ratio
$
$
83,426.00
11,437.00
$7.29
DEBT-TO-ASSET RATIO
Total Liabilities
Total Assets
Debt-to-Asset Ratio
$
197,808.00
$ 2,007,936.00
10%
EQUITY-TO-ASSET RATIO
Total Equity
Total Assets
Equity-to-Asset Ratio
$ 1,810,128.00
$ 2,007,936.00
90%
21