Ag Education II
Colorado Agriscience Curriculum
Section:
Intro to Agribusiness II
Unit:
Using data to manage the agricultural business or employment experience
Lesson Title:
Completing and Analyzing the Balance Sheet
Colorado Ag
Education Standards
and Competencies
Standard 10.1 – The student will utilize data to manage an agricultural business or
employment experience.
Competency 1-4 – Completing and analyzing the balance sheet
Colorado Model
Content Standard(s):
Student Learning
Objectives:
Math: 6.1
1. The student will learn how to complete the financial balance sheet
2.
The student will calculate and analyze net worth statements
3.
The student will calculate and interpret financial ratios from a balance sheet
Time:
Two fifty minute periods.
Resource(s):
Agribusiness: Decisions and Dollars by Jack Elliot, Delmar Publishing.
Farm and Ranch Business Management by John Deere Publishing
Italicized words are instructions to the teacher; normal style text is suggested script.
Instructions, Tools,
Equipment, and
Supplies:
Interest Approach:
LCD projection equipment connected to computer to show PowerPoint as well as balance sheet
examples (printed and computerized). A sample balance sheet is included with this lesson.
You may want to print PowerPoint handouts for the students instead of having them write all the
notes. Also included is a balance sheet assignment and key.
Rough Draft A – a day or two ahead of time, collect small farm toy type figures and/or
actual items that can represent various assets and liabilities. To introduce the lesson, ask
students to group the items into 4 different categories based on similarities and what they
have in common. This will start students visualizing items that fit into the current and noncurrent and asset and liability groups of a balance sheet.
Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 1
Objective 1:
The student will learn how to complete the financial balance sheet
1. What are the four major categories needed to complete the balance sheet?
a. Current assets – items that can be used or sold and converted to cash within
one year, without disrupting the business
b. Non-current assets – items used to produce a product, not sold within a year.
c.
Current liabilities – debt payable with one year
d. Non-current liabilities – debt that is due beyond one year
2. List multiple examples of current assets, non-current assets, current liabilities, and
non-current liabilities:
a. Current assets – cash, checking accounts, savings accounts, stocks, life
insurance, market livestock, harvested and growing crops, accounts receivable,
inventory purchased for resale, consumable supplies
b. Non-current assets – breeding livestock, equipment, machinery, buildings, land,
improvements to land (fences, etc.).
c. Current liabilities – accounts payable, depreciation, interest, taxes, current
portion of principal from non-current debt, operating loans
d. Non-current liabilities – debt on non-current assets, mortgages, real estate debt.
3. What should be done to complete filling out the balance sheet?
a. Accurately list the value of all assets and liabilities in the appropriate
categories.
b. Current assets are listed first followed by non-current assets, current liabilities
and non-current liabilities.
c.
There are two ways to assign valuation for the assets and liabilities:

Cost Valuation – better evaluation of performance

Market Valuation – truer representation of asset values
d. Add to get a total dollar value in each of the four categories as well as the
value of TOTAL ASSETS and TOTAL LIABILITIES.
e. Be sure to include the date of the balance sheet.
f.
The ending balance sheet for one year is the beginning balance sheet for the
next year.
Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 2
Objective 2:
The student will calculate and analyze net worth statements
1. After completing the balance sheet, Net Worth (also called Owner’s Equity) can be
calculated.
Net Worth = Total Assets – Total Liabilities
2. If Net Worth is positive, then total assets exceed total liabilities.
3. If Net Worth is negative, then debt is greater than the assets
4. Calculate Net Worth from the following numbers:
Current Assets = $5,432
Current Liabilities = $1,234
Non-current Assets = $246,810
Non-current Liabilities = $135,790
Solution:
Total Assets = $252,242
-Total Liability = $137,024
Net Worth = $115,218
5. What are two ways to increase net worth?
a. Increase assets
b. Decrease liability
Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 3
Objective 3:
The student will calculate and interpret financial ratios from a balance sheet
1. Explain liquidity and how it is measured.
a. Liquidity is the ability of a business to convert assets to cash quickly
b. It can be measured two ways:


Working Capital (current assets – current liabilities)

businesses strive for a positive working capital figure

business size has a large impact on working capital
Current Ratio (current assets / current liabilities)

a ratio of 1.5 to 1 indicates flexibility to withstand business crises

the higher the ratio, the more liquid the business
2. What is solvency and how is it measured?
a.
a business is solvent if total assets exceed total liabilities, therefore,
solvency is the ability to pay debts or liabilities.
b. solvency can be measured by three ratios:



Debt to Asset Ratio (total liabilities / total assets)

measures proportion of total assets owed to creditors

a ratio greater than .50:1 is risky
Equity to Asset Ratio (net worth / total assets)

also called the percent ownership ratio

the higher the ratio, the more capital supplied by owner
Debt to Equity Ratio (total liabilities / net worth)

also called the leverage ratio

less than 1:1 is preferred
3. Another measure of solvency is a Net Capital Ratio – also called Non-current Ratio
a. Non-current Ratio (non-current assets / non-current liabilities)
Review/Summary:
Review this lesson in form of the Jeopardy Game Show. Name an asset or liability,
students must respond in the form of a question like, “What is current asset.” Questions
could also be asked about ratios, liquidity, and solvency.
Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 4
Application-Extended Classroom
Activity:
1. Complete the Balance Sheet Assignment (attached).
Application--FFA
Activity:
Have students complete a balance sheet for the FFA Chapter.
Application--SAE
Activity:
Instruct students to complete a balance sheet for their SAEP record book.
2. Using an Excel spreadsheet, have students create a balance sheet that will automatically
calculates net worth and the various financial ratios. This will work much better if Standard
9.3, lesson 3-3, Using Spreadsheets, has been taught and mastered.
Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 5
Evaluation:
1. Give one example each of a current asset, non-current asset, current liability, and noncurrent asset. (4 points)
25 points
2. Current assets and liabilities: (1 point)
a. are usually associated with a time frame of 30 days
b. have to be less than non-current assets and liabilities
c.
are usually associated with a time frame of less than one year
d. have very little to do with the net worth statement
3. How is net worth calculated? (2 points)
4. If Net Worth increased from this year to last year, which of the following could have
happened. (circle all that apply) (2 points)
a. total assets increased
b. total liabilities increased
c.
total liabilities decreased
d. total assets decreased
5. True or False – Owner’s Equity and Net Worth are the same thing. (1 point)
6. True or False – Working Capital is current assets divided by current liabilities (1 point)
7. True or False – A businesses ability to pay it’s debts is called liquidity (1 point)
8. True or False – The Net Capital Ratio is one measure of solvency (1 point)
Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 6
9. True or False – A Debt to Equity Ratio of less than 1:1 means total liabilities are less than
net worth. (1 point)
10. What does a Debt to Asset Ratio of greater than 1:1 mean? (1 point)
a. the amount of liabilities and assets are equal
b. there are more assets than liabilities
c.
the business has moderate to low financial risk
d. there are more liabilities than assets
11. The larger the Equity to Asset Ratio: (1 point)
a. the more money a business owes to creditors
b. the more capital supplied by the owner
c.
the higher leveraged the business is
d. the higher in liquidity the business is
12. Use the following information to make the calculations below. (9 points)
Current Assets = $15,000
Current Liabilities = $5,000
Non-current Assets = $30,000
Non-current Liabilities = $10,000
Total Assets ______________
Total Liabilities _____________
a.
Net Worth –
b.
Working Capital –
c.
Current Ratio –
d.
Debt to Asset Ratio –
e.
Equity to Asset Ratio –
f.
Debt to Equity Ratio –
g.
Non-Current Ratio –
Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 7
Balance Sheets
2000 - 2004
Tucker farm business
12/31/00
12/31/01
12/31/02
12/31/03
12/31/04
Assets
Current Assets
Bank Balance
Savings & CD's
Hedging Account
Marketable Stocks & Bonds
Accounts Receivable
Crops & Feed Inventory
Market Livestock Inventory
Prepaid Expenses
Non-Farm Business/Other
Total Current Assets
$
$
$
$
$
$
$
$
$
62,218
50,000
9,088
123,628
61,205
15,278
321,417
Non Current Assets
Machinery, Buildings and Land
Total Non-Current Assets
$
782,630 $
782,630
Total Farm Assets
$
$
$
$
$
$
$
$
$
$1,104,047
141,285
53,514
7,653
168,157
49,430
420,039
$
$
$
$
$
$
$
$
$
768,480 $
768,480
$1,188,519
94,542
55,056
21,124
105,317
48,077
324,116
$
$
$
$
$
$
$
$
$
833,602 $
833,602
$1,157,718
99,661
56,176
8,376
163,010
50,839
19,234
397,296
$
$
$
$
$
$
$
$
$
117,793
50,000
3,900
127,965
64,590
8,257
372,505
626,546 $
626,546
659,201
659,201
$1,023,842
$1,031,706
Liabilities
Current Liabilities
Accounts Payable w/Merchants
$
Lease Payment
$
Feed Accounts Payable/FSA
$
CCC Loans
$
Operating/Short Term Notes
$
Est. Accrued Tax Liability (Income & SE) $
Accrued Interest
$
Principal Due Within 12 Months
Intermediate Notes
$
Long Term Notes
$
Total Current Liabilities
Non-Current Liabilities
Total Non-Current Liabilities
Total Farm Liabilities
Net Worth (Equity)
$
1,029
-
$
$
$
$
$
$
$
$
$
1,029
-
$
1,206
-
$
$
$
$
$
$
$
$
$
1,206
-
$
1,284
-
1,829
-
$
$
$
$
$
$
$
$
$
1,284
-
$
$
$
$
$
$
$
$
$
1,829
-
$
$
(50)
-50
-
$0
$0
$0
$0
$0
$1,029
$1,206
$1,284
$1,829
-$50
$1,103,018
$1,187,313
$1,156,434
$1,022,013
$1,031,756
Taken from the 2005 National FFA Farm Business Management CDE
Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 8
Balance Sheet Assignment
On the form below, complete a market value balance sheet by filling in each item listed as either a current or noncurrent asset, or a current or non-current liability.
December 31, 2005
Crop Inventory
Machinery and Equipment
Accounts Receivable
Operating Loan
Breeding Livestock Loan
Checking Account
Breeding Livestock – Dairy
Real Estate Debt
Buildings and Improvements
Current Portion of Debt
Land – 2 quarter sections
Market Steers
Account Credit at COOP
$40,149
$121,093
$5,100
$61,000
$37,223
$2,620
$170,800
$127,176
$86,416
$17,921
$78,000
$27,170
$9,300
Balance Sheet as of Dec. 31, 2005
Current Assets:
Current Liabilities:
Total Current Assets:___________
Total Current Liabilities: __________
Non Current Assets:
Non-Current Liabilities:
Total Non Current Assets: ___________
Total Non Current Liabilities: ___________
Total Assets: __________
Total Liabilities: ___________
Net Worth: __________
Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 9
Calculate the following:
(show your work)
1. Working Capital
2. Current Ratio
3. Debt to Asset Ratio
4. Equity to Asset Ratio
5. Debt to Equity Ratio
6. Net Capital Ratio
Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 10
KEY for Balance Sheet Assignment
Total Current Assets:
$84,339
Total Current Liabilities: $78,921
Total Non Current Assets: $456,309
Total Non Current Liabilities: $164,399
Total Assets: $540,648
Total Liabilities: $243,320
Net Worth: $297,328
Calculate the following:
(show your work)
1. Working Capital = $5,418
2. Current Ratio = 1.07 to 1
3. Debt to Asset Ratio = .45 to 1
4. Equity to Asset Ratio = .82 to 1
5. Debt to Equity Ratio = .55 to 1
6. Net Capital Ratio = 2.78 to 1
Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 11