INCOME STATEMENT
KEY CONCEPTS
NET INCOME IS THE BEST MEASURE OF BUSINESS
PERFORMANCE
ACCRUAL NET INCOME IS A MORE ACCURATE
MEASURE OF PROFITABILITY THAN CASH NET
INCOME
CASH RECEIPTS AND EXPENDITURES DO NOT
ALWAYS REPRESENT INCOME AND EXPENSES
EXPENSES SHOULD BE MATCHED TO THE
REVENUE THEY GENERATE IN THE SAME
ACCOUNTING PERIOD

THE SINGLE MOST IMPORTANT
MEASURE OF PERFORMANCE FOR A
FARM BUSINESS
REPRESENTS A RETURN TO
UNPAID LABOR AND MANAGEMENT
AND OWNER EQUITY CAPITAL IN
THE BUSINESS

NET INCOME IS DEFINED TO
INCLUDE BOTH FARM AND
NONFARM INCOME ON AN AFTER-
TAX BASIS.
NET INCOME MAYBE THOUGHT OF
AS REVENUE MINUS EXPENSES.

CASH VS. ACCRUAL
THE IRS ALLOWS FARMERS AND RANCHERS TO
FILL THEIR INCOME TAX RETURNS ON A CASH
BASIS
THIS ALLOWS CONSIDERABLE FLEXIBILITY IN
MANAGING TAXES PAID IN A GIVEN YEAR
CASH BASIS ACCOUNTING WILL OFTEN DIFFER
FROM ACCRUAL RESULTS
MANAGEMENT DECISIONS CAN BEST BE MADE
FROM AN ACCRUAL BASED ACCOUNTING
SYSTEM

ACCRUAL VS. CASH ACCOUNTING
THE ACCRUAL METHOD OF ACCOUNTING
RECOGNIZES REVENUES AND EXPENSES AS
THEY OCCUR
THE CASH METHOD OF ACCOUNTING
RECOGNIZES REVENUES AND EXPENSES WHEN
CASH ACTUALLY CHANGES HANDS

ACCRUAL CONCEPT
INCOME IS MEASURED BY OPERATING
TRANSACTIONS THAT AFFECT OWNER EQUITY
ANY INCREASE IN OWNERS EQUITY RESULTING
FROM OPERATIONS IS TERMED REVENUE
ANY DECREASE IN OWNERS EQUITY IS CALLED
AN EXPENSE
NET INCOME IS THE DIFFERENCE BETWEEN THE
TWO
AN EXPENSE CAN BE EITHER A CASH OR NON-
CASH ITEM

WITH CASH-BASIS, REVENUE AND
EXPENSES ARE DETERMINED BY THE
TIMING OF PAYMENT.
WITH ACCRUAL-BASIS, IT MAKES NO
DIFFERENCE WHEN THE SALE IS
MADE.
INVENTORIES ARE VALUED AT
YEAR-END, AND COMPARED TO THE
INVENTORIES AT THE BEGINNING OF
THE YEAR.

IF INVENTORIES HAVE INCREASED,
THE AMOUNT OF INCREASE IS
CONSIDERED A POSITIVE REVENUE.
IF INVENTORIES HAVE DECREASED,
THE AMOUNT OF DECREASE IS
CONSIDERED A NEGATIVE REVENUE.

REVENUE IS GENERATED BY BOTH
CASH SALES AND CHANGES IN
INVENTORY.
FEEDER LIVESTOCK AND FEED
PURCHASES DURING THE YEAR ARE
SUBTRACTED FROM GROSS
REVENUE TO GET "VALUE OF FARM
PRODUCTION."

VALUE OF FARM PRODUCTION
A TERM UNIQUE TO FARM EARNINGS
STATEMENTS
COMPUTED AS THE GROSS
REVENUES OF AN OPERATION LESS
THE PURCHASES OF ASSETS THAT
ARE INCLUDED IN THE
CALCULATION OF GROSS REVENUE

ADVANTAGES:
GROSS REVENUE IS NOT DISTORTED BY
PURCHASES OF INVENTORY LATE IN
THE OPERATING CYCLE
MORE ACCURATE COMPARISONS
BETWEEN CERTAIN TYPES OF
OPERATIONS.

CASH OPERATING EXPENSES
ACCRUAL EXPENSE ADJUSTMENTS
DEPRECIATION
INTEREST
CAPITAL ASSET ACCOUNT ADJUSTMENTS

NET INCOME FROM FARM OPERATIONS IS
TOTAL GROSS FARM REVENUE LESS
TOTAL FARM EXPENSES.
THE GAIN OR LOSS FROM THE SALE OF
CAPITAL ASSETS IS ACCOUNTED FOR TO
ARRIVE AT THE NET FARM INCOME.

NON-FARM REVENUE IS ADDED TO
NET FARM INCOME TO ARRIVE AT
INCOME BEFORE-TAXES.
INCOME TAXES ARE DEDUCTED TO
ARRIVE AT NET INCOME AFTER-
TAXES.

ACCRUAL ADJUSTMENTS TO REVENUE
INVENTORY CHANGE (crops, feed and livestock)
ACCOUNTS RECEIVABLE
ACCRUED INTEREST EARNED
FUTURES/OPTION ACCOUNT EQUITY

ACCRUAL ADJUSTMENTS TO EXPENSES
UNUSED ASSETS
• PREPAID EXPENSES
• SUPPLIES
• INVESTMENTS IN GROWING CROPS
UNPAID ITEMS
• ACCOUNTS PAYABLE
• ACCRUED PROPERTY TAXES AND WITHHOLDING
ACCRUED INTEREST
ACCRUED TAXS
• INCOME AND SOCIAL SECURITY
• DEFERRED TAXES ON CURRENT ASSETS

NET FARM INCOME
LESS
FAMILY LIVING EXPENSES, INCOME AND
SOCIAL SECURITY TAXES AND OTHER
WITHDRAWALS
EQUALS
CHANGE IN COST BASIS EQUITY

ADJUSTMENTS FOR CHANGES IN MARKET
VALUATIONS
EQUALS
CHANGE IN MARKET BASIS EQUITY