Financial Statements
Annie’s Project
January 30, 2007
Coweta Oklahoma
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 Statements
1. Balance Sheet
A statement that shows the wealth of the business
at a given date.
2. Cash Flow Statement
A summary of the cash inflows and outflows for a
business over a given time period.
3. Income Statement
A 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 payable
 Notes payable
 Current portion of term debt
 Accrued interest
 Taxes payable
 Deferred taxes
Non-current Liabilities
 Notes payable, non-real estate
 Notes payable, real estate
 Deferred 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
Worth
=
(Current Assets + Non-current Assets)
− (Current Liabilities + Non-current Liabilities)
Balance Sheet Exercise
Cash Flow Statement
A cash flow statement is a summary of cash inflows and
outflows divided into equal time periods usually monthly.
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
Uses of a Cash Flow Statement
 Establishes 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
Cash Flow Exercise
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
 Revenues
Livestock and crop sales
Changes in inventories
Government payments & other farm income
Gain/loss from sale of culled breeding stock
Change in value due to change in raised breeding
livestock numbers
Accrual adjustments in asset accounts
Changes in Inventories
 Market livestock
 Raised crops/feed inventories
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 receivable
 Prepaid expenses
 Cash investment in growing crops
 Supplies
 Contracts and notes receivable
 Investment in cooperatives
The Accrual Adjusted Income
Statement
 Expenses
Purchased market livestock
Cash operating expenses
Changes in feed inventories
Accrual adjustments for liability accounts
Depreciation
Cash interest paid
Change in accrued interest
Accrual Adjustments
Changes in:
 Purchased feed inventories
 Accounts payable
 Ad valorem taxes
 Employee payroll withholdings
 Accrued expenses
 Accrued interest
Depreciation
There 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)
Look at an Income Statement
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
Measuring Liquidity
Current ratio =
Total current farm assets
Total current farm liabilities
2
Low Stress
1
High Stress
Measuring Solvency
Debt/asset ratio =
Total farm liabilities
Total farm assets
40%
Low Stress
70%
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%
Low Stress
1%
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%
Low Stress
5%
High Stress
Measuring Efficiency and
Repayment Capacity
Interest Expense Ratio =
Total farm interest expense
Gross farm revenues
10%
Low Stress
20%
High Stress
Measuring Efficiency
Asset Turnover Ratio =
Gross farm revenues
Average total farm assets
40%
Low Stress
20%
High Stress
Stress Test Exercise