Keeping your financial records in order
Objectives
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 Understand and utilize a balance including:
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Understanding the purpose of a balance sheet
Be familiar with balance sheet terminology and structure
Be familiar with cost and market valuing of assets
Be able to use the balance sheet for strategic management purposes
Bookkeeping Basics

The Cliffs Notes to understanding financial management.
Accounting Terms

 Account Payable – Incurred expense that has not yet been paid
 Account Receivable – Revenue for a product that has been sold or
service that has been provided, but payment has not yet been received
 Accrued Expense – Expense that accumulates, but has not yet been paid
 Asset – Item of financial value or produces something of financial value
 Credit – Accounting entry that records decrease in asset/increase in
liability, owner’s equity, or an income account
 Debit – Accounting entry that records increase in asset/decrease in
liability or owner’s equity
Accounting Terms Cont’d

 Expense – Cost incurred in production of revenue
 Inventory - Physical quantity and value of stored products
 Liability – Debt or financial obligation
 Net Farm Income (Profit) – Revenue minus Expenses
 Owner’s Equity – Assets minus Liabilities
 Prepaid Expense – Payment for input prior to the accounting period it
will be used
 Revenue – Value of products produced and sold during an accounting
period
Bookkeeping Basics
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Bookkeeping is the compiling of financial records for mainly non-tax purposes.
 Financial Reports:
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Balance Sheet
Income Statement
Transaction Journal (check register)
General Ledger
Depreciation Schedule
Inventory Report
Enterprise Report
Employee Records
Income Tax Reports
Statement of Cash Flow
Statement of Owner Equity
Family Living Expense Report
 Spreadsheet Programs:
 Microsoft Excel
 Bookkeeping Programs:
 Quickbooks
 Famous Software
 Financial Report Programs:
 FINPACK
 University of Idaho Enterprise
Budget Software
Recording Transactions

Increase Debit Side
Decrease Credit Side
Debits
Credits
Assets
Liabilities
Expenses
Revenue and Retained Earnings
Dividends
Capital Stock
Decrease Debit Side
Increase Credit Side
You invest $10,000 from your personal savings account into your farm
business.
Account
Checking
Debit
Credit
$10,000
Owner’s Equity
$10,000
You purchase a piece of equipment using $8,000 from the farm’s
checking account and a loan from the bank for $12,000.
Account
Debit
Credit
Checking
$8,000
Note Payable
$12,000
Equipment
$20,0000
$10,000 - $8,000 = $2,000 left in checking account.
You deposit $20,000 from crop sales into farm checking.
Account
Checking
Debit
Credit
$20,000
Crop Sales
$20,000
You pay your hired labor $4,000 for the month.
Account
Debit
Checking
Labor Expense
Credit
$4,000
$4,000
$2,000 + $20,000 - $4,000 = $18,000 left in checking account.
What do you own and what do you owe?
Balance Sheet

 Use balance sheet to evaluate the value of what you own compared to
what you owe.
 Tells you the net worth of the business.
 Tells you the financial position of the business at a point in time.
 Solvency measures
 Liquidity measures
Balance Sheet Fundamentals

 Assets = Liabilities + Owner’s Equity
 Can be rewritten as:
 Assets – Liabilities = Owner’s Equity
 Definitions:
 Assets – Can be sold to generate cash or produces good that can be sold
 Liabilities – Obligation or debt owed to someone else
 Owner’s Equity- Represents what is left for the owners
Fundamentals Cont’d

 Assets
 Current Assets: Assets that can be sold quickly (liquid) or will be used up
in less than 1 year (i.e. checking account, inventory)
 Non-current Assets: Assets that are illiquid and have a life span greater
than 1 year (i.e. equipment, buildings, land)
 Liabilities
 Current Liabilities: Liabilities due within 1 year (i.e. operating loans)
 Non-current Liabilities: Liabilities due in more than 1 year (i.e. land loans)
 Assets increase Owner’s Equity, Liabilities decrease Owner’s Equity
Balance Sheet for
Grant County Farms Co.
December 31, 2013
ASSETS
Current Assets
LIABILITIES
Current Liabilities
Total Current Assets
Total Current Liabilities
Noncurrent Assets
Noncurrent Liabilities
Total Noncurrent Assets
Total Noncurrent Liabilities
TOTAL ASSETS
TOTAL LIABILITIES
OWNER EQUITY
Total Equity
Total Liabilities and OE
 Combine valued at $250,000.
 400 acres of winter wheat planted at a cost $45.00 per acre.
 Line of credit at the local feed store of $16,425.
 Checking account balance of $6,436.
 Real estate loan of $535,275, plus an accrued payment of $69,700.
 Breeding livestock worth $197,000.
 Corrals and buildings appraised at $103,000.
 Owners contributed $225,000 in capital to start the farm.
 Land worth $1,450,000.
Balance Sheet for
Grant County Farms Co.
December 31, 2013
ASSETS
Current Assets
Checking Account
Investment in Growing Crops
LIABILITIES
Current Liabilities
$6,436 Accounts Payable
$18,000 Accrued Payment (Interest & Principle)
Total Current Assets
$24,436.00 Total Current Liabilities
Noncurrent Assets
Equipment (Combine)
Breeding Livestock
Corrals & Buildings
Land
Noncurrent Liabilities
$250,000 Real Estate Loan
$197,000
$103,000 Total Noncurrent Liabilities
$1,450,000 TOTAL LIABILITIES
Total Noncurrent Assets
TOTAL ASSETS
$2,000,000.00 OWNER EQUITY
$2,024,436.00 Contributed Capital
Retained Earnings
Total Equity
Total Liabilities and OE
$16,425
$69,700
$86,125.00
$535,275
$535,275.00
$621,400.00
$225,000
$1,178,036
$1,403,036.00
$2,024,436.00
Market v. Cost

 Cost-Basis Balance Sheet – Uses the cost or cost less depreciation to
value assets (what is its book value)
 Market-Basis Balance Sheet – Uses the current market value less selling
costs (what could you get if you sold it today)
 Pros and cons of each:
 Cost-Basis: promotes conservatism, conforms to GAAP
 Market-Basis: more accurate for determining collateral
Balance Sheet for
Grant County Farms Co.
XX/XX/20XX
ASSETS
Current Assets
Checking Account
LIABILITIES
Cost Basis
Market Basis Current Liabilities
$6,436
$6,436 Accounts Payable
Investment in Growing
Crops
$40,000
Accrued Payment
$40,000 (Interest & Principle)
Crop Inventory
$60,000
$60,000 Total Current Liabilities
Total Current Assets
Noncurrent Assets
$106,436
Equipment (Combine)
Breeding Livestock
Corrals & Buildings
Land
$250,000
$197,000
$103,000
$1,450,000
Total Noncurrent Assets
TOTAL ASSETS
$2,000,000
$2,106,436
$106,436 Noncurrent Liabilities
Real Estate Loan
Total Noncurrent
$255,000 Liabilities
$200,000 TOTAL LIABILITIES
$150,000 OWNER EQUITY
$2,900,000 Contributed Capital
$3,505,000 Retained Earnings
$3,611,436 Market Valuation
Total Equity
Total Liabilities and OE
Cost Basis
$16,425
Market Basis
$16,425
$69,700
$69,700
$86,125
$86,125
$535,275
$535,275
$535,275
$621,400
$535,275
$621,400
$255,000
$255,000
$1,230,036
$1,485,036
$1,230,036
$1,505,000
$2,990,036
$2,106,436
$3,611,436
Balance Sheet Analysis
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Financial Condition of your Farm
Balance Sheet Analysis
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Liquidity
 Focuses on Current
Assets/Current Liabilities
 Do you have enough cash to pay
upcoming debts for the next 12
months without disrupting
business operations?
 Will you have anything left for
emergencies?
Solvency
 Focuses on Total Assets and
Total Liabilities
 If you were to shutdown today,
could you repay all your debt?
 How much more debt can your
farm handle?
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
$𝟏𝟎𝟔,𝟒𝟑𝟔
Current
CurrentRatio
Ratio==𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 𝟏. 𝟐𝟒
$𝟖𝟔,𝟏𝟐𝟓
Balance Sheet for
Grant County Farms Co.
XX/XX/20XX
ASSETS
Current Assets
Checking Account
Investment in Growing
Crops
Crop Inventory
Total Current Assets
Noncurrent Assets
Equipment (Combine)
Breeding Livestock
Corrals & Buildings
Land
Total Noncurrent
Assets
TOTAL ASSETS
LIABILITIES
Cost Basis Current Liabilities
$6,436 Accounts Payable
Accrued Payment (Interest
$40,000 & Principle)
$60,000 Total Current Liabilities
$106,436 Noncurrent Liabilities
Real Estate Loan
Total Noncurrent
$250,000 Liabilities
$197,000 TOTAL LIABILITIES
$103,000 OWNER EQUITY
$1,450,000
Contributed Capital
$2,000,000
$2,106,436
Retained Earnings
Market Valuation
Total Equity
Total Liabilities and OE
Cost Basis
$16,425
$69,700
$86,125
$535,275
$535,275
$621,400
$255,000
$1,230,036
$1,485,036
$2,106,436
Red: Ratio less than 1
Yellow: Ratio between 1 and 1.5
Green: Ratio greater than 1.5
Goal: Ratio greater than 1.5
Working
Capital
$106,436
–
Working Capital
==
Current
Assets
$86,125
= Liabilities
$20,311
– Current
No rule of thumb as to how much
you need. Larger operations may
need more than smaller operations.
Goal: Working Capital of ____
𝑇𝑜𝑡𝑎𝑙
𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
$𝟔𝟐𝟏,𝟒𝟎𝟎
Debt/AssetRatio
Ratio
Debt/Asset
= = $𝟐,𝟎𝟎𝟎,𝟎𝟎𝟎 = 𝟎. 𝟑𝟎
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Balance Sheet for
Grant County Farms Co.
XX/XX/20XX
ASSETS
Current Assets
Checking Account
Investment in Growing
Crops
Crop Inventory
Total Current Assets
Noncurrent Assets
Equipment (Combine)
Breeding Livestock
Corrals & Buildings
Land
Total Noncurrent
Assets
TOTAL ASSETS
LIABILITIES
Cost Basis Current Liabilities
$6,436 Accounts Payable
Accrued Payment (Interest
$40,000 & Principle)
$60,000 Total Current Liabilities
$106,436 Noncurrent Liabilities
Real Estate Loan
Total Noncurrent
$250,000 Liabilities
$197,000 TOTAL LIABILITIES
$103,000 OWNER EQUITY
$1,450,000
Contributed Capital
$2,000,000
$2,106,436
Retained Earnings
Market Valuation
Total Equity
Total Liabilities and OE
Cost Basis
$16,425
$69,700
$86,125
$535,275
$535,275
$621,400
$255,000
$1,230,036
$1,485,036
$2,106,436
Red: Ratio more than 0.55
Yellow: Ratio between 0.3 - 0.55
Green: Ratio less than 0.3
Goal: Ratio less than 0.3
𝑇𝑜𝑡𝑎𝑙
𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
$𝟔𝟐𝟏,𝟒𝟎𝟎
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
Debt/Equity
Ratio
Debt/Equity Ratio
= = $𝟏,𝟒𝟖𝟓,𝟎𝟑𝟔 = 𝟎. 𝟒𝟐
Red: Ratio greater than 1.22
Yellow: Ratio around .42 – 1.22
Green: Ratio less than .42
Goal: Ratio close to 0
𝑇𝑜𝑡𝑎𝑙
𝐴𝑠𝑠𝑒𝑡𝑠
$𝟐,𝟎𝟎𝟎,𝟎𝟎𝟎
Net
CapitalRatio=
Ratio =
= 𝟑. 𝟑𝟗
Net Capital
$𝟔𝟐𝟏,𝟒𝟎𝟎
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Balance Sheet for
Grant County Farms Co.
XX/XX/20XX
ASSETS
Current Assets
Checking Account
Investment in Growing
Crops
Crop Inventory
Total Current Assets
Noncurrent Assets
Equipment (Combine)
Breeding Livestock
Corrals & Buildings
Land
Total Noncurrent
Assets
TOTAL ASSETS
LIABILITIES
Cost Basis Current Liabilities
$6,436 Accounts Payable
Accrued Payment (Interest
$40,000 & Principle)
$60,000 Total Current Liabilities
$106,436 Noncurrent Liabilities
Real Estate Loan
Total Noncurrent
$250,000 Liabilities
$197,000 TOTAL LIABILITIES
$103,000 OWNER EQUITY
$1,450,000
Contributed Capital
$2,000,000
$2,106,436
Retained Earnings
Market Valuation
Total Equity
Total Liabilities and OE
Cost Basis
$16,425
$69,700
$86,125
$535,275
$535,275
$621,400
$255,000
$1,230,036
$1,485,036
$2,106,436
Red: Ratio close to 1
Yellow: Ratio close to 2
Green: Ratio greater than 2
Goal: Ratio greater than 2
$𝟖𝟔,𝟏𝟐𝟓
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Debt
StructureRatio
Ratio
Debt Structure
= = $𝟔𝟐𝟏,𝟒𝟎𝟎 =. 𝟏𝟒
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Ratio close to 1 means a large proportion of
debt is due soon. Ratio close to 0 means a
large proportion of debt is due in more
than 1 year.
Goal: Debt Structure Ratio of ____
Case Studies

Grant County Farms, LLC.

Objectives
 Evaluate the company’s current financial health based on the balance sheet.
 Based on your evaluation, what suggestions would you give Grant County Farms, LLC to better
manage their liquidity and solvency?
 Based on your evaluation of Grant County Farms, LLC’s liquidity and solvency, how do you feel
about a growth strategy? What other information do you need to know?
Operation and Background:
You are the owner of Grant County Farms, LLC. It is the end of your fiscal year, and you want to measure
the health of your business through profitability analyses. Grant County Farms owns 700 acres of nonirrigated cropland on which it runs a winter wheat/fallow rotation. You also run 300 cow/calf pairs on
another 700 acres.
You have an excellent reputation as a farmer, and you come from a well-establish family in the area. You
are the second generation to own this farm.
Homework

 Gather the information for your balance sheet.
 Construct or update your balance sheet.
 Calculate your financial ratios for liquidity and solvency.
 Discuss the financial condition of your business with your management
team.
One Minute Takeaway

 Take a minute to write down one or two ideas or takeaways from this
lesson.
Sieverkropp Consulting LLC.

Contact: Elizabeth Sieverkropp
esieverkropp@gmail.com
(509) 398-6858
Website:
www.sieverkroppconsulting.com
Training Program Homepage:
www.sieverkroppconsulting.com/fsa-borrower-trainingprogram-homepage