YOUR BALANCE SHEET
By Roger Betz, Sherrill Nott,
Gerald Schwab
Day 1
break to 12 p.m.
In the United States
Four Basic Financial Documents:
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Net Worth Statement (Balance Sheet)
Income Statement
Cash Flow Statement
and a newer one -- Statement of Owner
Equity
Balance Sheet defined:
A List of Assets Owned and Debts Owed
-- At a Given Time,
-- With Dollar Values Attached.
If the Question Is:
“Are my assets worth more than my liabilities?”
The Problem is SOLVENCY!
If Net Worth is Positive, the Business is Solvent
Definition: $ Assets
- $ Liabilities (Debts)
= $ Net Worth or Equity
What is the Balance Sheet or
Net Worth Statement?
• Picture in time -- a specific point, as in
“Midnight, 12/31/XX.”
• Shows financial position -- ability to
handle risk
• Net result of past
• Very important component to track and
monitor financial progress
• Basic building block for financial
analysis
The Balance Sheet
• Name -- What does this represent?
 Partnership, individual, combined
 Needs to be consistent over time
• Date -- This is as of what date?
• Listing of all assets and all liabilities
• Balances at the bottom of form
 Assets = Liabilities plus Equity
Balance Sheet Preparation
Some Issues
• IDENTIFY clearly the person(s) or the business entity
being described
• SEPARATE the business assets and liabilities from
the personal
• Be CONSISTENT as to WHEN the Balance Sheet is
prepared
 at a minimum, prepare a net worth statement when your
accounting year ends
• Valuation of Assets -- costs and/or market
 recommend two column balance sheet
The Balance Sheet is the Cornerstone
to Financial Management
Take out a Piece of Paper
Draw some lines and label like this:
Assets
Liabilities
Current
Current
Intermediate Intermediate
Long Term
Long Term
Parts of the Balance Sheet
Assets = What you own; have control of
• Current assets
 Normally converted to cash in 12 months, like
crops, market livestock, prepaid expenses, cash,
savings
• Intermediate Assets
 Useful life of one to 10 years -- machinery,
breeding livestock, equipment, stocks, some
buildings
• Long Term Assets
 Normal useful life of more than 10 years -- land,
buildings, stocks
 Selling would typically decrease volume or size of
business
Parts of the Balance Sheet
(Current)
Liabilities -- What you owe someone else (against what you own)
• Current Liabilities
 What you are scheduled to pay in the next
12 months
 Unpaid bills, accrued interest, property
taxes
 Operating loans
 Principal payments on term debts to be
made in the next 12 months
Parts of the Balance Sheet
(Intermediate)
Liabilities -- What you owe to someone else (against what you own)
• Intermediate Liabilities
 What is scheduled to be paid in one to 10
years (subtract out the current position)
 Typically, machinery loans, breeding
livestock, special use buildings
 Match up to the intermediate assets
Parts of the Balance Sheet
(Long Term)
Liabilities -- What you owe to someone else (against what you own)
• Long Term Liabilities
 What was scheduled originally as 11 or
more years
 Land debt, house payments
 Match up to the long term assets
Parts of a Balance Sheet
(Term)
Definition:
• Term Debts are:
 Intermediate liabilities
(Intermediate term)
 Long term liabilities
Term debts are not current loans
Balance Sheet Specials
• 1. Rented assets
Assets:
1) Belong on landlord’s balance sheet
2) Footnote on tenant’s
3) If payable, rent is short-term debt
4) Growing crops
Balance Sheet Specials
• 2. Growing Crops
1) Date sets the list
2) Winter Wheat
3) Value = Cost of variable inputs
3. Leased Items
(tractors, pickups, buildings)
Assets:
• A) On user’s balance sheet
= lease payments due
Liabilities
• B)
= lease payments due
Balance Sheet Specials
• 4. Government Commodity Loans
How To Build A Balance Sheet
• 1) Do a count:
– Crops: bushels, tons, etc.
– Animals: head
– Supplies
– Buildings
– Land: acres
• 2) $ Prices for each of the above.
– Recommend both cost and market value
for term assets
How To Build A Balance Sheet
• 3) Machinery list (depreciation schedule?)
Cost less depreciation = book value
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4) Assemble the above into the format
5) Add up the assets
6) Add up the debts
7) Assets minus debts = net worth or equity
“Z” Farms
Balance Sheet Trends
(example)
Dec. 31, 19X1 Dec. 31, 19X2
Net Worth $400,000
WHY?
$450,000
Change in Net Worth
due to:
• Retained Earnings
 from profits earned and retained in business
• Market Valuation Equity
 from change in market value of assets
Retained Earnings
(contributed capital)
Dollars earned by the business that are kept or
retained for reinvestment in the business
Calculated by:
 $ Total Assets @ Cost Value Basis
 $ Total Liabilities before Contingent Liabilities
Valuation Equity
Dollars of asset value that are created because
the market value of term assets is greater than
the book value
Calculated by:
+ $ Total assets @ Market Value basis
- $ Total Liabilities including Contingent
Liabilities
- $ Retained Earnings (contributed
Capital)
What a Balance Sheet is NOT
• Does NOT necessarily tell you if the
business is making money
• Does NOT tell you where net worth
came from
A Good Balance Sheet
1) One page summary
2) Name and date
3) Shows type of farm
4) Cost and market columns
A Good Balance Sheet
5) Indicates physical quantities of major items
6) Sequence of items
Sale time: quick
long
7) Assets less debts equals net worth
(Own - Owe = Equity)
The Balance Sheet:
Building Block for
Financial Analysis
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Financial Position
Trend Analysis
Feeds Into the Income Statement
Communication to Self
Communicating with those outside the
business
• Needs Good Detail