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 Statements1. Balance Sheet

A statement that shows the wealth of the business at a given date.

2. Cash Flow StatementA summary of the cash inflows and outflows for a business over a given time period.

3. Income StatementA 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 payableNotes payableCurrent portion of term debtAccrued interestTaxes payableDeferred taxes

Non-current Liabilities

Notes payable, non-real estateNotes payable, real estateDeferred 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 (Current Assets + Non-current Assets)Worth − (Current Liabilities + Non-current Liabilities)

=

Balance Sheet Exercise

Cash Flow Statement

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

A cash flow statement is a summary of cash inflows and outflows divided into equal time periods usually monthly.

Uses of a Cash Flow StatementEstablishes 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

RevenuesLivestock and crop salesChanges in inventoriesGovernment payments & other farm incomeGain/loss from sale of culled breeding stockChange in value due to change in raised breeding

livestock numbersAccrual adjustments in asset accounts

Changes in Inventories

Market livestockRaised 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 receivablePrepaid expensesCash investment in growing cropsSuppliesContracts and notes receivable Investment in cooperatives

The Accrual Adjusted Income Statement

ExpensesPurchased market livestockCash operating expensesChanges in feed inventoriesAccrual adjustments for liability accountsDepreciationCash interest paidChange in accrued interest

Accrual Adjustments

Changes in:Purchased feed inventoriesAccounts payableAd valorem taxesEmployee payroll withholdingsAccrued expensesAccrued interest

DepreciationThere 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

2 1

Measuring Liquidity

Current ratio =

Total current farm assets

Total current farm liabilities

Low Stress High Stress

Measuring Solvency

Debt/asset ratio =

Total farm liabilities

Total farm assets

40% 70%Low Stress 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% 1%Low Stress 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% 5%Low Stress High Stress

Measuring Efficiency and Repayment CapacityInterest Expense Ratio =

Total farm interest expense

Gross farm revenues

10% 20%Low Stress High Stress

Measuring Efficiency

Asset Turnover Ratio =

Gross farm revenues

Average total farm assets

40% 20%Low Stress High Stress

Stress Test Exercise