Introduction to Agricultural Financial Statements


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Introduction to Agricultural Financial Statements

  1. 1. Quick & Dirty Introduction to Financial Statements Small Business Management & Entrepreneurship AAEC 3454
  2. 2. Main Financial Statements <ul><li>Balance Sheet </li></ul><ul><ul><li>List of Assets, Liabilities, & Net Worth on a given date </li></ul></ul><ul><li>Cash Flow Statement (Cash Budget) </li></ul><ul><ul><li>List of Cash Receipts & Disbursements over a given period </li></ul></ul><ul><li>Income Statement </li></ul><ul><ul><li>List of Revenues & Expenses over a given time period </li></ul></ul><ul><ul><li>We’ll use Schedule C (1040) as a proxy </li></ul></ul>
  3. 3. Balance Sheet <ul><li>List of a firm’s assets, liabilities, and net worth at a certain point in time </li></ul><ul><li>Assets = Total Liabilities + Net Worth </li></ul><ul><ul><li>Always holds true!! </li></ul></ul><ul><ul><li>Note: Net Worth = Owner’s Equity </li></ul></ul><ul><li>In Business, assets are listed at Book Value </li></ul><ul><ul><li>Purchase Price - Accumulated Depreciation </li></ul></ul>
  4. 4. Assets <ul><li>Assets - anything owned that has monetary value </li></ul><ul><ul><li>historical cost valuation (cost less accumulated depreciation) </li></ul></ul><ul><li>Current Assets </li></ul><ul><ul><li>life under one year </li></ul></ul><ul><ul><li>cash or easily turned into cash </li></ul></ul><ul><li>Non-Current Assets </li></ul><ul><ul><li>life longer than one year </li></ul></ul><ul><ul><li>not readily convertible into cash </li></ul></ul><ul><ul><li>assets that support production or delivery of service </li></ul></ul><ul><ul><li>permanent or fixed property </li></ul></ul>
  5. 5. Liabilities & Owner Equity <ul><li>Liabilities - all claims against the business or individual </li></ul><ul><li>Current Liabilities </li></ul><ul><ul><li>items due to be paid within one year </li></ul></ul><ul><li>Non-Current Liabilities </li></ul><ul><ul><li>items due to be paid beyond one year </li></ul></ul><ul><li>Owner Equity - net worth of business (Assets - Liabilities) </li></ul><ul><ul><li>contributed capital </li></ul></ul><ul><ul><li>retained earnings </li></ul></ul><ul><ul><li>common stock (corporation) </li></ul></ul><ul><ul><li>additional paid-in capital (corporation) </li></ul></ul>
  6. 6. Balance Sheet <ul><li>Very Important for obtaining credit </li></ul><ul><li>Helps evaluate Liquidity and Solvency </li></ul><ul><ul><li>Liquidity = ability to meet short-term obligations as they come due, without disrupting normal operations </li></ul></ul><ul><ul><ul><li>Involves Current Assets & Current Liabilities </li></ul></ul></ul><ul><ul><li>Solvency = ability to meet all obligations as they come due </li></ul></ul><ul><ul><ul><li>Involves Total Assets & Total Liabilities </li></ul></ul></ul><ul><li>Also called Financial Statement or Net Worth Statement </li></ul>
  7. 7. Balance Sheet Structure <ul><li>Assets </li></ul><ul><li>Current Assets - cash (checking/savings) - accounts receivable - inventory - prepaid expenses - marketable securities - supplies </li></ul><ul><li>Non-Current Assets - land - buildings - machinery - non-marketable sec. </li></ul><ul><li>(A) Total Assets </li></ul><ul><li>Liabilities & Equity </li></ul><ul><li>Current Liabilities - accounts payable - accrued expenses - current principal - accrued interest - operating loan balance </li></ul><ul><li>Non-Current Liab. - principal on term loans </li></ul><ul><li>(B) Total Liabilities </li></ul><ul><li>(C) Owner Equity (A - B) </li></ul><ul><li>Total Liab. & Owner Equity </li></ul><ul><li>(B + C) = A </li></ul>
  8. 8. Cash Flow Statement (Cash Budget) <ul><li>Listing of cash inflows and outflows over a specific time period </li></ul><ul><li>Used to determine liquidity (cash flow), repayment ability and operating loan needed </li></ul><ul><li>May include non-business income or family living expense for sole proprietorships or partnerships </li></ul><ul><li>Includes income taxes </li></ul><ul><li>Includes principal and interest payments (P&I) </li></ul><ul><li>Does NOT include Depreciation ( Non-cash expense ) </li></ul>
  9. 9. Cash Flow Structure <ul><li>(A) Cash Inflows </li></ul><ul><li>(B) Cash Outflows </li></ul><ul><li>(C) Net Cash Flow (A-B) </li></ul><ul><li>Short-Term Borrowing Needs </li></ul>
  10. 10. Income Statement <ul><li>Also called Profit & Loss Statement (P&L) </li></ul><ul><li>Can use Schedule C (F for Farms) as a proxy </li></ul><ul><li>List of all Revenues and Expenses incurred over a period of time </li></ul><ul><li>Used to: </li></ul><ul><ul><li>Measure the profitability of the firm over a specific time period </li></ul></ul><ul><ul><ul><li>Weekly, Monthly, Quarterly, Yearly, etc. </li></ul></ul></ul><ul><ul><li>Measure repayment ability </li></ul></ul><ul><ul><li>Determine income tax liability </li></ul></ul>
  11. 11. Income Statement <ul><li>Income Statement includes: </li></ul><ul><ul><li>Revenues from sales </li></ul></ul><ul><ul><ul><li>Cash/Accrual differences in what is reported! </li></ul></ul></ul><ul><ul><li>Other revenues </li></ul></ul><ul><ul><li>Changes in inventories (Accrual Method) </li></ul></ul><ul><ul><li>Expenses from operations </li></ul></ul><ul><ul><ul><li>Cash and non-cash (depreciation) </li></ul></ul></ul><ul><ul><ul><li>Cost of goods sold, operating expenses, interest expense, income taxes </li></ul></ul></ul><ul><li>Does not include Principal payments! </li></ul>
  12. 12. Income Statement Structure <ul><li>(A) Revenues </li></ul><ul><li>- cash revenues - value of changes in inventories & accounts receivable (accrual) </li></ul><ul><li>(B) Cost of Goods Sold </li></ul><ul><li>(C) Gross Profit (A-B) </li></ul><ul><li>(D) Expenses </li></ul><ul><li>- cash expenses - non-cash expenses (depreciation) - changes in accrual expenses & accounts payable (accrual) </li></ul><ul><li>(E) Earnings Before Interest & Taxes (EBIT) (C-D) </li></ul><ul><li>(F) Interest Expense </li></ul><ul><li>(G) Earnings Before Taxes (E-F) </li></ul><ul><li>(H) Income Taxes </li></ul><ul><li>(I) Net Income (G-H) </li></ul>
  13. 13. Income Statement vs Cash Flow Statement <ul><li>Income statement includes: </li></ul><ul><ul><li>Depreciation </li></ul></ul><ul><ul><li>Changes in inventories </li></ul></ul><ul><li>Cash Flow Statement includes: </li></ul><ul><ul><li>Principal payments </li></ul></ul><ul><ul><li>Income taxes </li></ul></ul><ul><ul><li>Family living expense (in certain cases) </li></ul></ul><ul><ul><li>Non-business income </li></ul></ul>
  14. 14. Relationship between Statements <ul><li>Start with Current Balance Sheet </li></ul><ul><li>Develop Cash Flow next </li></ul><ul><li>Then develop Income Statement (P&L) </li></ul><ul><li>Then develop projected Balance Sheet </li></ul>Current Balance Sheet Projected Cash Flow Projected Income Statement Projected Balance Sheet