The document discusses balance sheet analysis for assessing the financial position of a business. It defines a balance sheet as showing the assets owned, liabilities owed, and owner's equity in a business. Assets are classified as current, intermediate, or fixed based on how quickly they can be converted to cash. Similarly, liabilities are classified as current, intermediate, or long-term based on the length of repayment period. Key financial ratios like liquidity, debt, and solvency ratios can be calculated from the balance sheet to analyze the business's liquidity, leverage, and overall financial health.
2. Balance sheet or Net-worth statement:
• A balance sheet statement shows what a business owns (assets) what it
owes (liabilities) and what investment the owners have in the business
(Owner’s claim).
• It reveals financial solvency of a business.
• Assets: Possessions that are owned and are capable of giving returns.
• Liabilities: The items that are owed to creditors.
E.g.: Dues/loans/borrowings of business/credit outstanding etc.
• Owner’s claim = Assets – Liabilities
a. k. a Owner’s equity or Networth
2
3. Three key financial statements:
•Balance sheet or Networth statement Farm Solvency
•Cashflow statement Farm Liquidity
•Income or Profit-loss Statement Farm Profitability
3
4. Classification of assets
• On the criterion of liquidity: The length of time required for any item to get converted
into cash.
• Current assets: Assets that can be converted to cash within one accounting year.
• E.g.: cash on hand, bills receivable, account deposits in banks, cash register money,
crop and livestock produce, shares and bonds, seed, fertilizers and manures.
• Intermediate assets: Those assets with life period of 3-10 years and can be
converted in to cash only after some delay and effort (i.e. not readily convertible)
• E.g.: Livestock, drip irrigation equipment, tractor, etc.
• Fixed assets: Fixed assets are those items that the business owns that have a
relatively long life and take long time or impossible to convert into cash.
• E.g.: land, buildings, cattle sheds, pump sheds, storage structures.
4
5. Classification of liabilities:
• On the basis of length of repayment period.
• Current liabilities : Repayment within one year.
• E.g.: Items purchased on credit, short term loans, wages payable,
crop loan, interest payments of long-term loans.
• Intermediate liabilities : Repayment period of 1 to 3 years.
• E.g.: Loan for drip irrigation equipment, loan taken for cattle,
poultry, etc.
• Long term liabilities : Repayment period exceeding 3 years
• E.g.: Mortgages, pump set loans, tractor loans, orchard
development loans, land development loans
5
6. Current Assets Current Liabilities (≥ 1 year loan period)
Cash in hand Operating expenses
Cash in bank / post office Taxes paid
Prepaid expenses Rent paid
Standing crop Interest of intermediate and long term liabilities
Time deposits (i.e. savings in banks) Crop loan
Shareholdings Hand loan
Inventory (like stock of grain, feed, and other supplies)
Gold ornaments
Intermediate Assets Intermediate Liabilities (1 to 3 years loan period)
Livestock Sale contracts
Machineries & equipment / Drip irrigation equipment Outstanding intermediate loan taken
Securities not readily marketable Livestock loan / Poultry loan taken
Long Term Assets or Fixed Assets Long Term Liabilities (of 3 to 25 years loan duration)
Land Tractor loan (outstanding amount)
Farm buildings Orchard loan (outstanding amount)
Cattle shed, storage structures, etc. Land development loan (outstanding amount)
6
7. Balance Sheet Statement:
I. Current Assets I. Current Liabilities
II. Intermediate Assets II. Intermediate Liabilities
III. Long Term Assets or Fixed Assets III. Long Term Liabilities
Total Assets ( I + II + III) = Total Liabilities ( I + II + III) =
Networth (Total Assets – Total Liabilities) =
7