3. Introduction
Managing money is an important part of operating a farm.
So the financial tools are more valuable as it explains the
position of business and give information about the solvency of
the firm
The most common financial tool includes:
Balance sheet
Cash flow sheet
Profit and loss statement
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4. Objectives of the study
To be able to prepare the Balance sheet.
To be able to analyzed the Balance sheet
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5. Literature Review
The balance sheet tells investors how much money a company or
institution has (assets), how much it owes (liabilities), and what is
left when you net the two together (net worth, book value, or
shareholder equity). (Saunders, A., 1997)
Kulikova, L (2015) study the opportunity of using the balance sheet
determinants as information model for the financial position of an
organization and suggest to maximize the balance profit of an
organization it is necessary to gain fixed assets, increase inventory
and short-term receivables.
The balance sheet accumulates the effects of previous accounting
choices, so the level of net assets partly reflects the extent of
previous earnings management. (Barton, J., & Simko, P. J. ,2002)
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6. Balance sheet
It is a statement of what a business owns (assets) and owes
(liabilities) at a specific point in time.
It lists the assets that the business owns, the liabilities owed by
the business, and the value of the owners equity (or net worth
of the business).
Statement of financial position
At any given time, assets must equal liabilities plus equity
Assets = Liabilities + Owners’ Equity
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7. Learning from the balance sheet,
How much debt the business has relative to its equity
How quickly customers are paying their bills.
Whether short-term cash is declining or increasing.
The percentage of assets that are tangible (factories, plants,
machinery) and how much comes from accounting transactions.
Whether products are being returned at higher-than-average
historical rates.
How many days it takes, on average, to sell the inventory the
business keeps on hand.
Whether the research and development budget is producing good
results.
Whether the interest coverage ratio on the bonds is declining.
The average interest rate a company is paying on its debt.
Where profits are being spent or reinvested
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8. Importance of Balance sheet
Help to learn more about your business and help to improve your
management. if the ratio of your business's assets to liabilities is
less than 1 to 1, company is in danger of going bankrupt.
Balance sheet is to help forecast the future
Accurate balance sheets are necessary before you can calculate a
true profit and loss statement for farm business.
A properly-prepared balance sheet can make it easier to borrow
more money. It can help to convince the lender that you not only
understand your farm business but that you have made financial
progress.
Balance sheet let banks to know whether business qualifies for
additional loans or credit.
Today many others want information about your business. If you
want to lease equipment or get an interest-free machinery loan,
financial information is required.
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9. Assets
Anything tangible or intangible that can be owned or controlled
to produce value and that is held by a company to produce
positive economic value is an asset.
Represent value of ownership that can be converted into cash .
Assets can classified in two categories:
current and non-current/fixed
Current Assets
Cash or assets that can and will be turned into cash entity’s in
normal operating cycle or one year.eg
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10. cont
Cash - Any cash on hand in checking or savings accounts.
Marketable securities - Stock or other securities that are
publicly traded and can be easily turned to cash.
Accounts receivable - services provided for which payment
has not been received.
Marketable inventories – Stock input/output
Cash investment in growing crops - invested in growing
crops after planting but before harvest.
Supplies - Any items such as fertilizer, chemicals or feed that
are on hand and scheduled to be used in the next year.
Prepaid expenses - Items that have been paid for but not yet
consumed
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11. Non-current assets
Assets that support production activities and are considered to
have a life greater than one year.
Eg. machinery and equipment, Breeding livestock, furnishings
and equipment, vehicles, land, buildings and improvements.
A personal residence may also be included, if the balance sheet
is prepared for a consolidated entity.
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12. Liabilities
All claims against the business by creditors, suppliers or any
other person or institution to which a debt is owed.
Can classified into current and non-current categories.
Non-current liabilities/long term
All obligations that are due and payable beyond one year.
Eg.long term loans used to finance machinery, equipment,
breeding livestock, or real estate, supplier credit
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13. Current liabilities
All debts and obligations that are due within the next 12
months.
Accounts Payable - business has received product but not
yet made payment for.
Note payable within 1 year
Short term loan
Long term loan (current portion)
Accrued Liabilities - invoices have not yet been received.
Income tax
Product warranty expenses
Other accrued expenses - Items such as rents and leases
that have been utilized but not yet paid would be accrued
expenses.
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14. Owner equity
Net worth, is the difference between total assets and total
liabilities.
Reflects the owner’s stake in the business and includes
investment capital and retained profits. generated over time.
Retained earnings are profits that have been reinvested back
into the business rather than withdrawn by the owners
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15. Balance sheet analysis
Working capital
Current Assets - Current Liabilities
Is the liquid buffer available in meeting financial demands
and contingencies of the near future.
If a company's current assets do not exceed its current
liabilities, then it may have trouble paying back creditors
or go bankrupt
Current Ratio:
Current Assets ÷ Current Liabilities
Values > 1 are preferred (safety margin).
Larger ratios imply more liquidity.
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16. cont
Quick / Acid Test :
Current Assets - inventory (called "Quick Assets) ÷ Current Liabilities
Value less than 1 do not have enough liquid assets to pay their current liabilities and
should be treated with caution.
If the acid-test ratio is much lower than the current ratio, it means that current assets
are highly dependent on inventory.
Very high ratio is not always an unalloyed good. It could indicate that cash has
accumulated and is idle, rather than being reinvested, returned to shareholders, or
otherwise put to productive use.
Debt to Equity Ratio:
Total Liabilities ÷ Shareholders' Equity
A high debt/equity ratio generally means that a company has been aggressive in
financing its growth with debt.
Aggressive leveraging practices are often associated with high levels of risk.
This may result in volatile earnings as a result of the additional interet expenses
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17. Balance sheet of small tea firm from Ilam
Assets Liabilities
Current assets Cost(Rs) Current Liabilities Cost
Cash and bank balance 100000 Account payable 5000
Account Receivables 25000 Note Payable within 1
year
40000
Inventories Accrued liabilities 25000
Input/output
Stock
50000 Short term loan 100000
Long term loan(current
portion)
100000
Prepaid expense 40000 Provision
Investment in growing
crop
100000 Income tax 30000
Other current assets - Product warranty
expenses
-
Total current assets 315000 Total current
liabilities
300000
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18. cont
Fixed assets Cost Long term Liabilities Cost
Land 1000000 Long term loan 1600000
Machine equipment 100000 Suppliers credit 10000
Building 1000000
Capital work in
progress
20000 Total 1700000
Total 2120000 Total Liabilities 2000000
Other assets Cost Owner equity
Patent - Share Capital 185000
Copy right - Retained earning 250000
Total 435000
Total 2435000 Total 2435000
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19. Analysis
Working capital = Current Assets - Current Liabilitie
315000 – 300000
15000
Business is in safe position.
Current ratio= Current Assets ÷ Current Liabilities
315000/300000
1.05
Business has safety margin.
Conclusion:
The business is in solvent condition as the net worth is higher than
the zero and in the safe position as the current assets had exceed
current liabilities.
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20. Conclusion
It shows the financial condition and stability of the business at
a particular point of time.
Net worth is shown as excess of assets over liabilities and
shows whether the business is expanding or shrinking.
Business is said to be solvent when the net worth or equity is
greater than zero.
Said insolvent or bankrupt when the total liabilities are not
covered by the total resources.
Difference between assets and liabilities shows the distance
from insolvency position,greater the difference the sounder will
be business.
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