Acquiring and organizing management information

1. Chapter 3
Acquiring and Organizing
Management Resources
 

2.  Purpose and Use of
 A Cash Versus Accrual
Example
Records
 Farm Financial
 Farm Business Activities Standards Council
 Basic Accounting Terms Recommendations
 Options in Choosing an
 Chart of Accounts
Accounting System
 Output from an
Accounting System
 Basics of Cash
Accounting
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3. 1. To appreciate the value of
establishing and selecting a good
accounting system
2. To outline the concepts of cash
and accrual accounting
3. To review some recommendations
of the Farm Financial Standards
Council
4. To introduce some financial
records
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4. 1. Measure profit and assess financial
condition
2. Provide data for business analysis
3. Assist in obtaining loans
4. Measure the profitability of individual
enterprises
5. Assist in the analysis of new investments
6. Prepare income tax returns
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5. • These are among the most important
reasons for keeping records.
• Profit is estimated by developing an
income statement, the topic of chapter 6.
• The financial condition is shown on the
balance sheet, the topic of chapter 5.
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6. • Use the information from the balance
sheet and income statement to
perform an in-depth analysis.
• Analysis of past decisions is useful
for making current and future
decisions.
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7. • Lenders require financial information
about the farm business to assist them
in their lending decisions.
• Following the farm financial difficulties
during the 1980s, many agricultural
lenders are requiring more and better
records.
• Good records increase the odds of
getting a loan.
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8. • Internal Revenue Service (IRS)
regulations require keeping records
for tax purposes.
• Tax records are often inadequate for
management purposes.
• Sound record-keeping can also help
reduce income tax obligations.
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9.  Production Activities
 Investment Activities
 Financing Activities
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11. These accounting transactions involve
activities related to the production of:
•crops and livestock
•revenue from product sales or
•other farm revenue is included
•as are production expenses.
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12. These activities relate to the purchase,
depreciation, and sale of long-lived assets,
such as land, equipment, or breeding livestock.
Records should include:
•purchase date and price,
•annual depreciation,
•book value,
•current market value,
•sale date and price, and
•gain or loss when sold.
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13. • These transactions relate to borrowing
money, and paying the interest and
principal on loans.
• Financing activities include money
borrowed to finance new investments
and money borrowed to finance
production activities.
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14.  Account payable  Inventory
 Account receivable  Liability
 Accrued expense  Net Farm Income
 Asset  Owner Equity
 Credit  Prepaid Expense
 Debt  Profit
 Expense  Revenue
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15. An expense that has been incurred but
not yet paid.
Typical accounts payable are for items
charged at farm supply stores
where the purchaser is given 30 to 90
days to pay the amount due.
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16. Revenue for a product that has been sold
or a service provided but for which no
payment has yet been received.
An example would be custom work for a
neighbor who has agreed to make payment
at a future time.
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17. An expense that accrues or accumulates
daily but which has not yet been paid.
Examples are interest on loans and
property taxes.
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18. An item of value, tangible or financial.
Examples would include machinery,
land, bank accounts, buildings, grain,
and livestock.
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19. • An accounting entry in the right-hand
side of a double-entry ledger.
• A credit entry records a decrease in the
value of an asset.
• It records an increase in liability, owner
equity, or an income account.
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20. • An accounting entry in the left-
hand side of a double-entry ledger.
• A debit entry records an increase
in an asset or expense account.
• It records a decrease in liability or
owner equity.
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21. A cost or expenditure incurred in the
production of revenue.
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22. The physical quantity and financial
value of products produced for sale that
have not yet been sold.
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23. A debt or other financial obligation that
must be paid at some point in the future.
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24. Revenue minus expenses. The same
as profit.
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25. • The difference between business assets
and business liabilities.
• It represents the net value of the
business to the owner(s) of the
business.
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26. A payment made for a product or service
in an accounting period before the one
in which it will be used to produce
revenue.
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27. Revenue minus expenses. The same as net
farm income.
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28. • The value of products and services
produced by a business during an
accounting period.
• Revenue may be either cash or noncash.
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29.  What accounting period should be used?
 Should it be cash or accrual?
 Should it be single or double entry?
 Should it be basic or complete?
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30. A period of time used to summarize revenue
and expenses and estimate profit. It can be
either a calendar year or a fiscal year.
It is generally recommended that a firm’s
accounting period follow the production
cycle of the major enterprises.
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31. • With single-entry, only one entry is made
for each transaction.
• A double-entry system records changes
in values of assets and liabilities as well
as revenue and expenses.
• In double-entry, there are equal and off-
setting entries for every transaction.
• Double-entry accounting requires more
effort, but it is also more accurate.
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32. • The most basic accounting system is one that is
very simple and uses cash accounting.
• A complete system would be computerized with
capabilities for both cash and accrual
accounting, and with
 the ability to track inventories, loans, and
depreciation, and to handle payroll
accounting and perform enterprise
analysis.
• Between these extremes are many possibilities.
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33.  How much accounting knowledge does the
user have?
 How large and complex is the farm?
 How much and what kind of information is
needed or desired for management
decision making?
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34.  Revenue: recorded when and only when
cash is received for sale of product or
service
 Expenses: recorded when they are paid,
even if that is not when the item is bought
or used to produce a product
 Advantages: simple and easy-to-use
 Disadvantages: recorded revenues and
expenses may not be accurate reflections
of activities during the accounting period
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35.  Revenue: recorded when the item is produced,
regardless of when sold
 Expenses: “matched” to revenue; recorded when
used to produce
 Advantage: accurate
 Disadvantage: requires more time and
knowledge than cash system
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36.  November 2003: Purchased, paid for and
applied fertilizer for the 2004 grain crop.
$8,000.
 May 2004: Purchased and paid for seed,
chemicals, fuel, etc. $25,000.
 October 2004: Purchased and charged to
account fuel for drying. $3,000.
 November 2004: One half of grain sold for
$50,000. The rest placed in storage and
valued at $50,000.
 January 2005: Paid bill for fuel used to dry
grain. $3,000.
 May 2005: Remaining 2004 grain sold.
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37. Cash Accounting Accrual Accounting
Cash grain sales 50,000 50,000
Grain inventory increase N/A 50,000
Total Revenue $50,000 $100,000
Fertilizer 0 8,000
Seed, chemicals, fuel 25,000 25,000
Drying fuel 0 3,000
Total Expenses 25,000 36,000
Net Farm Profit $25,000 $64,000
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38.  Accrual-based system recommended, but cash
system accepted, with end-of-year adjustments
 A full discussion of the adjustments will be
provided in chapter 6
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39.  Balance Sheet: report that shows the financial
condition of the farm at a point in time
 Income Statement: report of revenue and
expenses over the accounting period
 Other reports, depending on complexity of system
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41. • This chapter discussed the importance, purpose,
and use of records as a management tool.
• Records provide the information needed to
measure how well a business is performing.
• They also provide information needed to make
sound decisions in the future.
• Any accounting system must be able to handle
production, investment, and financing activities.
• The output desired from the accounting system
must be considered when choosing one.
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