This document provides an introduction to key financial statements used in agriculture: the balance sheet, income statement, and cash flow statement. It describes the components and purpose of each statement. The balance sheet presents the financial position of a farm at a point in time, including assets, liabilities, and owner equity. The income statement measures revenue and expenses over a period of time, usually a year. The cash flow statement tracks cash inflows and outflows over time. Financial ratios are also discussed that can evaluate the liquidity, solvency, profitability, and efficiency of a farm business.

2. Submitted to:
Dr. S B Vekariya
Dept. Of agril economics
College of agriculture
JAU, Junagadh.
Presented by:
Jyothi P
M.Sc.(agri) I yr
College of agriculture
JAU, Junagadh.

3. Preparation of
financial
statements

4. INTRODUCTION
 Financial statements (or financial report) is a
formal record of the financial activities and position
of a business, person, or other entity.
 Relevant financial information is presented in a
structured manner and in a form easy to
understand.

5.  The objective of financial statements is to provide
information about the financial position,
performance and changes in financial position of an
enterprise that is useful to a wide range of users in
making economic decisions.
 Financial statements should be understandable,
relevant, reliable and comparable.

6. BASIC FINANCIAL STATEMENTS ARE:
 Balance sheet or statement of financial position or
Net Worth Statement
 Income statement or statement of comprehensive
income, statement of revenue & expense, profit and
loss report
 Cash flow statement or flow of fund statement

7. BALANCE SHEET
 The balance sheet is a statement of financial
position at a specific point in time or a financial
snapshot of the business.
 The balance sheet reflects the result of all past
transactions but not how the current financial
position was obtained.
 The balance sheet consists of three main parts:
•Assets
•Liabilities
•Net worth (owner equity)

8. ASSETS
 Assets include anything that is owned by the entity
that has monetary value.
 Assets has to be valued on a cost basis or on the
basis of market value.
 Assets should be separated into three categories:
i) current assets
ii) intermediate assets
iii) long term assets

9. CURRENT ASSETS
 Current assets include items such as cash or
assets that can and will be turned into cash within a
year.
 Examples of current assets include:
Cash
Marketable securities
Purchased feed, supplies
Prepaid expenses
Growing crops

10. INTERMEDIATE ASSETS
 These assets can not be converted or sold for cash
in short period of time
 Ex: milch and draught animals, small equipments,
etc.
 These assets are not consumed within the year and
continue to give returns beyond one year.

11. LONG TERM ASSETS
 These assets support production activities and are
considered to have a life greater than one year.
 They are of permanent nature.
 In agriculture, common long term assets include
•Buildings
•Land
•Shares in other entities

12. LIABILITIES
 Liabilities are financial obligations of the business,
such as money owed to lenders, suppliers,
employees, etc.
 Any type of borrowing from persons or banks for
improving a business or personal income that is
payable during short or long time
 Liabilities should be separated into three
categories:
i) current liabilities
ii) intermediate liabilities
iii) long term liabilities

13. CURRENT LIABILITIES
 Current liabilities include all debts and obligations
that are due within the next 12 months.
 Examples of some common current liabilities are:
Accounts payable (bills, taxes, etc.)
Operating loan balances
Principal portion of term loans due within the
next year
Accrued interest on all loans

14. INTERMEDIATE LIABILITIES
 These are also called as medium-term liabilities
 Medium term loans/liability are those whose
maturity is between 1 and 7 years
 Ex: cattle loan, sheep loan
Long term liabilities
 Long term loans/liability are those whose maturity
period is more than 7 years.
 Ex: land mortgage

15. OWNER EQUITY
 Owner equity, or net worth, is the difference between total
assets and total liabilities.
 It reflects the owner’s stake in the business and includes
investment capital and retained profits.
total assets –total liabilities = Equity
“have” “owe” “what you are worth”

17. FINANCIAL TESTS AND RATIOS
 The financial ratio analysis can also be done based
on balance-sheet data which monitors the financial
structure of the farm business or farm operator.
 These financial ratios provide information pertaining
to extent of risk involved in lending to the farmer
and can be divided as:
a) liquidity ratios,
b) solvency ratios.

18. (A) LIQUIDITY RATIOS
 These ratios indicate the ability of the farmer to
generate sufficient cash in order to meet the debt
obligations without disrupting his farm business.
 These are:
(i) Current ratio =
(ii)Working ratio =
Current assets
Current liabilities
Sum of current plus working assets
Sum of current plus working liabilities

19. (iii) Debt-structure ratio =
(iv) Acid test ratio or quick ratio =
Current liabilities
Total liabilities
Current assets minus inventories and supplies
Current liabilities

20. (B) SOLVENCY RATIOS
 Solvency is a measure of financial security, i.e.
what would be left in case all the assets are
converted into cash and debts are paid.
(i) Leverage ratio (or) debt-to-equity ratio =
(ii) Net capital ratio =
Total liabilities
Net worth
Total assets
Total liabilities

21.  Equity-to-asset value ratio =
 Since total assets = total debt + owner’s equity, the
leverage ratio, net capital ratio and equity-to asset
value ratio are alternative ways of expressing the
overall leverage position of a farm business.
Value of assets
Farmer’s equity or net worth

22. INCOME STATEMENT (OR) PROFIT AND LOSS
STATEMENT
 It is a measure of revenue and expenses during a
specified accounting period (usually a year).
 It provides a fairly good picture of income earning
and managerial ability of the farmer, in case drawn
over a number of years.
 Moreover, an income-statement can be constructed
either for a farm business or of a farm operator.
 Once prepared for a farm business, it reveals the
success or failure story over time together with the
costs and returns associated in the use of capital or
credit.

23. Usually, the income statement considers the various
types of income such as
(a) cash revenue from sale of crops, livestock and its
products, earnings from custom hiring and cash
receivables,
(b) kind income such as, value of farm produce
consumed by the family, the rental value of farm
dwellings,
(c) unrealized income such as inventory changes,
(d) miscellaneous sources,

25. EFFICIENCY RATIOS
These ratios measure the degree to which a farm operator
uses his farm resources in order to obtain the optimum
results.
(i) Operating ratio =
It reflects the proportion of operating farm expenses into the
gross farm income.
Total operating farm expenses
Gross farm income

26. (ii) Fixed ratio =
 It represents the share of fixed farm expenses per
rupee of gross farm income.
(iii) Gross ratio =
 It expresses the proportions of gross farm income
being absorbed by the total costs.
Total fixed farm expenses
Gross farm income
Total farm expenses
Gross farm income

27. (iv) Expense structure ratio =
 Higher the value of expense structure ratio, the
more inflexible the farm operator is to adjust quickly
and efficiently with the changing market conditions.
Fixed cash expenses
Total cash expenses

28. PROFITABILITY RATIOS
(i) Capital turnover ratio =
 It measures the gross farm income generated per
rupee of capital investment. It is used to quickly
appraise the efficiency of capital.
(ii) Rate of return on debt and equity capital =
Gross income
Total capital investment
Net return to capital
Total capital investment

29. (iii) Rate of return on equity capital =
 It describes the returns per rupee of equity invested and
provides a basis for comparison with the rates of return
on non-farm investments.
“Greater than one profitability ratios indicate that
borrowed loan has generated the additional returns
reflecting”
Return to equity
Net worth

30. CASH FLOW STATEMENT
 It is also called as the sources and uses of funds or flow
of funds statement.
 It is prepared either for a farm business or to a farm
operator’s family.
 In Cash flow statement both the cash in flows and out-
flows are summarized over a given period of time.
 In a cash flow statement the total cash inflows must equal
to the total cash out flows.

31. (i) Total cash available which excludes borrowings,
(ii) new operating loans
(iii) new medium and long-terms loans as well as the
consumption loan
The total cash outflows consist of:
(i) total cash required which excludes principal
repayments
(ii) Principal repayments
(iii) ending cash balance
The total cash in flows include:

32. A
B

33.  In fact, it is the ending cash balance entry which really
balances the account.
 The problem of untimely repayment of loan instalments
can be diagnosed and resolved by the cash flow
statement of a farm business.
 Thus, from an annual cash flow, a farmer can foresee
when he will actually need the loan and when he will be
able to repay it.
 A flow also helps the farmer in checking his farm
expenses and in assessing the possibility of reducing his
costs.