Farm Management II
Farm Management II ABM 430
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This 31 page Class Notes was uploaded by Leanne McDermott on Saturday September 19, 2015. The Class Notes belongs to ABM 430 at Michigan State University taught by Staff in Fall. Since its upload, it has received 33 views. For similar materials see /class/207439/abm-430-michigan-state-university in Agricultural Economics And Business at Michigan State University.
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Date Created: 09/19/15
Your Net Income Statement Originally Prepared by FIRM AoE Team Members This edition by Gerry Schwab December 2003 Farm Business Management ABM 430 Net Income Statement Purpose Measures profitability through calculation of Net Farm Income NFI Is a dynamic account of the production amp marketing activities of the business Summarizes for a period of time the income earned and expenses incurred Includes revenues and expenses Doesnotincude principal payment family draws capital purchases Does include depreciation change in inventory change in AR amp AP Also known as Profit and Loss Statement If the Question is Will there be any earnings left after expenses incurred The problem is Profitability Are income earned more than expenses incurred Profitability measures the Net Revenue above Expenses that a business generates from the use of its resources including land labor capital and management Profitability is the key for a business to improve its solvency and avoid cash flow liquidity problems Net Income Statement For For time period From To ncome Statement Cash Farm Income Quantity Value Cash Farm Expense Inventory Changes Crop amp Feed Market Receivables Prepaid Payables Total Livestock and other expenses amp amp accrued Income items Supplies Expenses Ending Inventory Beg Beginning Inventory End F Inventory Change GNet Operating profit De reciation and other Ca ital Ad39ustments Breeding Machinery Buildings amp Other Livestock Equipment Improvements Assets Ending Inventory Capital Sales Beginning Inventory Capital purchases H Depreciationcap adj I Net farm income Building an Income Statement NEED ALL Cash Income ALL Cash Expenses Plus Accurate Beginning and Ending Net Worth Statements to calculate changes in inventory Identify clearly the persons or the business entity being desc bed Specify time period being desc bed Includes only income and expenses plus changes in inventory Don t confuse income with assets Don t confuse expenses with liabilities Historic Projected Dec 31 20X1 Dec 31 20X2 Dec 31 20X3 Balance Sheet as Pro Forma Balance Sheet of 1231x2 Balance Sheet 12l31X1 as of 12l31X3 Statement of Owner Equity as of 12l31X2 Flow Statement Income Statement for 12 months for 12 months ending 20x2 ending 12l31X3 ro Forma lncom Flows for Statement for 12 12 months ending months ending 20X2 12l31X3 Source Agricultural Financial Reporting amp Analysis PURPOSE Indicator of Farm Business Profit earned during the accounting period Net farm income Unpaid family and is the RETURN TO Operator labor Unpaid management Unpaid equity i CALCULATION Groggriatlam income Ending inventory of crops feed market Beginning inventory Of quotquote5t quot Ending inventory of accounts receivable and capital accounts payable adjustments depreciation Beglnnlng Inventory Of accounts payable Cash operating PURPOSE Indicates profit performance of farm business and may suggest required business size for desired lifestyle withdrawals Determines how much return for each dollar of sales Can be used to compare individual farms to industry average standard or past performance CALCULATION Net farm income Gross farm income PURPOSE Provides an accrual measure of income that is determined before income taxes and interest expense as if the business has no debt CALCULATION Net farm income NFI Interest paid Charge for unpaid operator s family labor and management Rate of Return on Farm Assets or investment ROA or ROI PURPOSE To determine the beforetax rate earned by the of capital invested in the business CALCULATION Return on Farm Assets Average Total Farm Assets Overall measure of profitability Nonfarm income should not be included ROI Can vary with structure of business Owned land in business Market vs cost method to value farm assets will affect ratio Must consistently estimate the value of unpaid labor and management Comparison across farms is more meaningful using market values Comparison from year to year of an individual farm is more meaningful using cost values PURPOSE To determine the BeforeTax Rate earned by the owner s equity in the business If assets were valued at market value this rate of return can be compared to ratios that could be earned in the market from alternative investments CALCULATION Net farm income Opportunity Average Cost for Unpaid Net Worth laborand Management X 100 to get on a percentage basis i i ii Measures how well your equity capital is employed in the business Highly leveraged and under capitalized farms can get wild results Comparing across farms is more meaningful using market values Deferred taxes should be included for return using market value will show low return without including deferred tax PURPOSE To provide a measure of Gross Earnings Produced on farm CALCULATON Gross Farm Income Purchased Feed Purchased Feeder Livestock i Changes in inventory of crops and feed market livestock accounts receivable and breeding livestock Asset Turnover Ratio PURPOSE To measure how efficiently farm assets are being used to generate dollars of valueadded production High asset turnover ratio provides increased opportunity for profit CALCULATION Value of Farm Production Average Total Farm Assets PURPOSE To determine the operation efficiency of the business It indicates the percent profit earned per dollar of value produced CALCULATION Net Farm Income Interest Expense Opportunity Cost for unpaid labor and management Value of farm production x100 Return on Investment Operating Profit Margin X Asset Turnover Rate If ROA Is Not Satisfactory Must Increase 1 Operating Profit Margin andor 2 Asset Turnover Rate Needs Pay Attention To Higher prices Marketing of output and output mix Lower overhead Investment amp nance Production High yle39ds efficiency Low operating expenses Purchasing of input and input mix Chan e entergrise mix External analySIs to higher value of new business crops eg alternatives speCIal or valuea ded Needs Pay Attention To Higher value of Marketing of output and yield efficiency production Value of invested assets is too high Investment in durable assets Alternative methods of asset control eg renting sharing ownership custom hire Liquidate non productive assets PURPOSE Measures ability of the business to pay scheduled financial payments on term debts and capital leases If calculated ratio is less than one 100 potential liquidity problems exist CALCULATION Net farm income Nonfarm income Interest on Term Debt Interest on Capital Lease Depreciation Expense Income and Social Security Tax Owner withdrawals Annual scheduled principal and interest payment on Term Debt and Capital Leases In analyzing farm business only you may prefer to exclude non farm income Also adjust downward the income tax obligations associated with the nonfarm income PURPOSE To determine ability of the business to pay scheduled financial payment on term debts and capital leases Indicates ability of business to generate funds for capital asset replacements CALCULATION Net farm income Nonfarm income Depreciation expense Income and Social Security tax Own withdrawals In analyzing farm business only may prefer to exclude non farm income and also adjust downward the income tax obligations associated with the nonfarm income PURPOSE To determine ability of the business to pay scheduled financial payment on term debts and capital leases Indicates ability of business to generate funds for capital asset replacements CALCULATION Capital replacement and term debt repayment capacity Payment on unpaid operating debt from a previous period Principal payment on current portion of term debt Principal payment on current portion of capital lease PURPOSE Indicates percentage of gross farm income that was spent for farm operating expenses used for comparing expense control of the individual farm with the industry average CALCULATION Total Farm Operating Expense Farm Interest Expense Gross Farm Income PURPOSE Can be used for comparing ownership expense on durable assets with industry average provides indicator of amount of capitalization investment in depreciable assets CALCULATION Depreciation expense Gross farm income PURPOSE Indicates percentage of gross farm income spent on interest expense Can be used to compare individual farm to industry average standard or past performance CALCULATION Interest Expense 1 Change in Accrued Interest Expense Gross farm income t n e m e t a t S e m 0 c n I 2 a H a O a m 139 SE o I H mg 215 g 2 lt9 g 71 I39 939 O i l39
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