Balance Sheets

Question 1

Simple definition of Owner Equity (Net Worth)

Answer 1

owned free and clear

• if all assets are sold and liabilities paid, how much money do you have left?

Question 2

Owner Equity Equation

Answer 2

Owner Equity = Assets - Liabilities

Question 3

Balance Sheet

Answer 3

Systematic listing of everything owned and owed by a business/individual at a point in time

Question 4

Income Statement

Answer 4

Over a period of time

Question 5

Solvency

Answer 5

ability of all assets to cover all liabilities - the health of the farm

Question 6

Liquidity

Answer 6

ability of farm to meet current financial obligations with current revenues (can we pay the bills without dipping into savings?)

ability to generate cash as needed

Question 7

Assets

Answer 7

anything the farmer owns that has value

Question 8

Current Assets

Answer 8

easy to sell, ready for market (grain, feeder livestock) typically used and sold within one year

• market livestock
• checking account
• accounts receivable (available for you to use)
• investment in growing crops

Question 9

Non-Current Assets

Answer 9

hard to sell quickly at full value (machinery, land, breeding livestock) able to sell if you need to but probably not good if you have to

Question 10

Liabilities

Answer 10

obligations or debts owed on your assets

Question 11

Current Liabilities

Answer 11

financial obligations due within 1 year (accounts at farm stores, interest and principle on loans, accrued expenses (property and income taxes)

• accounts payable
• income taxes to be paid
• payments on real estate debt due this year
• accrued interest (interest you have to pay this year)

Question 12

Non-Current Liabilities

Answer 12

everything else not due in the next year, remaining debts on long-term loans after this year’s payments

Question 13

Intermediate Assets/Liabilities

Answer 13

Assets/Liabilities sold/due in 1 - 10 years

• machinery
• equipment
• perennial crops
• breeding livestock
• loans

Question 14

When does equity change?

Answer 14

when business experiences profit/loss, if you put money in/pull it out, or if asset values change

Question 15

How to increase equity

Answer 15

pay off bills

don’t take out new loans/bills

Question 16

True or False: Balance Sheets are for the FARM BUSINESS

Answer 16

True

Assets and Liabilities must be farm-related

Question 17

Cost Method of Asset Valuation

Answer 17

price paid originally
(cost minus depreciation = book value)
a lot more conservative

Question 18

Market Value Method of Asset Valuation

Answer 18

fair market price, what it’s worth now

Question 19

What method of asset valuation is best for farmers?

Answer 19

Market Value

for items purchased long ago (land) that is worth more today than it was purchased for

Question 20

What changes in a Cost vs. Market basis?

Answer 20

Non-current assets

Question 21

FFSC’s view on cost vs. market

Answer 21

Market basis with cost basis values in attached or footnoted
OR
Double column with both

Question 22

Liquidity Measures

Answer 22

current ratio

working capital

Question 23

Solvency Measures

Answer 23

debt/asset ratio
equity/asset ratio
debt/equity ratio
net capital ratio

Question 24

Current Ratio

Answer 24

Current Asset Value/Current Liability Value

• 2 is preferred
• the larger the current ratio, the more liquid it is

Question 25

Working Capital

Answer 25

Current Assets - Current Liability

Question 26

Debt/Asset Ratio

Answer 26

Total Liabilities/Total Assets Over 1 is insolvent Want to see under .5

Question 27

Equity/Asset Ratio

Answer 27

Owner Equity/Total Assets ``` 1.0 = zero liability 0 = insolvent ```

Question 28

Debt/Equity Ratio

Answer 28

Total Liabilities/Owner Equity Larger values indicate insolvency 1.0 means lenders and owners provide equal share

Question 29

Net Capital Ratio

Answer 29

Total Assets/Total Liabilities Minimum Safe Value = 2.0