Balance Sheets Flashcards
Simple definition of Owner Equity (Net Worth)
owned free and clear
- if all assets are sold and liabilities paid, how much money do you have left?
Owner Equity Equation
Owner Equity = Assets - Liabilities
Balance Sheet
Systematic listing of everything owned and owed by a business/individual at a point in time
Income Statement
Over a period of time
Solvency
ability of all assets to cover all liabilities - the health of the farm
Liquidity
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
Assets
anything the farmer owns that has value
Current Assets
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
Non-Current Assets
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
Liabilities
obligations or debts owed on your assets
Current Liabilities
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)
Non-Current Liabilities
everything else not due in the next year, remaining debts on long-term loans after this year’s payments
Intermediate Assets/Liabilities
Assets/Liabilities sold/due in 1 - 10 years
- machinery
- equipment
- perennial crops
- breeding livestock
- loans
When does equity change?
when business experiences profit/loss, if you put money in/pull it out, or if asset values change
How to increase equity
pay off bills
don’t take out new loans/bills
True or False: Balance Sheets are for the FARM BUSINESS
True
Assets and Liabilities must be farm-related
Cost Method of Asset Valuation
price paid originally
(cost minus depreciation = book value)
a lot more conservative
Market Value Method of Asset Valuation
fair market price, what it’s worth now
What method of asset valuation is best for farmers?
Market Value
for items purchased long ago (land) that is worth more today than it was purchased for
What changes in a Cost vs. Market basis?
Non-current assets
FFSC’s view on cost vs. market
Market basis with cost basis values in attached or footnoted
OR
Double column with both
Liquidity Measures
current ratio
working capital
Solvency Measures
debt/asset ratio
equity/asset ratio
debt/equity ratio
net capital ratio
Current Ratio
Current Asset Value/Current Liability Value
- 2 is preferred
- the larger the current ratio, the more liquid it is
Working Capital
Current Assets - Current Liability
Debt/Asset Ratio
Total Liabilities/Total Assets
Over 1 is insolvent
Want to see under .5
Equity/Asset Ratio
Owner Equity/Total Assets
1.0 = zero liability 0 = insolvent
Debt/Equity Ratio
Total Liabilities/Owner Equity
Larger values indicate insolvency
1.0 means lenders and owners provide equal share
Net Capital Ratio
Total Assets/Total Liabilities
Minimum Safe Value = 2.0
