Chapter 5 - The Income Statement and it Analysis Flashcards
Depreciation
- Annual loss in value of durable assets due to use.
what assets do you depreciate?
- needs an useful life of more than one year
- needs a use in business
- determinable useful life but not an unlimited life
Is land depreciable?
- No, just improvements.
Three main reasons ag producers track depreciation
- tax purposes
- determine the true asset value
- insurance purpose
Cost (Depreciation):
- The price paid for the asset
Useful Life (Depreciation):
- Number of years the asset is expected to be used in business
Salvage Value (Depreciation):
- Expected market value of the asset at the end of its useful life
Book Value (Depreciation):
- The asset’s original cost less accumulated depreciation
Straight Line Depreciation
- Draw a straight line between beginning and ending values.
- constant
Straight Line Depreciation Formula
= (cost - salvage) / useful life
Declining Balance Depreciation
- Constant percent of the asset’s current balance
- Book Value * R
Declining Balance Depreciation Formula
- (100 / useful life) / 100
- (150 / useful life) / 100
- (200 / useful life) / 100
Comparison on Depreciations
- Early Years: Double declining balance results in more depreciation than straight line.
- Later Years: Straight line depreciation is higher than double.
Facts Straight Line
- Slowest and easiest
- Finishes at salvage value without adjustments
Facts Declining Balance
- Faster depreciation
- Requires adjustment to finish at salvage value
Economics
- The study of how people make decisions under scarcity
Scarcity
- People have unlimited wants with limited resources
Opportunity Cost
- What you must give up when you make choices.
- Next best choice
Opportunity Cost of Labor
- Unpaid family labor
- What the operator would earn in best alternative
Opportunity Cost of Management
- Combine labor and management
Opportunity Cost of Capital
- Many uses for capital
- Higher expected return often carry higher risk
Which of the following cannot be valued using the cost less accumulated depreciation method?
- purchased dairy cow
- barn
- tractor
- land
- land
Which of the following is not included as an expense on the net farm income statement?
- depreciation
- principal payments made on loans
- the cost of supplies used but not yet paid for
- interest payments made on loans
- principal payments made on loans
The depreciation method with the greatest depreciation in the first year is
- All of these have the same depreciation in the first year.
- 150% declining balance.
- double declining balance.
- straight line.
- double declining balance.
Book value and market value will always be the same dollar amount. (T/F)
- False
Depreciation reflects the decline in values of an asset over time due to wear and tear, age, and obsolescence. (T/F)
- True
All depreciation methods will result in the same total depreciation over the full life of the asset. (T/F)
- True
The Statement of Cash Flows summarizes
- Everything the business owns and owes as of a certain date.
- The change in owner equity in the business over a period of time.
- All the income and expenses in the business over a period of time.
- All the sources and uses of cash in the business over a period of time.
- All the sources and uses of cash in the business over a period of time.
- All the sources and uses of cash in the business over a period of time..
Which financial measure shows how many dollars are left over after opportunity costs for equity capital and unpaid labor have been deducted from net farm income from operations?
- return to labor and management
- return to management
- net farm income
- return on assets
- return to management
- return to management
It is possible for an asset to have a $0 salvage value. (T/F)
- True
