Quiz 2

Question 1

Is depreciation a cash expense or a non-cash expense?

Answer 1

Non-cash expense

Question 2

What is the equation for Accounting Profit?

Answer 2

Profit (Loss) = Revenue - Expenses

Question 3

Is interest (capital invested in farm assets) a cash expense or a non-cash expense?

Answer 3

Non-cash expense

Question 4

Is interest (borrowed capital) a cash expense or a non-cash expense?

Answer 4

Cash expense

Question 5

Is value of operator labour a cash expense or a non-cash expense?

Answer 5

Non-cash expense

Question 6

What is the equation for Economic Profit?

Answer 6

Economic Profit = Net Farm Revenue - Opportunity cost of labour, management, capital (assets)

Economic Profit starts with Revenue - Expenses = Profit, but considers alternative uses for resources.

Question 7

Are wages for hired labour a cash expense or a non-cash expense?

Answer 7

Cash expense

Question 8

Which will always be lower: Accounting Profit or Economic Profit?

Answer 8

Economic Profit

Question 9

Is farm-raised feed a cash expense or a non-cash expense?

Answer 9

Non-cash expense

Question 10

What are the three types of costs?

Answer 10

1. Opportunity Costs
2. Cash or Non-Cash
3. Fixed or Variable

Question 11

Is purchased feed a cash expense or a non-cash expense?

Answer 11

Cash expense

Question 12

Is owned land a cash expense or a non-cash expense?

Answer 12

Non-cash expense

Question 13

Is cash rented land a cash expense or a non-cash expense?

Answer 13

Cash expense

Question 14

Is seed, fertilizer, fuel and repairs a cash expense or a non-cash expense?

Answer 14

Cash expense

Question 15

What is Opportunity Costs?

Answer 15

Defined in one of two ways:
- Income that could have been earned by selling or renting input.
- Income resource could have earned/generated in its most profitable alternative use.

Question 16

Is property taxes and insurance a cash expense or a non-cash expense?

Answer 16

Cash expense

Question 17

What is Unpaid Labour?

Answer 17

-Opportunity cost is what could be earned in next best option
- Employment on another farm or ranch?
- Non- farm employment options?
- Not uncommon for a producer to say their time is ‘free’

Question 18

What is Unpaid Management?

Answer 18

• Value of making and implement decisions
• Difficult to estimate - %gross income, farm manager fee
• Often combined with unpaid labour

Question 19

What is Opportunity Cost of Equity Capital?

Answer 19

Risk-return tradeoff - “better” uses of capital (higher expected returns) may have higher degree of risk

Therefore, opportunity cost of equity capital often set to:
- interest rate on savings account or GIC
(Guaranteed Investment Certificate)
- or current interest rate on borrowed capital

Question 20

What is a short-run business?

Answer 20

period during which quantity of at least one input is fixed.
Current crop production cycle is short run as land quantity is fixed.
Not a defined period of time, but typically one crop or livestock production year.

Question 21

What is a long-run business?

Answer 21

Period during which quantity of all inputs can change.
In long-run, all inputs can be bought or sold.

Question 22

What is Opportunity Cost of Farm Long-lived Assets?

Answer 22

• Land and machinery, can use rental rates for opportunity cost, but for others (ex. fences) use the most profitable alternative for the capital invested in them.
• Depreciating assets - need to adjust their opportunity cost each year

Question 23

What is Cash Expenses?

Answer 23

• Actual transfer of cash occurs
• Can be fixed or variable
  - Fixed (e.g. property taxes)
  - Variable (e.g. fertilizer, fuel, feed)

Question 24

What Non-Cash Expenses?

Answer 24

• No cash outlay
• Depreciation & opportunity costs (unpaid labour, interest on own capital, homegrown feed)
• Can be fixed or variable
  
  • Fixed (e.g. depreciation)
  • Variable (e.g. homegrown feed)

Question 25

What are Fixed Costs (Overhead Costs)?

Answer 25

Fixed costs incurred whether or not production takes place.
Examples: Depreciation, insurance, property taxes, interest on debt, interest on equity capital (ex. Ownership costs)
- Only exist in short-run
- Total fixed costs do not change as level or production changes

Question 26

What is fixed cost (overhead costs)? Give examples.

Answer 26

Fixed costs incurred regardless of the level of production. They only exist in short-run, in long-run nothing is a fixed cost, as assets can be sold.
Different assets have different types of fixed costs.
Example: At beginning of seeding, too late to increase the amount of cropland owned or rented therefore it’s a fixed cost.

Question 27

What is the equation for Average Fixed Costs?

Answer 27

Average Fixed Costs = Total Fixed Costs (TFC) / Output

• Total Fixed Costs remain fixed (by definition), but as output increases, Average Fixed Cost will decline.
• Output measured in physical units (per acre, per cow, etc.)
  May be increasing, constant, or decreasing depending on underlying production function.

Question 28

Total fixed costs (TFC) are the sum of several costs. List what the DIRTI five are.

Answer 28

Depreciation
Interest
Repairs (and shelter)
Taxes
Insurance

Question 29

Do accountants and tax authorities consider principal payments or interest payments on loans a cost of doing business?

Answer 29

Interest payments

Question 30

Which one of these can be both fixed and variable and which one can be neither fixed or variable: Loan principal payments or interest payments?

Answer 30

Principal Payments - neither
Interest Payments - both

Question 31

What is fixed cost depreciation and what is the equation?

Answer 31

Loss of value from use, age or obsolescence.
Formula for average yearly loss of value over lifetime of asset.

Depreciation = (Purchase price - Salvage value) / Useful life

Question 32

What are Variable Costs (Direct Costs)?

Answer 32

• Directly related to the amount of production, manage controls.
• No variable costs if no production in short-run
• Variable costs exist in short-run and long-run
  Examples: Seed, Fertilizer, Herbicide, Repairs,
  Fuel, Feed, Vaccines
• In long-run, all costs are variable costs
  Examples: Fertilizer or feed are variable costs, but
  once purchased, become fixed costs for rest of
  production cycle.
  Examples: Labour or cash rent are also fixed
  costs during the contract period

Question 33

What is the equation for Variable Cost?

Answer 33

Variable Cost = (Quantity of input x Price of input)

Question 34

What is fixed cost interest?

Answer 34

Interest on capital invested in an asset.
This is an opportunity (noncash) cost if you own it, or a cash cost if paying a loan, or a combination of the two.
Since value of depreciable asset decreases each year, invested equity in the asset also decreases yearly.
This decrease in value is taken into account in calculating this fixed cost.

Question 35

what is the formula to estimate interest for average value of depreciating asset over its useful life?

Answer 35

Interest = Average asset value x Interest rate

Average asset value = (Initial cost + Salvage cost) / 2

Question 36

What is the formula to estimate interest cost for current year?

Answer 36

Interest = Current asset value x Interest rate

Question 37

What is the equation for Total Cost?

Answer 37

TC = TFC + TVC
Total Cost is sum of fixed and variable costs.

Question 38

What is the equation for Average Total Cost?

Answer 38

Average Total Cost = TC/output
OR
Average Total Cost = AFC + AVC

Question 39

What is the equation for Marginal Cost?

Answer 39

Marginal Cost = ΔTC / Δ output
OR
Marginal Cost = ΔTVC / Δ output

Question 40

What are repairs of fixed cost?

Answer 40

Repairs (actually machinery shelter)
-Repairs are partly fixed, partly variable
-Machinery housing to maintain more asset value

Taxes
-$ amount found in records

Insurance
-Actual $ amount applicable to item

Except for land taxes, these costs are much smaller in general.
Total Fixed Costs are often 10-15% of the purchase price for farm machinery.

Question 41

What is Average fixed cost? Give the equation and an example.

Answer 41

Average fixed cost = Total fixed costs / Output

Dividing TFC by a unit of output, (bushel, hundredweight) or acres, hours for machinery gives an Average Fixed Cost.
Example: Combine cost/acre, Dairy housing cost/cwt milk.
Total Fixed costs remain fixed (by definition), but as output increases, Average Fixed Cost is spread out and will decline.
With equipment, AFC calculated by dividing TFC by hours used or acres used
Acres and hours are not units of production.

Question 42

What are variable costs (direct costs)? Give examples.

Answer 42

Directly related to the amount of production, manager controls.
No variable costs if no production in short-run.
Examples: Seed, Fertilizer, Herbicide, Fuel, Feed, Vaccines, Labour

Question 43

What is an Enterprise Budget?

Answer 43

• A farm business management tool to project revenue, expenses & profit for a specific activity (enterprise)
• Provides a detailed physical and financial plan for growing a specific crop or raising one livestock species or class
• Base unit for crops generally $/acre
• Base unit for livestock generally $/cwt, /head or per typical size operation

Question 44

What is total variable costs? Give examples.

Answer 44

A cost that varies with the level of output.
Total variable costs: sum of all variable costs
Variable cost = (Quantity of input x Price of input)
Ex. # vaccines x $ cost/vaccine; lbs. seed x $ cost seed/lb

Question 45

What is average variable costs? Give examples.

Answer 45

Average variable costs : TVC / output (hours, acres for machinery)
Output measured in physical units (vet costs / cwt milk, fertilizer cost/ bu. wheat harvested).
AVC may be increasing, constant or decreasing as output increases depending on underlying production function

Question 46

What is Enterprise Budgeting and Analysis used for?

Answer 46

• calculating break-even price and break-even yield
• develop cash flow budgets and whole-farm plans

It is best to use own production and financial data whenever possible
Provinces or other ag organizations compile data that can also be used or modified

Question 47

Where do variable costs exist? Give an example.

Answer 47

Variable costs exist in short-run and long-run.
Ex. Fertilizer or feed are variable costs, but once purchased, the costs are fixed for rest of production cycle.

Question 48

What is the equation for cost of production?

Answer 48

Cost of production = Total fixed costs + Total variable costs

Question 49

How are enterprise budgets an example of economic budgeting?

Answer 49

• Include cash costs and opportunity costs
• Typically, these opportunity costs are for operator labour and for capital invested in machinery, buildings and land.
• The profit or return shown is thus an economic profit.

Question 50

What is included in constructing an enterprise budget?

Answer 50

• Gross Revenue: cash (from crop or livestock sales) and non-cash revenue (homegrown feed)
• Variable Costs: expenses specific to production of the commodity, only incurred if production occurs (operating, direct costs)
• Gross Margin: gross revenue less Variable Costs (return over variable expenses, income above operating expenses )
• Fixed Costs: expenses that do not vary with production, result from ownership of assets (ownership, indirect, overhead costs)
• Estimated Profit/Returns: return to management if opportunity costs included (return over total expenses, return to management)

Question 51

What are examples of Operating or Variable Costs?

Answer 51

• Seed, fertilizer, lime, pesticides: Quantity of input to be used x input price
• Machinery variable costs: fuel, oil, lubricants, and repairs.
  - Fuel consumption - estimated in various
  ways, simple or complex
  - Lubricants and filters ~10-15% of fuel
  - Repairs - % of purchase price; actual records
  for each machine
  - Need to allocate to specific enterprise when
  machinery shared
• Labour: Cash (paid labour) and/or opportunity cost for unpaid labour
• Hauling and drying: depends on yield, moisture
• Crop insurance: insurance premium
• Interest: for capital tied up by operating expenses

Question 52

How do you calculate profit?

Answer 52

Profit = (P x Q) - (VC x Q) - FC

(P x Q) = Revenue
(VC x Q) = Variable costs
FC = Fixed cost

P = The market price per unit of the commodity
Q = The number of marketable units produced
VC = The variable cost per unit produced
FC = Represents the fixed costs

Profit = Revenue - Expenses

Question 53

Example of Interest Calculation for Operating Cost:
$100,000 needed for operating expenses to produce 500 acres of flax.
Operating loan: $80,000 for 6 months @ 7% interest
Opportunity cost of equity capital: $20,000 for 6 months 2% GIC rate
Total interest (interest assumed 6 months on all operating costs)
Per acre cost

Answer 53

Operating loan: $80,000 x 0.07 x 6/12 = $2,800
Opportunity cost of equity capital: $20,000 x 0.02 x 6/12 = $200
Total interest: $3000
Per acre cost: $3000/500 acres = $6 interest cost/acre

Question 54

What are production decisions in short run?

Answer 54

In short run, when expected selling Price > minimum Average Total Costs, maximize profit where Marginal Revenue = Marginal Costs.

In short run, when expected selling Price < minimum Average Total Costs, continue production at level which reduce losses the most.

In short run, production should pause when selling Price < minimum Average Variable Costs.

Note: Expected selling prices may not be actual selling prices.

Question 55

What are production costs in long run?

Answer 55

If selling price is expected to continually be less than minimum Average Total Costs, there will be continual loss.

Question 56

What is short-run production?

Answer 56

Revenue must cover variable costs.

Question 57

What is long-run production?

Answer 57

All costs need to be covered.

Question 58

What does it mean if your gross margin is negative? What does it mean if it’s positive?

Answer 58

Negative: Enterprise should not be produced
Positive: gross margin shows how much an acre of this crop enterprise or head of livestock will contribute toward payment of fixed costs

Question 59

Why do farms grow?

Answer 59

Because they can.
Transition -> make room for next generation.
Peers, friends, neighbours.
Lower unit cost of production.
Efficiency gains.

Question 60

What is Ownership (Fixed Costs)?

Answer 60

Since many fixed assets are used in more than one enterprise, need to allocate fixed costs between the enterprises which use them.
- Machinery depreciation: compute average annual depreciation (straight line) then convert to per acre or per hour value and then prorate to specific enterprise based on its use.
- Machinery interest: interest rate x average value of asset; total cost needs to be allocated to each enterprise
- Land charge: actual cash rent or opportunity cost of land ownership; typically cash rental rate used even if land owned
- Miscellaneous Overhead: expenses not directly associated with a single enterprise; allocate share of pickup truck expenses, liability insurance, shop expenses, legal expenses, etc

Question 61

Why should you get better, before getting bigger?

Answer 61

Be as financially efficient as you can before growing.
If financial stress exists -> adding acres or cows likely won’t fix things.

Question 62

What does it mean if management charge is not in budget? What does it mean if it is in budget?

Answer 62

• If management charge (opportunity cost) not in budget, estimated profit is return to management
• When management charge is in budget, positive estimated profit means revenue covers all costs to produce commodity, including opportunity costs of land, labour and capital

Question 63

Why should you grow the farm?

Answer 63

Reduce production costs per unit of product.
Improve profit margins.
Improve asset utilization.
Transition/Add New Family Members.
Invest Retained Earnings.

Question 64

What are the four ways of estimating enterprise costs?

Answer 64

1. Direct Costing
2. Allocating Whole-Farm Expenses
3. Market Value
4. Formula-Based

Question 65

What is the Economies of size theory?

Answer 65

As farm/ranch size increases, cost per unit of output could be decreasing, constant or increasing.
If avg costs per unit decreasing -> incentive to get bigger to achieve economies of size.

Question 66

What is Allocating Whole-Farm Expenses?

Answer 66

• Shared expenses such as utilities, subscriptions, office expenses, legal/accounting, insurance, property taxes, small tools
  a)Percent of Gross Margin recommended
  approach
  - If commodity accounts for 25% of Whole
  Farm Gross Margin, allocate 25% of
  shared overhead expense
  b) Other approaches - split equally, % of gross
  revenues, % of total expenses, % of acres, #
  of hours used in enterprise

Question 67

What is Direct Costing?

Answer 67

Detailed records tracking actual amounts, best for direct variable costs

Question 68

What is Formula-Based?

Answer 68

Etimating costs using percentages or formula
- e.g. Capital Recovery Charge, % Purchase Price
(PP) for Insurance & Housing, Repairs

Question 69

What are reasons for economies of size?

Answer 69

-Spread fixed costs over more units of production.
-Technology investment -> high investment cost needs to be spread over larger acres or head.
-Engineering economics -> capacity increases more than purchase price -> lower fixed costs per unit of capacity.
-Specialized resources -> larger farms can make full-use of specialized equipment, can specialize in labour.
-Lower input prices -> price discounts with bulk purchase.
-Higher output prices -> price premium with larger volumes.
-Management -> double farm size, doesn’t double time required.

Question 70

What are reasons for diseconomies of size?

Answer 70

-Management -> as farm/ranch grows, difficult to be knowledgeable about all aspects of all enterprises; multiple managers will face difficulty reaching agreement on decisions; timeliness issues can emerge.
-Labour Supervision -> as farm/ranch grows, additional labour required which requires supervision and travel time.
-Geographic Dispersion -> time and expense to monitor, move labour and equipment between sites.
-Biohazards -> intensive livestock operations have additional regulations to be followed for manure, deadstock, etc.

Question 71

Name an example of each Direct Cost, Allocate Whole Farm Expenses, Market Value, Formula-Based?

Answer 71

Direct: Seed, Feeder cattle, Prepared feed, salt, mineral, Fertilizer, Pesticide, herbicide, Custom feeding, Insurance premiums (crop, livestock), Vet, medicine, breeding fees, Other crop and livestock supplies
Allocate Whole Farm Expenses: Motor vehicle expenses, Small tools, Containers, twine, Soil testing, Office expenses, Legal & accounting, Memberships, Licenses, permits, Motor vehicle interest and leasing costs, Utilities, Other insurance premiums, Property taxes
Market Value: Labour, Custom Work, Freight and shipping, Commissions and levies, Storage/drying, Rent (land, pasture, buildings), Machinery lease/rental
Formula-Based: Machinery (fuel/oil), Building and fence repairs, Depreciation (buildings and machinery), Interest (operating), Interest (real estate, mortgage, term loans)

Question 72

What does a long-run average cost curve look like?

Answer 72

It is a L-shaped costs are high when size is small. then costs decrease as size increases.

Question 73

What are things you need to consider while enterprise budgeting?

Answer 73

• Many different input combinations - no single budget for an enterprise
• Many budgets available - all look slightly different, but have same underlying components
• Use caution with third-party budgets - may not reflect your farm/ranch conditions
• Past records or provincial data can provide information for enterprise budgets
• Price is an estimate and can become outdated quickly
• Economic enterprise budgets include opportunity costs for labour, land and capital

Question 74

How do you interpret enterprise budget?

Answer 74

• An economic enterprise budget includes opportunity costs on labour, capital, land and maybe management as expenses.
• Result is economic profit. If 0, not so bad. All assets are earning their opportunity costs.
• Accounting profit would give the revenue remaining to pay management, unpaid labour and equity capital for their use.

Question 75

What is equation for Cost of Production?

Answer 75

COP = Total Costs / Expected Yield

Question 76

What are some assumptions made when planning a crop?

Answer 76

Crop prices
Estimated crop yields
Seeding rates
Seeding costs
Fertilizer
Plant protection
Machinery operating costs
Custom work/Hired labour
Crop insurance premiums
Utilities
Interest on variable expenses
Building repairs
Business overhead
Machinery deprecation
Building depreciation
Machinery investment interest cost
Building investment interest cost
Land investment interest cost
Labour and Management

Question 77

What is the equation for Breakeven Price?

Answer 77

Breakeven Price = Total Cost / Expected Yield

Breakeven price - output price needed to just cover all costs at a given output level.

Question 78

What is the equation for Breakeven Yield?

Answer 78

Breakeven Yield bu/ac = (Total Cost $/ac) / (Expected Price $/bu)

Breakeven yield - output yield needed to just cover all costs at a given price.

Question 79

If the total cost: $220 per ac
Expected yield: 740 bu/ac
Expected price: $0.28/bu
What is the Breakeven Price?

Answer 79

Breakeven Price = Total Cost / Expected Yield
= $220 / 740 = $0.30/bu

Question 80

If the total cost: $220 per ac
Expected price: $0.28
Expected yield: 740 bu
What is the Breakeven Yield?

Answer 80

Breakeven Yield = Total Cost / Expected Price
= $220 / 0.28 = 786 bu

Question 81

What is the equation for breakeven price per unit of production?

Answer 81

Breakeven price per unit of production = (Variable costs + Fixed costs) / Total Lbs. weaned

Question 82

Your production costs for yellow pea are $375/acre. Your expected yield is 30 bu/ac. Your expected selling price is $12/acre. What is your break even yield?

Answer 82

Breakeven Yield = Total Cost / Expected Price
= $375 / 12 = 31.25 bu

Question 83

Your production costs for yellow pea are $375/acre. Your expected yield is 30 bu/ac. Your expected selling price is $12/acre. What is your break even price?

Answer 83

Breakeven Price = Total Cost / Expected Yield
= $375 / 30 = $12.5 /bu

Question 84

What are the 6 steps to whole farm budgeting?

Answer 84

1. Determine objectives and specify goals.
2. Inventory available resources.
   - Land, buildings, machinery, labour, management
3. Identify possible enterprises and technical coefficients.
   -Technical coefficient: how much of a resource is required to produce one unit -> use to determine enterprise size, combination.
4. Estimate gross margins per unit for each possible enterprise.
5. Choose the best combination of enterprises.
6. prepare a whole-farm budget

Question 85

Interest is included as a variable cost on an enterprise budget…
A) only if money will be borrowed
B) because of the investment in machinery
C) because capital will be tied up in variable
costs until revenue is received
D) because of the investment in land

Answer 85

C) because capital will be tied up in variable
costs until revenue is received

Question 86

Cost of production will be the same value as…
A) average total cost
B) total cost
C) average variable cost
D) marginal cost

Answer 86

A) average total cost

Question 87

Ownership or fixed costs for farm include all of the following except…
A) interest on the investment
B) utilities
C) depreciation
D) insurance

Answer 87

B) utilities

Question 88

A crop enterprise budget containing all economic costs would include an entry for…
A) fertilizer and seed
B) depreciation
C) opportunity cost on capital required
D) all of the above

Answer 88

D) all of the above

Question 89

The purpose of completing a whole farm budget is to…
A) evaluate the effect on profit of one
particular management change
B) compare which enterprises are most
profitable
C) project how much operating capital you
will need to borrow in each period during
the upcoming year
D) estimate the net income from all
enterprises combined

Answer 89

D) estimate the net income from all
enterprises combined

Question 90

A whole farm budget contains…
A) costs, returns, and resource need for a
specific set of enterprises
B) the actual costs and returns that were
realized during one year for all the
enterprises on a farm
C) projected costs and returns for one unit
of a specific enterprise
D) costs and returns that would be affected
by a specific management change

Answer 90

A) costs, returns, and resource need for a
specific set of enterprises

Question 91

What is the purpose and use of partial budgeting?

Answer 91

Tool to analyze how changes in operations would impact profits.
Simpler approach than comparing two enterprise or whole-farm budgets.
Does not account for changes in value of money over time.
Analyzes operational changes:
- Renting vs owning
- Raising replacement animals vs buying
- Using a new technology vs keeping
current
Typical first step - identify all changes resulting from adoption of proposed change

Question 92

What are the four questions that partial budgeting asks?

Answer 92

1. What will new or additional costs be?
2. What current costs will be reduced or eliminated?
3. What new or additional revenue will be received?
4. What current revenue(s) will be lost or reduced?

Question 93

What are the objectives of a partial budget?

Answer 93

Managers need to be clear about profitibality objectives.
- Is primary concern to increase cash flow?
- Non-cash items (depreciation, unpaid
labour, opportunity costs) do not need to
be considered
- Is primary objective economic improvement of
operation?
- Including non-cash items allows an
analysis of true profitability

Question 94

What are the additional costs for partial budget format?

Answer 94

What additional costs expected with proposed change?
Additional costs can be fixed or variable.

Question 95

What are the additional revenues for partial budget format?

Answer 95

What additional revenues will be earned with proposed change?
Increase production?
Increased yield?

Question 96

What are the reduced revenues for partial budget format?

Answer 96

What revenues currently being received will change with the proposed change?
Lower selling price? Lower yield?
Fewer animals sold?

Question 97

What are the reduced costs for partial budget format?

Answer 97

What costs will decline or disappear with proposed change?
Reduced input use?
Reduced input price?

Question 98

Which ones are paired together for partial budgeting format: Additional Costs, Additional Revenue, Reduced Revenue, Reduced Costs.
Which one is negative and which one is positive?

Answer 98

Additional Costs and Reduced Revenue (Negative)
Additional Revenue and Reduced Costs (Positive)

Question 99

What is sensitivity analysis?

Answer 99

Partial budgeting requires estimates of change in yield, price, costs
Accuracy of analysis depends on accuracy of estimates
Sensitivity analysis changes the values used to see impact on result
- Calculate profit change using low, average, and high yield estimates
- Calculate profit change using 10, 20, and 30% higher and lower prices
See how ‘sensitive’ the expected profit change is to price or yield variations - indication of risk

Question 100

What are the partial budgeting pitfalls?

Answer 100

Must have good data
Cost (and sometimes revenue) changes are not always proportional because or economies and diseconomies of size
Opportunity costs for capital and labour should be included, but especially when changes would be large

Question 101

What are the partial budgeting limitations?

Answer 101

Can only compare present situation with one alternative at a time - if multiple alternatives, need multiple budgets
Assumes constant expected average annual changes in revenue and expenses
If large capital investment required and/or varying cashflows - best to use capital investment analysis

Question 102

True or false: When summarizing a partial budget, added revenue and added costs are summed together.

Answer 102

False

Question 103

True or false: Partial budgets include all costs and returns for the enterprises under consideration.

Answer 103

False, partial budgets only compare 2 things.

Question 104

Which of the following are the profit increasing changes in a partial budget?
A) Additional costs and additional revenue
B) Reduced costs and reduced revenue
C) Additional costs and reduced revenue
D) Reduced costs and additional revenue

Answer 104

D) Reduced costs and additional revenue

Question 105

A partial budget is designed to analyze the effect of a proposed management change on…
A) only revenue
B) only costs
C) profit
D) crop or livestock yields

Answer 105

C) profit

Question 106

Evaluating the riskiness of a particular change being analyzed with a partial budget by varying one or more key values is called…
A) sensitivity analysis
B) profitability analysis
C) break-even analysis
D) partial analysis

Answer 106

A) sensitivity analysis

Question 107

What is a cash flow budget and what does it include?

Answer 107

Summary of projected cash inflows and outflows for farm/ranch for a future period of time it is typically, monthly projections for period of 1 year.
No noncash entries are included.
Estimate amount and timing of borrowing and ability to make payments, manage liquidity.
At year end compare cash flow budget with actual cash flow statement.

Question 108

What are the major components of a cash flow budget?

Answer 108

Cash inflows
Cash outflows
Cash balance = Inflows - Outflows
New borrowing required?
Loan repayment (principal and interest)
Outstanding balances for all loan types

Ending cash balance in one period is beginning balance for the next period

Question 109

What are the sources of cash?

Answer 109

Beginning cash balance or cash on hand at the beginning of the period.
Farm product sales or other cash revenue from operations.
Capital asset sales.
Non-business cash receipts.
New borrowed capital or loans received.

Question 110

What are the uses of cash?

Answer 110

Farm operating expenses.
Capital purchases.
Non-business expenses.
Loan payments (principal + interest).

Question 111

What is cash flow deficit?

Answer 111

Operating loan or line of credit often used to bridge cash flow gaps.
-Use to cover operating expenses, not to
purchase long-term assets (equipment,
cattle).
-Repay as commodities sold -> ideally
within the year or production cycle.
Farm input suppliers may offer input loans or delayed payment.
Federal government Advance Payments Program.
-$100,000 interest-free borrowing.

Question 112

What is the AAFC Advanced Payments program?

Answer 112

Available for +50 commodities (crops, forage, livestock).
Borrow up to $1M -> first $100K ($250K for ’22 & ’23) interest-free, remainder prime less 0.75%, security required.
Repay in 18 months for crop, hogs, lambs, goats.
Repay in 24 months for cattle, bison.
Advance rates are intended to reflect 50% of selling price for a given commodity.

Question 113

What are the 10 steps to cash flow budgeting?

Answer 113

1. Outline whole-farm plan (Acres of each
   crop, # of animals).
2. Take inventory (current assets).
3. Estimate crop production & feed
   requirements for livestock.
4. Estimate cash receipts from livestock.
5. Estimate cash crop sales.
6. Estimate other cash income (custom
   work, government payments, non-farm
   income can be included (investments,
   gifts)).
7. Estimate cash farm operating expenses
   (Refer to past year values).
8. Estimate personal and non-farm cash
   expenses (living expenses, income tax)
   (Estimate family living withdrawals,
   incorporated/partnership may exclude).
9. Estimate purchase and sales of capital
   assets.
10. Scheduled principal and interest
    payments on existing debt.

prepare alternative versions (Vary assumptions on yield, price, input costs, capital purchases).

Question 114

What are cash inflows?

Answer 114

New loans received.
Non-farm income.
Full sale price of capital assets.
Monetary gifts and inheritances received.

Question 115

What are cash outflows?

Answer 115

Principal payments on debt.
Full purchase price of capital assets.
Family living expenses/personal withdrawals (maybe on cash flow).
Income taxes.

Question 116

What is found on income statements and not cashflow statements?

Answer 116

Inventory changes
Accounts receivable
Accounts payable
Depreciation

Question 117

What are uses for cashflow budgets?

Answer 117

Plan borrowing and debt repayment. Identify ways to minimize borrowing.
Help establish realistic line of credit.
Plan purchases to obtain discounts.
Aid tax planning.
Monitor and control cash flows -> budget, actual, deviation.
Does not project profit -> net cash flow ≠ net farm income.
Determine financial feasibility of an investment.

Question 118

What does cash flow and economic profit show?

Answer 118

Profit from budgets: overall Revenue > overall Expenses.
-Does not consider the timing of revenue
inflow and expense outflow.
A positive cash flow is required to make an enterprise financially feasible.
-Do you have the cash resources to pay
the expenses when they are due?
A positive cash flow does not always mean profit.
-Selling off capital assets for cash ≠ profit.
Cash flow budget does not substitute for enterprise budget.

Question 119

What do you do when you have cash?

Answer 119

-Hold onto your cash. you may need this for operation expenses in the future.
-Evaluate income statements and verify that your cash availability also means you’re generating a profit.
-Buy inputs in advance and consider forward contracting your commodities.
-Assets future expansion or purchase plans. is now the time to take on that value-added opportunity?
-Pay off more on your loans.

Question 120

What do you do when you are short on cash?

Answer 120

-See where you can cut costs, reduce labour or find efficiencies. Dig into the fixed and variable costs within your operation.
-Find ways to make extra sales. Is there equipment you don’t use that you can auction off? Can you rent out storage space or take on new work?
-Diversity activities to provide year-round cash flow. If your income comes in the fall, include something that produces income in the late spring.
-If your operation can’t handle an interest spike, lock in your rates.

Question 121

What is a projected cash flow statement?

Answer 121

Monthly or quarterly plan of cash inflows and outflows.
Determine timing and size of cash deficits or surpluses throughout the year.
-Expenses not paid evenly over the year.
-Marketing not evenly distributed over the
year either.
Use to justify loan requests (line of credit), determine repayment schedules, plan for short-term investments.

Question 122

A primary purpose of a cash flow budget is to…
A) project how large a credit line is needed
for the coming year
B) estimate total costs of production per unit
of crops or livestock
C) minimize income taxes
D) project the farm’s net income for the
coming year

Answer 122

A) project how large a credit line is needed
for the coming year

Question 123

Which of the following would never appear in a farm cash flow budget?
A) Payment to be made on an operating line
of credit
B) Opportunity cost of the family’s own
labout
C) Wages to be paid to hired labour
D) Cost of purchasing a new seeder

Answer 123

B) Opportunity cost of the family’s own
labout

Question 124

True or false: A farm business that is profitable over the long run will always have plenty of funds to meet cash obligations.

Answer 124

False

Question 125

Cash flow problems can result from all of the following except…
A) purchasing new buildings, land or
equipment
B) expanding a livestock enterprise
C) paying off loans over too long a period
D) financing high nonfarm expenses from
farm income

Answer 125

C) paying off loans over too long a period

Question 126

If projected net cash flow for the entire year is negative, a possible adjustment to the cash flow budget would be…
A) change the date of a major loan payment
to a different month
B) plan to sell old grain crop earlier in the
year
C) postpone new capital investments until a
future year
D) borrow more operating capital in the
spring and repay it in the fall

Answer 126

C) postpone new capital investments until a
future year

Question 127

What is the difference between ricks and uncertainty?

Answer 127

Risks - possible outcomes and probabilities of occurring are known (or estimated).
Uncertainty - possible outcomes and probabilities of occurring are unknown.

Question 128

List what attitudes risk depends on.

Answer 128

• Financial security
• Stage of life
• Health
• Family circumstances
• Business and personal goals

Question 129

What is the right level of risk?

Answer 129

When you can sleep well at night.

Question 130

True or False: Ag producers are less likely to take more risk than the general population

Answer 130

False

Question 131

How do managers form expectations for future conditions?

Answer 131

They often use average (mean) or “expected” values for yield, input costs, output prices; however, there is no guarantee that expected outcome will be actual outcome

Question 132

How is historic production of farm useful for managing risk?

Answer 132

• Provides picture of risk faced in the past
• Assess how successful past risk management has been

Question 133

What are the three measures that help look at the expected value of yield or price?

Answer 133

• the most frequent value (mode)
• the “middle” value (median)
• the average value (mean)

Question 134

What is the difference between objective probability or subjective probability?

Answer 134

Objective:
- observation or measurement
- data available
Subjective:
- reliance on personal beliefs, past
experience/educated guess
- vary from person to person

Question 135

What are measures of variability?

Answer 135

• Range
• Standard deviation
• Coefficient of variation

Question 136

What is the equation for range?

Answer 136

Range = Largest value - Smallest value

Question 137

What is standard deviation?

Answer 137

• Common measure of variability
• Can estimate from sample of past actual outcomes
• Large standard deviation means greater variability of possible outcomes
• Greater likelihood that actual outcome different from expected value

Question 138

What is the equation for coefficient of variation?

Answer 138

Coefficient of variation (CV) = Standard deviation / Mean or expected value

Question 139

What is the coefficient of variation?

Answer 139

• Compare relative variability between alternatives
• Standardizes the variation if samples vary in scale or mean
  The larger the coefficient of variation - the greater the variability
• Greater likelihood that expected value will not give you actual outcome

Question 140

What is the main production driver in unpredictability in agriculture?

Answer 140

Climate

Question 141

True or false: If flax yield has a higher calculated standard deviation than fenugreek yield, it necessarily means that flax is “riskier” to produce.

Answer 141

False

Question 142

Which of the following measures of variability is best for making comparisons among the profitability of different enterprises?
A) Range
B) Standard deviation
C) Coefficient of variation
D) Average

Answer 142

C) Coefficient of variation

Question 143

True or false: The best information source for production and marketing information to apply to your operations comes from expert ag economists.

Answer 143

False.
The best information comes from your own records.

Question 144

True or false: When trying to predict livestock weight gain, adding the standard deviation to the mean of your observations will give a complete view of the variability in weight gain to expect.

Answer 144

False.
Your need to add and subtract standard deviation from your mean. You might have to do 2 standard deviations.

Question 145

Give examples of Production/Technical Risks.

Answer 145

• Weather, disease, weeds, pests
• Fire, wind, theft
• Yield variability, field loss, spoilage

Question 146

The best expected value to use for selling prices of weaned calves while preparing an enterprise budget is…
A) a weighted average using subjective
probabilities
B) a weighted average using objective
probabilities
C) a simple average using 10 years of data
D) any of the above you feel most
comfortable using

Answer 146

D) any of the above you feel most
comfortable using

Question 147

Give examples of Price & Market Risks.

Answer 147

• Seasonal & annual price variation
• Input price variability & availability
• Market access

Question 148

Give examples of Financial Risks.

Answer 148

• Interest rate fluctuations
• Debt repayment
• Working capital

Question 149

Give examples of Legal & Social Risks.

Answer 149

• Rules, Regulations
• Liability
• Consumer preferences & awareness

Question 150

Give examples of Human Resources/Personal Risks.

Answer 150

• Accident/Injury
• Illness, Death, Divorce, Family disputes
• Mental health
• Employees

Question 151

What do farmers say their top three risks are in order?

Answer 151

1. Marketing
2. Production
3. Financial

Question 152

Name five production risk tools and describe them.

Answer 152

• Use your education: incorporate recommended production practices where appropriate and monitor results
• Choose stable enterprises: flowers vs commodities, alpacas vs cattle
• Diversification on the farm: growing several crops with livestock to reduce risk (better if different crops are not susceptible to the same insects and diseases)
• Diversification off the farm: Part-time nonfarm job
• Property Insurance: insuring buildings, machinery, livestock, stored grain
• Crop insurance: insuring crops

Question 153

What is extra production capacity risk tool?

Answer 153

May choose to invest in excess machinery or labour capacity to be able to catch up when needed

Question 154

What is crop/livestock share leases rick tool?

Answer 154

Production and price risks shared between tenant and owner

Question 155

What is custom farming and feeding risk tool?

Answer 155

Fixed cost received for services

Question 156

What is market risk?

Answer 156

• Market risk comes from variability of commodity prices
• Manage must decide to produce without knowing future price

Question 157

List five market risk tools and describe them.

Answer 157

• Be educated: Learn how markets function and how prices are determined
• Spreading sales: sell crop or livestock throughout the year
• Contract sales: deferred delivery contract (deliver specific quantity quantity at particular price for specified future date)
• Futures hedging: sell a commodity futures contract at a price that guarantees you some profit over costs
• Commodity Options: derived from commodity futures contract (pay a premium to buy the right, not obligation to buy or sell commodity future contract by specified future date)

Question 158

What are the responses to financial risk?

Answer 158

• Maintain liquidity and solvency
  - Good set of financial records
  - Cash flow projections
  - Manage pace of purchases & sales, family
  withdrawals
• Fixed interest rate vs variable rate on loans
• Self - liquidating loan
• Hold liquid (cash, commodities) and credit reserves

Question 159

Name the financial risk tool.

Answer 159

• AgriInvest (self-managed producer-government savings account)

Question 160

Name some responses to legal/social risk.

Answer 160

• Appropriate business organizational structure
• Will and estate plan
• Liability insurance
• Stay current on environmental obligations, government policy
• Seek legal advice/counsel: written contracts and leases

Question 161

Name some responses to human/personal risk.

Answer 161

• Life and disability insurance
• Make health and safety a priority: including adequate rest
• Cross-train, develop SOPs, involve successors in all facets of business
• Paid labour: fair compensation, benefits, training, job description

Question 162

Which of the following strategies does NOT reduce production risk for an operation with cash crops and cattle?
A) Selling grain before harvest with a
forward contract
B) Vaccinating livestock against disease
C) Applying insecticide to your crop
D) Keeping an extra year’s supply of hay in
storage

Answer 162

A) Selling grain before harvest with a
forward contract

Question 163

What type of insurance protects against damage to a farm machine storage building?
A) Liability insurance
B) Property insurance
C) Life insurance
D) Multi-peril crop insurance

Answer 163

B) Property insurance

Question 164

According to the recent FCC survey, which of the following sources of risk in agricultural protection was perceived as most important to cash crop and cattle producers?
A) Production risk
B) Marketing risk
C) Financial risk
D) Legal risk
E) Human resource risk

Answer 164

B) Marketing risk

Question 165

True or false: For cash crop farmers in Saskatchewan, crop diversification is one of the most effective tools to reduce production risk.

Answer 165

False

Question 166

What makes the Agrilnvest program attractive to many Canadian ag producers?
A) The matching government contribution of
1% on your deposits
B) The flexibility to place your money in an
institution of your choice
C) The ability to withdraw funds when
needed
D) All of the above

Answer 166

D) All of the above

Question 167

What is a farm?

Answer 167

CRA definition and case by case
Tax regulations similar to self-employed businesses with important exceptions.
Activities, revenue, comparisons (to farms nearby and similar in size), investments, plans to expand?
You can’t just buy some property and a cow and say you have a farm.

Question 168

What tax advantages do farmers have?

Answer 168

Cash accounting
-Play around when you buy and sell things
Higher Capital Gain Exemption
-Non-farm businesses have exemption of 800,000 where farms have exemption of 1,000,000, gains you make with your capital assets
Intergenerational Qualified Farm Property transfer
-Can be done tax free

Question 169

What province has the highest % of sole proprietorship and least amount of partnerships?

Answer 169

Saskatchewan

Question 170

List the 3 types of farm business structures.

Answer 170

Sole proprietorship
Partnership
Corporation

Question 171

What is the sole proprietorship legal aspects?

Answer 171

Legally you have to do nothing to be a sole proprietorship, you just have to start your operation and register your name.
Liabilities of the whole farming operation is dependent on the person.
Make sure you have really good liability insurance.
There is some restriction on farmland in SK.
-You need to be Canadian or have a permanent residence to have farmland over 10 acres.

Question 172

How does sole proprietorship deal with taxes?

Answer 172

Income taxes are considered personal income.
Profit from the farm is added to any other income you are getting from other sources.
Tax rate will be whatever your personal tax rate is.

Question 172

Sole proprietorship business operations.

Answer 172

Owner’s role -> makes all decisions and gets all of the profit
There is no limit to how big you can make your business.

Question 173

Sole proprietorship advantages

Answer 173

Simplicity and autonomy.
Don’t need lawyers.
Don’t need to file a bunch of papers, only have 1 income form to fill out.
No expenses to set it up.
Freedom to do what you want.
There are no penalties if you mix farm income with personal income.

Question 174

Sole proprietorship disadvantages

Answer 174

Liability is unlimited.
- you have no protection against creditors, they can seize both personal and business assets.
Limits to growth.
-You cannot bring in other people
Higher tax rate
-Depends on the situation

Question 175

What is the partnership legal aspects?

Answer 175

Not a legal entity, an agreement
Can have 2 or more partners (must be over 18)
Liability -> all partners are equally responsible for everything and personally responsible for everything
Share all the profits

Question 176

Partnership tax considerations

Answer 176

Income Tax- partnership not a taxable person
Each person has their own personal tax returns, need to figure out how to split up profit.

Question 177

Partnership business operations

Answer 177

Flexibility is possible
Partner can sell assets (land) without other partner’s consent
Can have assets in your own name and rent to partnership
Partnership agreements:
-Contributions, profit and loss allocation
-Rights and responsibilities
-Decision-making, dispute resolution
-Partnership bank accounts
-Can new partners may be added? How?
-Who will do the paperwork?
-Termination of partnership

Question 178

Partnership advantages

Answer 178

Increased assets, skills, shared management
Access more credit
Flexibility to bring in next generation

Question 179

Partnership disadvantages

Answer 179

Unlimited liability of general partners
-You are only liable for the business debts of the other party, not their personal debts. But if the partnership has debts your personal assets can be claimed by the creditors
No continuity
-Partnership dissolves if someone dies
Potential for disagreement

Question 180

What is the corporation legal aspects?

Answer 180

Legal organization
-Need lots of paperwork
-Need a name for corporation
Need to talk about nature of the business (but don’t be too specific)
Articles of Incorporation need to be filed
“Constitution of corporation” governs structure and manner in which the corporation operates

Question 181

What is a corporation and what happens with taxes?

Answer 181

Independent organization
-Can be private or public
Assets and liabilities belong to the corporation
Separate entity (legal person)
-Can own property
-Can borrow money
-Can enter into contracts
-Can sue and be sued
Files its own income tax return
-Can have lower tax rates

Question 182

What is the corporation business breakdown?

Answer 182

Shareholders
-Owners
How much equity you contributed gives you % of shares
Directors
-Voted in by shareholders
-Need to be 18+ and not bankrupt
-Does not need to be a shareholder
-Can be as many people as you want
-Set general policies and conduct business affairs
Officers
-Elected/removed by directors
-Can be made up of whatever you want (president, secretary etc.)
-Does not need to be shareholders or directors
-Responsible for daily operations of the business (hire/fire people, sign contracts, borrow up to a certain amount of money)
-Need approval from directors for big things
(For a farm/ranch corporation, often all the same individuals)

Question 183

How are corporation shares split up and what are the types of shares ?

Answer 183

Number of shares and initial value of shares is determined by how much equity you put into the business
Types of shares
-Common shares
-Value increases as corporation grows
-Can get dividends
-Voting shares
-If business gets dissolved, they can get
some property
-Preferred shares
-Value does not increase as corporation
grows
-Do not vote
-Get money before common shares
-Receive fixed dividends

Question 184

Corporation advantages

Answer 184

Limit liability to shareholders
-Shareholders personal assets are protected
More resources, credit access
Continuity, Transition
-Corporation does not disappear if someone dies
-Can transfer shares
Taxes
-Have a lower tax rate

Question 185

Corporation disadvantages

Answer 185

Costly
-Costs money to set up and maintain
Meetings, reports required
Must manage withdrawals for tax benefit

Question 186

What is the most common business structure in the Canadian Prairie provinces?
A) Sole proprietorship
B) Partnership
C) Corporation

Answer 186

A) Sole proprietorship

Question 187

The number of shares received by each shareholder at the time of incorporation for a ranch or farm is based on the ______ contributed by each shareholder.
A) Value of equity capital
B) Value of liabilities
C) Amount of labour
D) Managerial experience

Answer 187

A) Value of equity capital

Question 188

Which of the following are special tax benefits available to ranchers and farmers in Canada?
A) Can use cash accounting when filing
income tax returns
B) Higher capital gain exemption than other
taxpayers
C) Intergenerational farm property can be
transferred tax-free
D) All of the above
E) None of the above

Answer 188

D) All of the above