The Balance Sheet

1. The Balance Sheet

2. Assets = Liabilities + Equity

3. Balance Sheet • Is Statement of Financial Position • Not necessarily the value of a business • Only an estimate of market Value

4. Balance Sheet • Assets of a business ultimately valued by their ability to generate revenue • True value determined from actual sale to third party

5. Primary Financial Statements • Balance Sheet • Earnings Statement • Cash Flow Statement

6. Types of Accounts • Assets • Liabilities • Equity • Income • Expenses

7. Beginning Balance Sheet Ending Balance Sheet Assets Liabilities Assets Liabilities Equity Equity • +/- Net Income • +/- Valuation Changes • Family living withdrawals • + Capital contributions

8. Account Valuation • All accounts have dollar value • Asset Accounts • Cost Basis • Market Value

9. Current Assets • Those that will be realized in cash, sold or consumed in the current operating cycle (1 year)

10. Current Assets • Inventories • Raised for Sale • Raised for use in Production • Purchased for Resale • Purchased for use in Production • Page II-32

11. Valuation Issues • Inventories • Lower of Cost or Market • Blending

12. Non Current Assets • Machinery & Equipment • Breeding Livestock • Buildings & Improvements • Land • Other

13. Valuation Issues • Raised Breeding Stock • Full Cost Absorption • Base Value Method • Page II-36, F-1

14. Current Liabilities • Those that will be discharged by use of current assets or creation of additional current liabilities in the current operating cycle.

15. Deferred Taxes • Tax liability in event of liquidation • Liquidation Value –Tax Basis times tax rate • Page II-24

16. Depreciation • Allocation of the expense that reflects “using up” of capital assets

17. Depreciation Original Cost – Salvage Value Years of useful Life

18. Depreciation Issues • Straight line • Accelerated • Front end loaded • Short life span • Section 179 • Zero Salvage Value

19. Depreciation Issues • Capitalize or Expense • Small tools • Equipment • Major repairs • Improvements

20. Example Farm’s Balance Sheet

21. Leverage • <40% - Financially Sound • 40-70% - Vulnerable • >70% - Financial Stress • >100% - Insolvent

22. Accounts Receivable Sales Revenue = Sales/Week 52 weeks Accts. Receivable = Weeks to Collect Sales/Week

23. Inventory Inventory Cost of Goods Sold = Turnover Inventory 52 Weeks Average Inventory = Inv. Turnover Holding Time

24. Accounts Payable Inventory = COGS/Wk Ave. Inv. Holding Time Accounts Payable = Weeks to Pay COGS/Wk