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Changes in Owner Equity & Net Worth

Changes in Owner Equity & Net Worth. Net worth = personal assets - personal liabilities* * Recommended by the Farm Financial Standards Council. Changes in Owner Equity & Net Worth. Net worth = business assets – business liabilities + personal assets - personal liabilities*

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Changes in Owner Equity & Net Worth

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  1. Changes in Owner Equity & Net Worth • Net worth = personal assets - personal liabilities* *Recommended by the Farm Financial Standards Council

  2. Changes in Owner Equity & Net Worth • Net worth = business assets – business liabilities + personal assets - personal liabilities* * Recommended by the Farm Financial Standards Council

  3. Changes in Owner Equity & Net Worth • Owner Equity = business assets – business liabilities* * Recommended by the Farm Financial Standards Council

  4. Changes in Owner Equity & Net Worth Owner Equity. Same as equity. The term is generally used when presenting a statement of financial position for only abusiness enterprise and which statement does not include information for an individual person.

  5. Changes in Owner Equity & Net Worth • Owner equity represents the financial claims of the owners against the assets of the firm • Liabilities represent the financial claims of creditors against the assets of the firm Problem 1, p. 81 in packet

  6. Changes in Owner Equity & Net Worth • Flows determine changes • Profit (loss) • Owner contributions & withdrawals • Gifts & inheritances • Non-business flows • Market values vs. cost basis of assets • Our balance sheets display market values

  7. Changes in Owner Equity & Net Worth • Market value balance sheet: values for long-lived (fixed) assets are market values. • Cost basis balance sheet: values for long-lived (fixed) assets are book values.

  8. Changes in Owner Equity & Net Worth • The banker likes to see market value balance sheets. • How much cash can be recovered from the assets? (Note that the values can change in an unfavorable financial situation)

  9. Changes in Owner Equity & Net Worth • The owner/manager should like to see consecutive cost basis balance sheets. • What were the individual impacts of profit and withdrawals? • Question cannot be answered with market value balance sheets only.

  10. Changes in Owner Equity & Net Worth • Cost basis owner equity Beginning cost basis OE + profit (- loss) • withdrawals for unpaid labor, mgmt + non-farm income added to farm assets +/- gifts, inheritances affecting farm assets = ending cost basis OE Problems 2a & 2b, p. 81 in packet

  11. Changes in Owner Equity & Net Worth If cost basis owner equity increased over an accounting period, and gifts & inheritances received = 0, and non-farm income contributed to farm = 0, then profit > owner withdrawals

  12. Changes in Owner Equity & Net Worth • Market value owner equity Beginning market value OE + Δ cost basis OE + Δ valuation equity = ending market value OE

  13. Changes in Owner Equity & Net Worth • Valuation equity reflects changes in the market values of long-lived assets and related deferred taxes. • As the market values of long-lived assets increase, valuation equity typically increases, which causes market value owner equity to increase.

  14. Changes in Owner Equity & Net Worth Cost basis owner equity + valuation equity = market value owner equity Problem 2c, p. 81 in packet

  15. Changes in Owner Equity & Net Worth ∆ cost basis owner equity + ∆ valuation equity = ∆ market value owner equity

  16. Changes in Owner Equity & Net Worth • Net worth Beginning net worth + Δ market value OE + non-farm income added to non-farm assets +/- Δ in personal assets/liabilities = ending net worth

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