Accounting Basics

1. Accounting Basics Keeping your financial records in order

2. Objectives • Understand and utilize a balance including: • Understanding the purpose of a balance sheet • Be familiar with balance sheet terminology and structure • Be familiar with cost and market valuing of assets • Be able to use the balance sheet for strategic management purposes

3. Bookkeeping Basics The Cliffs Notes to understanding financial management.

4. Accounting Terms • Account Payable – Incurred expense that has not yet been paid • Account Receivable – Revenue for a product that has been sold or service that has been provided, but payment has not yet been received • Accrued Expense – Expense that accumulates, but has not yet been paid • Asset – Item of financial value or produces something of financial value • Credit – Accounting entry that records decrease in asset/increase in liability, owner’s equity, or an income account • Debit – Accounting entry that records increase in asset/decrease in liability or owner’s equity

5. Accounting Terms Cont’d • Expense – Cost incurred in production of revenue • Inventory - Physical quantity and value of stored products • Liability – Debt or financial obligation • Net Farm Income (Profit) – Revenue minus Expenses • Owner’s Equity – Assets minus Liabilities • Prepaid Expense – Payment for input prior to the accounting period it will be used • Revenue – Value of products produced and sold during an accounting period

6. Bookkeeping Basics Bookkeeping is the compiling of financial records for mainly non-tax purposes. Spreadsheet Programs: Microsoft Excel Bookkeeping Programs: Quickbooks Famous Software Financial Report Programs: FINPACK University of Idaho Enterprise Budget Software • Financial Reports: • Balance Sheet • Income Statement • Transaction Journal (check register) • General Ledger • Depreciation Schedule • Inventory Report • Enterprise Report • Employee Records • Income Tax Reports • Statement of Cash Flow • Statement of Owner Equity • Family Living Expense Report

7. Recording Transactions Decrease Debit Side Increase Credit Side Increase Debit Side Decrease Credit Side

8. You invest $10,000 from your personal savings account into your farm business. You purchase a piece of equipment using $8,000 from the farm’s checking account and a loan from the bank for $12,000. $10,000 - $8,000 = $2,000 left in checking account.

9. You deposit $20,000 from crop sales into farm checking. You pay your hired labor $4,000 for the month. $2,000 + $20,000 - $4,000 = $18,000 left in checking account.

10. Balance Sheet What do you own and what do you owe?

11. Balance Sheet • Use balance sheet to evaluate the value of what you own compared to what you owe. • Tells you the net worth of the business. • Tells you the financial position of the business at a point in time. • Solvency measures • Liquidity measures

12. Balance Sheet Fundamentals • Assets = Liabilities + Owner’s Equity • Can be rewritten as: • Assets – Liabilities = Owner’s Equity • Definitions: • Assets – Can be sold to generate cash or produces good that can be sold • Liabilities – Obligation or debt owed to someone else • Owner’s Equity- Represents what is left for the owners

13. Fundamentals Cont’d • Assets • Current Assets: Assets that can be sold quickly (liquid) or will be used up in less than 1 year (i.e. checking account, inventory) • Non-current Assets: Assets that are illiquid and have a life span greater than 1 year (i.e. equipment, buildings, land) • Liabilities • Current Liabilities: Liabilities due within 1 year (i.e. operating loans) • Non-current Liabilities: Liabilities due in more than 1 year (i.e. land loans) • Assets increase Owner’s Equity, Liabilities decrease Owner’s Equity

15. Combine valued at $250,000. 400 acres of winter wheat planted at a cost $45.00 per acre. Line of credit at the local feed store of $16,425. Checking account balance of $6,436. Real estate loan of $535,275, plus an accrued payment of $69,700. Breeding livestock worth $197,000. Corrals and buildings appraised at $103,000. Owners contributed $225,000 in capital to start the farm. Land worth $1,450,000.

17. Market v. Cost • Cost-Basis Balance Sheet – Uses the cost or cost less depreciation to value assets (what is its book value) • Market-Basis Balance Sheet – Uses the current market value less selling costs (what could you get if you sold it today) • Pros and cons of each: • Cost-Basis: promotes conservatism, conforms to GAAP • Market-Basis: more accurate for determining collateral

19. Balance Sheet Analysis Financial Condition of your Farm

20. Balance Sheet Analysis Liquidity Solvency Focuses on Total Assets and Total Liabilities If you were to shutdown today, could you repay all your debt? How much more debt can your farm handle? • Focuses on Current Assets/Current Liabilities • Do you have enough cash to pay upcoming debts for the next 12 months without disrupting business operations? • Will you have anything left for emergencies?

21. Current Ratio = Current Ratio = Red: Ratio less than 1Yellow: Ratio between 1 and 1.5Green: Ratio greater than 1.5Goal: Ratio greater than 1.5 Working Capital = $106,436 – $86,125 = $20,311 Working Capital = Current Assets – Current Liabilities No rule of thumb as to how much you need. Larger operations may need more than smaller operations. Goal: Working Capital of ____

22. Debt/Asset Ratio = Debt/Asset Ratio = Red: Ratio more than 0.55Yellow: Ratio between 0.3 - 0.55Green: Ratio less than 0.3Goal: Ratio less than 0.3 Debt/Equity Ratio = Debt/Equity Ratio = Red: Ratio greater than 1.22Yellow: Ratio around .42 – 1.22Green: Ratio less than .42 Goal: Ratio close to 0

23. Net Capital Ratio = Net Capital Ratio= Red: Ratio close to 1Yellow: Ratio close to 2Green: Ratio greater than 2Goal: Ratio greater than 2 Debt Structure Ratio = Debt Structure Ratio = Ratio close to 1 means a large proportion of debt is due soon. Ratio close to 0 means a large proportion of debt is due in more than 1 year. Goal: Debt Structure Ratio of ____

24. Case Studies

25. Grant County Farms, LLC. Objectives • Evaluate the company’s current financial health based on the balance sheet. • Based on your evaluation, what suggestions would you give Grant County Farms, LLC to better manage their liquidity and solvency? • Based on your evaluation of Grant County Farms, LLC’s liquidity and solvency, how do you feel about a growth strategy? What other information do you need to know? Operation and Background: You are the owner of Grant County Farms, LLC. It is the end of your fiscal year, and you want to measure the health of your business through profitability analyses. Grant County Farms owns 700 acres of non-irrigated cropland on which it runs a winter wheat/fallow rotation. You also run 300 cow/calf pairs on another 700 acres. You have an excellent reputation as a farmer, and you come from a well-establish family in the area. You are the second generation to own this farm.

26. Homework • Gather the information for your balance sheet. • Construct or update your balance sheet. • Calculate your financial ratios for liquidity and solvency. • Discuss the financial condition of your business with your management team.

27. One Minute Takeaway • Take a minute to write down one or two ideas or takeaways from this lesson.

28. Sieverkropp Consulting LLC. Contact: Elizabeth Sieverkropp esieverkropp@gmail.com (509) 398-6858 Website: www.sieverkroppconsulting.com Training Program Homepage: www.sieverkroppconsulting.com/fsa-borrower-training-program-homepage