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Balance Sheet

Balance Sheet. Describes the financial condition of the business at a point in time Gives two important financial measures of the business: Solvency Liquidity. Balance Sheet. Assets = Liabilities + Net Worth Someone has a claim on each asset of the farm business Lender – liability

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Balance Sheet

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  1. Balance Sheet • Describes the financial condition of the business at a point in time • Gives two important financial measures of the business: • Solvency • Liquidity AGEC 407

  2. Balance Sheet • Assets = Liabilities + Net Worth • Someone has a claim on each asset of the farm business • Lender – liability • Owner - equity • According to business finance laws, which claim has priority? AGEC 407

  3. Assets • Current Assets • Cash and property that will be converted into cash during the business year • Cash, savings accounts, CDs • Inventories: e.g. feed, supplies, fertilizers • Items held for sale: e.g. hogs, feeder cattle, grain AGEC 407

  4. Assets • Intermediate Assets • Short-lived capital resources used in farm production • Not sold or converted to cash in the coming year • Useful life of <= 7-10 years • Includes machinery and equipment, vehicles, breeding livestock AGEC 407

  5. Assets • Long-term Assets • Land and buildings • Personal Assets AGEC 407

  6. Liabilities • Current liabilities • Debt obligations that are payable on demand or within the operating year (coming 12 months) • Accounts payable • Current portion of loans (principal) • Accrued interest, expenses, and taxes AGEC 407

  7. Liabilities • Intermediate liabilities • Debt obligations that are due from one to 7-10 years out • Deferred accounts, principal • Loans for machinery, livestock, or non-land improvements AGEC 407

  8. Liabilities • Long-term liabilities • Debt obligations that are due more than 7-10 years out • Loans for land, mortgage • Personal Liabilities AGEC 407

  9. Net Worth • Total assets less total liabilities • Owner’s financial claims on the business assets • The amount the owner would receive if the business was sold and all debts paid AGEC 407

  10. Valuation of Assets • Two valuation methods: • Market value • Use current market value of assets purchased in the past • Cost basis • Use original cost less accumulated depreciation since purchase AGEC 407

  11. Valuation of Assets • Market value • More accurate reflection of financial condition and collateral for loans • Better for soon-to-be-sold assets (e.g. market livestock, grain) AGEC 407

  12. Valuation of Assets • Cost basis • Changes in equity from net income retained in the business (not from change in market price) • More conservative estimate of asset’s value AGEC 407

  13. Valuation of Assets • FFSC Recommendations for farms: • Use market valuation with cost information as footnotes; OR • Use a double column balance sheet AGEC 407

  14. Financial Measures • Solvency • Relationship between assets and liabilities • Liabilities > Assets: • Insolvent • Negative net worth • Candidate for bankruptcy AGEC 407

  15. Financial Measures • Liquidity • A short-run concept • Ability of the business to meet financial obligations as they come due AGEC 407

  16. Financial Measures • Measures of Liquidity • Current Ratio • Ratio of current assets to current liabilities • Working capital • Difference between current assets and current liabilities AGEC 407

  17. Financial Measures • Measures of Solvency • Net Worth • Debt/Asset Ratio • Measures long-run solvency • Debt/Equity Ratio • How much capital from lenders vs. owners • Equity/Asset Ratio AGEC 407

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