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Learn to prepare and analyze a balance sheet, differentiate assets and liabilities, asset valuation, debt types, and building a two-column statement. Get insights on the purpose, significance, and parts of the balance sheet in financial management.
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YOUR BALANCE SHEET Roger Betz, Sherrill Nott, Gerald Schwab, Barbara Dartt FIRM AoE team
In the United States Four Basic Financial Documents: • Balance Sheet (Net Worth Statement) • Income Statement • Statement of Cash Flows • and a newer one -- Statement of Owner Equity
Balance Sheet Purpose • Determines solvency of business
Balance Sheet Defined • List of Assets Owned and Debts Owed • At a point in time • With dollar values attached + $ Assets - $ Liabilities (Debts) = $ Net Worth or Equity
The Balance Sheet • Name -- What does this represent? • Partnership, individual, combined • Needs to be consistent over time • Date -- This is as of what date? • Listing of all assets and all liabilities • Balances at the bottom of form • Assets - Liabilities = Equity
Balance Sheet PreparationSome Issues • IDENTIFY clearly the person(s) or the business entity being described • SEPARATE the business assets and liabilities from the personal • Be CONSISTENT as to WHEN the Balance Sheet is prepared • at a minimum, prepare a net worth statement when your accounting year ends • Valuation of Assets -- costs and/or market • recommend two column balance sheet • The Balance Sheet is the Cornerstone to Financial Management
Balance SheetAsset Types • Current assets (<1 year) • Consumed or converted to cash in 12 months e.g. crops, market livestock, prepaid expenses,cash, savings • Intermediate (1-10 years) • e.g. machinery, breeding livestock, equipment, stocks, some buildings • Long Term (>10 years) • e.g. land, buildings, stocks • Selling would typically decrease volume or size of business
Asset Value Determination • Book Value (cost basis) • Useful for trend analysis • Fair Market Value • Useful to determine liquidation value
Balance SheetDebt Types • Current liabilities (<1 year) • To pay in the next 12 months e.g. bills, accrued interest, taxes, operating loans • Intermediate (1-10 years) • What is scheduled to be paid in 1 to 10 years e.g. machinery loans, special use buildings • Long Term (>10 years) • Scheduled originally to be paid in 11 or more years e.g. land debt, house payments
Parts of the Balance Sheet(Current)Liabilities -- What you owe someone else (against what you own) • Current Liabilities • What you are scheduled to pay in the next 12 months • Unpaid bills, accrued interest, property taxes • Operating loans • Principal payments on term debts to be made in the next 12 months
Parts of the Balance Sheet(Intermediate)Liabilities -- What you owe to someone else (against what you own) • Intermediate Liabilities • What is scheduled to be paid in 1 to 10 years (subtract out the current position) • Typically, machinery loans, breeding livestock, special use buildings • Match up to the intermediate assets
Parts of the Balance Sheet(Long Term)Liabilities -- What you owe to someone else (against what you own) • Long Term Liabilities • What was scheduled originally as 11 or more years • Land debt, house payments • Match up to the long term assets
Parts of a Balance Sheet(Term) Definition: • Term Debts are • Intermediate liabilities (Intermediate term) • Long term liabilities Term debts are NOT current loans
How to Build a Balance Sheet 1) Do a count: Crops: bushels, tons, etc. Animals: head Supplies Buildings Land: acres 2) $ Prices for each of the above. Recommend both cost and market value for term assets
How to Build a Balance Sheet 3) Machinery list (depreciation schedule?) Cost less depreciation = book value 4) Assemble the above into the format 5) Add up the assets 6) Add up the debts 7) Assets minus debts = net worth or equity
How to Build a Balance Sheet 3) Machinery list (depreciation schedule) Cost minus depreciation = book value 4) Assemble the above into the format 5) Add up the assets 6) Add up the debts 7)Assets minus debts = net worth, or equity
Take out a Piece of Paper Draw some lines and label like this:
What is the Balance Sheet? • Picture in time -- a specific point, as in “Midnight, 12/31/20XX.” • Shows financial position--ability to handle risk • Net result of past • Very important component to track and monitor financial progress • Basic building block for financial analysis
What a Balance Sheet is NOT • Does NOT necessarily tell you if the business is making money • Does NOT tell you where net worth came from
Change in Net Worthdue to: • Retained Earnings • from profits earned and retained in business • Market Valuation Equity • from change in market value of assets
Retained Earnings(contributed capital) • Dollars earned by the business that are kept or retained for reinvestment in the business • Calculated by: + $ Total Assets @ Cost Value Basis • $ Total Liabilities before Contingent Liabilities
Balance Sheet Specials 1. Rented assets 1) Belong on landlord’s balance sheet 2) Footnote on tenant’s 3) If payable, rent is short-term debt
Balance Sheet Specials 2. Growing Crops 1) Date sets the list 2) Winter Wheat 3) Value = Cost of variable inputs
Balance Sheet Specials • 3. Leased Items (tractors, pickups, buildings) • Assets: A) On user’s balance sheet = lease payments due • Liabilities B) On user’s balance sheet = lease payments due
Balance Sheet Specials 4. Government Commodity Loans
Valuation Equity • Dollars of asset value that are created because the market value of term assets is greater than the book value • Calculated by: • + $ Total assets @ Market Value basis • - $ Total Liabilities inc. Contingent Liabilities • - $ Retained Earnings (contributed Capital)
A Good Balance Sheet 1) One page summary 2) Name and date 3) Shows type of farm 4) Cost and market columns
A Good Balance Sheet 5) Indicates physical quantities of major items 6) Sequence of items Sale time: quick ---> long 7) Assets less debts equals net worth (Own - Owe = Equity)
The Balance Sheet:Building Block forFinancial Analysis • Financial Position • Trend Analysis • Feeds Into the Income Statement • Communication to Self • Communicating with those outside the business • Needs Good Detail