Acquiring and Organizing Management Resources

Acquiring and OrganizingManagement Resources

farm management chapter 3

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Farm Records

1. Measure profit and assess financial condition2. Provide data for business analysis3. Assist in obtaining loans4. Measure the profitability of individual

enterprises5. Assist in the analysis of new investments6. Prepare income tax returns


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Measure Profit and Assess Financial Condition

Profit is estimated by developing an income Statement.

The financial condition is shown on the balance sheet.


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Provide Data for Business Analysis

Use the information from the balance sheet and income statement to perform an in-depth analysis.

Analysis of past decisions is useful formaking current and future decisions.


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Assist in Obtaining Loans Lenders require financial

information about the farm business to assist them in their lending decisions.

lenders are requiring more and better records.

Good records increase the odds of getting a loan.


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Prepare Income Tax Returns

Internal Revenue Service (IRS)

Tax records are often inadequate for management purposes.

Sound record-keeping can also help reduce

income tax obligations.


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Farm Business Activities Production Activities


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Farm Business Activities Investment Activities


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Farm Business Activities Financing Activities


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Figure 3-1Farm business activities included in an accounting system


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Production Activities These accounting

transactions involve activities related to the production

Revenue from

product sales


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Production Activities These accounting

transactions involve activities related to the production

Production

expenses.


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Investment Activities

These activities relate to the purchase,depreciation, and sale of long-lived assets,such as land, equipment, or breeding livestock.

1. purchase date and price,2. annual depreciation, 3. book value4. current market value5. sale date and price6. gain or loss when sold.


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Financing Activities

1. borrowing money,2. paying the interest and principal

• Financing activities include money borrowed to• finance new investments• money borrowed to finance production activities.


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Basic Accounting Terms Account payable Account receivable Accrued expense Asset Credit Debt Expense

Inventory Liability Net Farm Income Owner Equity Prepaid Expense Profit Revenue


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Account Payable

An expense that has been incurred butnot yet paid.

30 to 90 days to pay the amount due.


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Account Receivable

Revenue for a product that has been soldor a service provided but for which nopayment has yet been received.


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Accrued Expense

An expense that accrues or accumulatesdaily but which has not yet been paid.

property taxes.


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Asset

tangible or financial.1. machinery2. Land3. Buildings4. grain,5. Livestock6. bank accounts


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CreditAn accounting entry in the right-handside of a double-entry ledger.


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DebitAn accounting entry in the left-handside of a double-entry ledger.


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Expense

A cost or expenditure incurred in theproduction of revenue.


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Inventory

The physical quantity and financial value of products produced for sale thathave not yet been sold.


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Liability

A debt or other financial obligation thatmust be paid at some point in the future.


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Net Farm Income

Revenue minus expenses. The sameas profit.


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Owner Equity

The difference between business assetsand business liabilities. It represents thenet value of the business to the owner(s)of the business.


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Prepaid Expense

A payment made for a product or servicein an accounting period before the onein which it will be used to produce revenue.


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Profit

Revenue minus expenses. The same as net farm income.


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Revenue

The value of products and services produced by a business during anaccounting period. Revenue maybe either cash or noncash.


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Options in Choosing an Accounting System

What accounting period should be used?

Should it be cash or accrual? Should it be single or double entry? Should it be basic or complete?


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Accounting Period

A period of time used to summarize revenueand expenses and estimate profit. It can beeither a calendar year or a fiscal year.


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Single vs. Double Entry

With single-entry, only one entry is made foreach transaction.

A double-entry system records changes in values of assets and liabilities as well as revenue and expenses.


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Basic vs. CompleteThe most basic accounting system is one that is very simple and uses cash accounting.

A complete system would be computerized with capabilities for both cash and accrual accounting,and with the ability to track inventories, loans, and depreciation, and to handle payroll accounting and performenterprise analysis.


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How Complete?

How much accounting knowledge does the user have?

How large and complex is the farm?

How much and what kind of information is needed or desired for management decision making?


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Basics of Cash Accounting Revenue: recorded when and only when cash

is received for sale of product or service Expenses: recorded when they are paid, even

if that is not when the item is bought or used to produce a product

Advantages: simple and easy-to-use Disadvantages: recorded revenues and

expenses may not be accurate reflections of activities during the accounting period


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Basics of Accrual Accounting

Revenue: recorded when the item is produced, regardless of when sold

Expenses: “matched” to revenue; recorded when used to produce

Advantage: accurate Disadvantage: requires more time

and knowledge than cash system


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Cash vs. Accrual Example November 2003: Purchased, paid for and applied fertilizer

for the 2004 grain crop. $8,000. May 2004: Purchased and paid for seed, chemicals, fuel,

etc. $25,000. October 2004: Purchased and charged to account fuel for

drying. $3,000. November 2004: One half of grain sold for $50,000. The

rest placed in storage and valued at $50,000. January 2005: Paid bill for fuel used to dry grain. $3,000. May 2005: Remaining 2004 grain sold. $60,000.


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2004 Profit

Cash grain sales 50,000 50,000Grain inventory increase N/A 50,000 Total Revenue $50,000 $100,000

Fertilizer 0 8,000Seed, chemicals, fuel 25,000 25,000Drying fuel 0 3,000 Total Expenses 25,000 36,000

Net Farm Profit $25,000 $64,000

Cash Accounting Accrual Accounting


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Farm Financial Standards Council Recommendations

Accrual-based system recommended, but cash system accepted, with end-of-year adjustments


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Output from an Accounting System

Balance Sheet: report that shows the financial condition of the farm at a point in time

Income Statement: report of revenue and expenses over the accounting period

Other reports, depending on complexity of system


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Figure 3-2Twelve possible reports

Documents

Acquiring and Organizing Management Resources