INCOME STATEMENT

KEY CONCEPTSNET INCOME IS THE BEST MEASURE OF BUSINESS PERFORMANCEACCRUAL NET INCOME IS A MORE ACCURATE MEASURE OF PROFITABILITY THAN CASH NET INCOMECASH RECEIPTS AND EXPENDITURES DO NOT ALWAYS REPRESENT INCOME AND EXPENSESEXPENSES SHOULD BE MATCHED TO THE REVENUE THEY GENERATE IN THE SAME ACCOUNTING PERIOD

NET INCOME

THE SINGLE MOST IMPORTANT MEASURE OF PERFORMANCE FOR A FARM BUSINESS

REPRESENTS A RETURN TOUNPAID LABOR AND MANAGEMENT AND OWNER EQUITY CAPITAL IN THE BUSINESS

NET INCOME IS DEFINED TO INCLUDE BOTH FARM AND NONFARM INCOME ON AN AFTER-TAX BASIS.

NET INCOME MAYBE THOUGHT OF AS REVENUE MINUS EXPENSES.

CASH VS. ACCRUAL

THE IRS ALLOWS FARMERS AND RANCHERS TO FILL THEIR INCOME TAX RETURNS ON A CASH BASIS

THIS ALLOWS CONSIDERABLE FLEXIBILITY IN MANAGING TAXES PAID IN A GIVEN YEAR

CASH BASIS ACCOUNTING WILL OFTEN DIFFER FROM ACCRUAL RESULTS

MANAGEMENT DECISIONS CAN BEST BE MADE FROM AN ACCRUAL BASED ACCOUNTING SYSTEM

ACCRUAL VS. CASH ACCOUNTING

THE ACCRUAL METHOD OF ACCOUNTING RECOGNIZES REVENUES AND EXPENSES AS THEY OCCUR

THE CASH METHOD OF ACCOUNTING RECOGNIZES REVENUES AND EXPENSES WHEN CASH ACTUALLY CHANGES HANDS

ACCRUAL CONCEPT

INCOME IS MEASURED BY OPERATING TRANSACTIONS THAT AFFECT OWNER EQUITY

ANY INCREASE IN OWNERS EQUITY RESULTING FROM OPERATIONS IS TERMED REVENUE

ANY DECREASE IN OWNERS EQUITY IS CALLED AN EXPENSE

NET INCOME IS THE DIFFERENCE BETWEEN THE TWO

AN EXPENSE CAN BE EITHER A CASH OR NON-CASH ITEM

WITH CASH-BASIS, REVENUE AND EXPENSES ARE DETERMINED BY THE TIMING OF PAYMENT.

WITH ACCRUAL-BASIS, IT MAKES NO DIFFERENCE WHEN THE SALE IS MADE.

INVENTORIES ARE VALUED AT YEAR-END, AND COMPARED TO THE INVENTORIES AT THE BEGINNING OF THE YEAR.

IF INVENTORIES HAVE INCREASED, THE AMOUNT OF INCREASE IS CONSIDERED A POSITIVE REVENUE.

IF INVENTORIES HAVE DECREASED, THE AMOUNT OF DECREASE IS CONSIDERED A NEGATIVE REVENUE.

REVENUE

REVENUE IS GENERATED BY BOTH CASH SALES AND CHANGES IN INVENTORY.

FEEDER LIVESTOCK AND FEED PURCHASES DURING THE YEAR ARE SUBTRACTED FROM GROSS REVENUE TO GET "VALUE OF FARM PRODUCTION."

VALUE OF FARM PRODUCTION

A TERM UNIQUE TO FARM EARNINGS STATEMENTS

COMPUTED AS THE GROSS REVENUES OF AN OPERATION LESS THE PURCHASES OF ASSETS THAT ARE INCLUDED IN THE CALCULATION OF GROSS REVENUE

ADVANTAGES:GROSS REVENUE IS NOT DISTORTED BY PURCHASES OF INVENTORY LATE IN THE OPERATING CYCLE

MORE ACCURATE COMPARISONS BETWEEN CERTAIN TYPES OF OPERATIONS.

EXPENSESCASH OPERATING EXPENSES

ACCRUAL EXPENSE ADJUSTMENTS

DEPRECIATION

INTEREST

CAPITAL ASSET ACCOUNT ADJUSTMENTS

NET INCOME FROM FARM OPERATIONS IS TOTAL GROSS FARM REVENUE LESS TOTAL FARM EXPENSES.

THE GAIN OR LOSS FROM THE SALE OF CAPITAL ASSETS IS ACCOUNTED FOR TO ARRIVE AT THE NET FARM INCOME.

NON-FARM REVENUE IS ADDED TO NET FARM INCOME TO ARRIVE AT INCOME BEFORE-TAXES.

INCOME TAXES ARE DEDUCTED TO ARRIVE AT NET INCOME AFTER-TAXES.

ACCRUAL INCOME STATEMENT ADJUSTMENT

ACCRUAL ADJUSTMENTS TO REVENUEINVENTORY CHANGE (crops, feed and livestock)ACCOUNTS RECEIVABLEACCRUED INTEREST EARNEDFUTURES/OPTION ACCOUNT EQUITY

ACCRUAL ADJUSTMENTS TO EXPENSES

UNUSED ASSETS• PREPAID EXPENSES

• SUPPLIES

• INVESTMENTS IN GROWING CROPS

UNPAID ITEMS• ACCOUNTS PAYABLE

• ACCRUED PROPERTY TAXES AND WITHHOLDING

ACCRUED INTEREST

ACCRUED TAXS• INCOME AND SOCIAL SECURITY

• DEFERRED TAXES ON CURRENT ASSETS

THE RELATIONSHIP OF THE INCOME STATEMENT TO THE

BALANCE SHEET

NET FARM INCOME

LESS

FAMILY LIVING EXPENSES, INCOME AND SOCIAL SECURITY TAXES AND OTHER

WITHDRAWALS

EQUALS

CHANGE IN COST BASIS EQUITY

ADJUSTMENTS FOR CHANGES IN MARKET VALUATIONS

EQUALS

CHANGE IN MARKET BASIS EQUITY