The Balance Sheet

Assets = Liabilities + Equity

Balance Sheet

•Is Statement of Financial Position•Not necessarily the value of a business•Only an estimate of market Value

Balance Sheet

•Assets of a business ultimately valued by their ability to generate revenue

•True value determined from actual sale to third party

Primary Financial Statements

•Balance Sheet

•Earnings Statement

•Cash Flow Statement

Types of Accounts

•Assets

•Liabilities

•Equity

•Income

•Expenses

Assets Liabilities

Equity

Assets Liabilities

Equity

+/- Net Income+/- Valuation Changes

- Family living withdrawals+ Capital contributions

Beginning Balance Sheet Ending Balance Sheet

Account Valuation

•All accounts have dollar value

•Asset Accounts•Cost Basis

•Market Value

Current Assets

•Those that will be realized in cash, sold or consumed in the current operating cycle (1 year)

Current Assets

•Inventories•Raised for Sale

•Raised for use in Production

•Purchased for Resale

•Purchased for use in Production

•Page II-32

Valuation Issues

•Inventories•Lower of Cost or Market

•Blending

Non Current Assets

•Machinery & Equipment

•Breeding Livestock

•Buildings & Improvements

•Land

•Other

Valuation Issues

•Raised Breeding Stock•Full Cost Absorption

•Base Value Method

•Page II-36, F-1

Current Liabilities

•Those that will be discharged by use of current assets or creation of additional current liabilities in the current operating cycle.

Deferred Taxes

•Tax liability in event of liquidation

•Liquidation Value –Tax Basis times tax rate

•Page II-24

Depreciation

•Allocation of the expense that reflects “using up” of capital assets

Depreciation

Original Cost – Salvage Value

Years of useful Life

Depreciation Issues

•Straight line•Accelerated•Front end loaded•Short life span

•Section 179•Zero Salvage Value

Depreciation Issues

•Capitalize or Expense•Small tools

•Equipment

•Major repairs

•Improvements

Example Farm’s Balance Sheet

Beginning

Ending Average

Total Assets $551,166 $600,566

$575,866

Total Liabilities

$356,060 $363,119

$359,590

Net Worth $195,106 $237.447

$216.276

% in Debt 64% 60% 62%

Leverage

•<40% - Financially Sound

•40-70% - Vulnerable

•>70% - Financial Stress

•>100% - Insolvent

Accounts Receivable

Sales Revenue52 weeks

=

Weeks to Collect

Sales/Week

Accts. Receivable

Sales/Week=

Inventory

Cost of Goods Sold

Inventory=

InventoryTurnover

52 Weeks

Inv. Turnover=Average Inventory

Holding Time

Accounts Payable

Inventory

Ave. Inv. Holding Time=COGS/Wk

Accounts Payable

COGS/Wk=Weeks to Pay