Balance Sheet

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

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?

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

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
• Includes machinery and equipment, vehicles,
  breeding livestock

5
Assets

• Long-term Assets
• Land and buildings
• Personal Assets

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

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

8
Liabilities

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

9
Net Worth

• Total assets less total liabilities
• Owners financial claims on the business assets
• The amount the owner would receive if the
  business was sold and all debts paid

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

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)

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 assets value

13
Valuation of Assets

• FFSC Recommendations for farms
• Use market valuation with cost information as
  footnotes OR
• Use a double column balance sheet

14
Financial Measures

• Solvency
• Relationship between assets and liabilities
• Liabilities Assets
• Insolvent
• Negative net worth
• Candidate for bankruptcy

15
Financial Measures

• Liquidity
• A short-run concept
• Ability of the business to meet financial
  obligations as they come due

16
Financial Measures

• Measures of Liquidity
• Current Ratio
• Ratio of current assets to current liabilities
• Working capital
• Difference between current assets and current
  liabilities

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