AGEC 407

Balance Sheet

• Describes the financial condition of the business at a point in time

• Gives two important financial measures of the business:– Solvency– Liquidity

AGEC 407

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?

AGEC 407

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

AGEC 407

Assets

• Intermediate Assets– Short-lived capital resources used in farm

production– Not sold or converted to cash in the coming

year– Useful life of <= 7-10 years– Includes machinery and equipment, vehicles,

breeding livestock

AGEC 407

Assets

• Long-term Assets– Land and buildings

• Personal Assets

AGEC 407

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

AGEC 407

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

AGEC 407

Liabilities

• Long-term liabilities– Debt obligations that are due more than 7-10

years out– Loans for land, mortgage

• Personal Liabilities

AGEC 407

Net Worth

• Total assets less total liabilities

• Owner’s financial claims on the business assets

• The amount the owner would receive if the business was sold and all debts paid

AGEC 407

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

AGEC 407

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)

AGEC 407

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 asset’s value

AGEC 407

Valuation of Assets

• FFSC Recommendations for farms:– Use market valuation with cost information as

footnotes; OR– Use a double column balance sheet

AGEC 407

Financial Measures

• Solvency– Relationship between assets and liabilities – Liabilities > Assets:

• Insolvent

• Negative net worth

• Candidate for bankruptcy

AGEC 407

Financial Measures

• Liquidity– A short-run concept– Ability of the business to meet financial

obligations as they come due

AGEC 407

Financial Measures

• Measures of Liquidity– Current Ratio

• Ratio of current assets to current liabilities

– Working capital• Difference between current assets and current

liabilities

AGEC 407

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