keeping your financial records in order. understand and utilize a balance including: ...
TRANSCRIPT
Accounting Basics
Keeping your financial records in order
Understand and utilize a balance including:
Understanding the purpose of a balance sheet Be familiar with balance sheet terminology and structure Be familiar with cost and market valuing of assets Be able to use the balance sheet for strategic management
purposes
Objectives
Bookkeeping Basics
The Cliffs Notes to understanding financial management.
Account Payable – Incurred expense that has not yet been paid Account Receivable – Revenue for a product that has been sold or
service that has been provided, but payment has not yet been received Accrued Expense – Expense that accumulates, but has not yet been
paid Asset – Item of financial value or produces something of financial value Credit – Accounting entry that records decrease in asset/increase in
liability, owner’s equity, or an income account Debit – Accounting entry that records increase in asset/decrease in
liability or owner’s equity
Accounting Terms
Accounting Terms Cont’d
Expense – Cost incurred in production of revenue Inventory - Physical quantity and value of stored products Liability – Debt or financial obligation Net Farm Income (Profit) – Revenue minus Expenses Owner’s Equity – Assets minus Liabilities Prepaid Expense – Payment for input prior to the accounting
period it will be used Revenue – Value of products produced and sold during an
accounting period
Bookkeeping Basics
Bookkeeping is the compiling of financial records for mainly non-tax purposes.
Financial Reports: Balance Sheet Income Statement Transaction Journal (check register) General Ledger Depreciation Schedule Inventory Report Enterprise Report Employee Records Income Tax Reports Statement of Cash Flow Statement of Owner Equity Family Living Expense Report
Spreadsheet Programs: Microsoft Excel
Bookkeeping Programs: Quickbooks Famous Software
Financial Report Programs: FINPACK University of Idaho Enterprise
Budget Software
Debits Credits
Assets Liabilities
Expenses Revenue and Retained Earnings
Dividends Capital Stock
Recording Transactions
Increase Debit Side
Decrease Credit Side
Decrease Debit Side
Increase Credit Side
Account Debit CreditChecking $10,000
Owner’s Equity $10,000
You invest $10,000 from your personal savings account into your farm business.
You purchase a piece of equipment using $8,000 from the farm’s checking account and a loan from the bank for $12,000.
Account Debit CreditChecking $8,000
Note Payable $12,000
Equipment $20,0000
$10,000 - $8,000 = $2,000 left in checking account.
Account Debit CreditChecking $20,000
Crop Sales $20,000
You deposit $20,000 from crop sales into farm checking.
You pay your hired labor $4,000 for the month.
Account Debit CreditChecking $4,000
Labor Expense $4,000
$2,000 + $20,000 - $4,000 = $18,000 left in checking account.
Balance Sheet
What do you own and what do you owe?
Use balance sheet to evaluate the value of what you own
compared to what you owe. Tells you the net worth of the business. Tells you the financial position of the business at a point in
time. Solvency measures Liquidity measures
Balance Sheet
Assets = Liabilities + Owner’s Equity
Can be rewritten as: Assets – Liabilities = Owner’s Equity
Definitions: Assets – Can be sold to generate cash or produces good that can
be sold Liabilities – Obligation or debt owed to someone else Owner’s Equity- Represents what is left for the owners
Balance Sheet Fundamentals
Assets
Current Assets: Assets that can be sold quickly (liquid) or will be used up in less than 1 year (i.e. checking account, inventory)
Non-current Assets: Assets that are illiquid and have a life span greater than 1 year (i.e. equipment, buildings, land)
Liabilities Current Liabilities: Liabilities due within 1 year (i.e. operating
loans) Non-current Liabilities: Liabilities due in more than 1 year (i.e. land
loans) Assets increase Owner’s Equity, Liabilities decrease Owner’s
Equity
Fundamentals Cont’d
Balance Sheet for Grant County Farms Co.
December 31, 2013
ASSETS LIABILITIESCurrent Assets Current Liabilities
Total Current Assets Total Current Liabilities
Noncurrent Assets Noncurrent Liabilities
Total Noncurrent Assets Total Noncurrent Liabilities
TOTAL ASSETS TOTAL LIABILITIES OWNER EQUITY
Total Equity
Total Liabilities and OE
Combine valued at $250,000.
400 acres of winter wheat planted at a cost $45.00 per acre.
Line of credit at the local feed store of $16,425.
Checking account balance of $6,436.
Real estate loan of $535,275, plus an accrued payment of $69,700.
Breeding livestock worth $197,000.
Corrals and buildings appraised at $103,000.
Owners contributed $225,000 in capital to start the farm.
Land worth $1,450,000.
Balance Sheet for Grant County Farms Co.
December 31, 2013
ASSETS LIABILITIESCurrent Assets Current Liabilities Checking Account $6,436 Accounts Payable $16,425
Investment in Growing Crops $18,000Accrued Payment (Interest & Principle) $69,700
Total Current Assets $24,436.00 Total Current Liabilities $86,125.00
Noncurrent Assets Noncurrent Liabilities Equipment (Combine) $250,000 Real Estate Loan $535,275Breeding Livestock $197,000 Corrals & Buildings $103,000 Total Noncurrent Liabilities $535,275.00Land $1,450,000 TOTAL LIABILITIES $621,400.00
Total Noncurrent Assets $2,000,000.00 OWNER EQUITY
TOTAL ASSETS $2,024,436.00 Contributed Capital $225,000 Retained Earnings $1,178,036 Total Equity $1,403,036.00
Total Liabilities and OE $2,024,436.00
Cost-Basis Balance Sheet – Uses the cost or cost less
depreciation to value assets (what is its book value) Market-Basis Balance Sheet – Uses the current market value
less selling costs (what could you get if you sold it today)
Pros and cons of each: Cost-Basis: promotes conservatism, conforms to GAAP Market-Basis: more accurate for determining collateral
Market v. Cost
Balance Sheet for Grant County Farms Co.
XX/XX/20XX
ASSETS LIABILITIES Current Assets Cost Basis Market Basis Current Liabilities Cost Basis Market BasisChecking Account $6,436 $6,436 Accounts Payable $16,425 $16,425
Investment in Growing Crops $40,000 $40,000
Accrued Payment (Interest & Principle) $69,700 $69,700
Crop Inventory $60,000 $60,000 Total Current Liabilities $86,125 $86,125
Total Current Assets $106,436 $106,436 Noncurrent Liabilities Noncurrent Assets Real Estate Loan $535,275 $535,275
Equipment (Combine) $250,000 $255,000Total Noncurrent Liabilities $535,275 $535,275
Breeding Livestock $197,000 $200,000 TOTAL LIABILITIES $621,400 $621,400Corrals & Buildings $103,000 $150,000 OWNER EQUITY Land $1,450,000 $2,900,000 Contributed Capital $255,000 $255,000
Total Noncurrent Assets $2,000,000 $3,505,000 Retained Earnings $1,230,036 $1,230,036TOTAL ASSETS $2,106,436 $3,611,436 Market Valuation - $1,505,000
Total Equity $1,485,036 $2,990,036
Total Liabilities and OE $2,106,436 $3,611,436
Balance Sheet Analysis
Financial Condition of your Farm
Balance Sheet Analysis
Liquidity
Focuses on Current Assets/Current Liabilities
Do you have enough cash to pay upcoming debts for the next 12 months without disrupting business operations?
Will you have anything left for emergencies?
Solvency
Focuses on Total Assets and Total Liabilities
If you were to shutdown today, could you repay all your debt?
How much more debt can your farm handle?
ASSETS LIABILITIES
Current Assets Cost Basis Current Liabilities Cost BasisChecking Account $6,436 Accounts Payable $16,425Investment in Growing Crops $40,000
Accrued Payment (Interest & Principle) $69,700
Crop Inventory $60,000 Total Current Liabilities $86,125Total Current Assets $106,436 Noncurrent Liabilities
Noncurrent Assets Real Estate Loan $535,275
Equipment (Combine) $250,000Total Noncurrent Liabilities $535,275
Breeding Livestock $197,000 TOTAL LIABILITIES $621,400Corrals & Buildings $103,000 OWNER EQUITY
Land $1,450,000 Contributed Capital $255,000Total Noncurrent Assets $2,000,000 Retained Earnings $1,230,036TOTAL ASSETS $2,106,436 Market Valuation -
Total Equity $1,485,036Total Liabilities and OE $2,106,436
Balance Sheet for Grant County Farms Co.
XX/XX/20XX
Current Ratio =
Red: Ratio less than 1Yellow: Ratio between 1 and 1.5Green: Ratio greater than 1.5
Goal: Ratio greater than 1.5
Working Capital = Current Assets – Current Liabilities
No rule of thumb as to how much you need. Larger operations may need more than smaller operations.
Goal: Working Capital of ____
Current Ratio =
Working Capital = $106,436 – $86,125 = $20,311
ASSETS LIABILITIES
Current Assets Cost Basis Current Liabilities Cost BasisChecking Account $6,436 Accounts Payable $16,425Investment in Growing Crops $40,000
Accrued Payment (Interest & Principle) $69,700
Crop Inventory $60,000 Total Current Liabilities $86,125Total Current Assets $106,436 Noncurrent Liabilities
Noncurrent Assets Real Estate Loan $535,275
Equipment (Combine) $250,000Total Noncurrent Liabilities $535,275
Breeding Livestock $197,000 TOTAL LIABILITIES $621,400Corrals & Buildings $103,000 OWNER EQUITY
Land $1,450,000 Contributed Capital $255,000Total Noncurrent Assets $2,000,000 Retained Earnings $1,230,036TOTAL ASSETS $2,106,436 Market Valuation -
Total Equity $1,485,036Total Liabilities and OE $2,106,436
Balance Sheet for Grant County Farms Co.
XX/XX/20XX
Debt/Asset Ratio =
Red: Ratio more than 0.55Yellow: Ratio between 0.3 - 0.55Green: Ratio less than 0.3
Goal: Ratio less than 0.3
Debt/Equity Ratio =
Red: Ratio greater than 1.22Yellow: Ratio around .42 – 1.22Green: Ratio less than .42
Goal: Ratio close to 0
Debt/Asset Ratio =
Debt/Equity Ratio =
ASSETS LIABILITIES
Current Assets Cost Basis Current Liabilities Cost BasisChecking Account $6,436 Accounts Payable $16,425Investment in Growing Crops $40,000
Accrued Payment (Interest & Principle) $69,700
Crop Inventory $60,000 Total Current Liabilities $86,125Total Current Assets $106,436 Noncurrent Liabilities
Noncurrent Assets Real Estate Loan $535,275
Equipment (Combine) $250,000Total Noncurrent Liabilities $535,275
Breeding Livestock $197,000 TOTAL LIABILITIES $621,400Corrals & Buildings $103,000 OWNER EQUITY
Land $1,450,000 Contributed Capital $255,000Total Noncurrent Assets $2,000,000 Retained Earnings $1,230,036TOTAL ASSETS $2,106,436 Market Valuation -
Total Equity $1,485,036Total Liabilities and OE $2,106,436
Balance Sheet for Grant County Farms Co.
XX/XX/20XXNet Capital Ratio=
Red: Ratio close to 1Yellow: Ratio close to 2Green: Ratio greater than 2
Goal: Ratio greater than 2
Debt Structure Ratio =
Ratio close to 1 means a large proportion of debt is due soon. Ratio close to 0 means a large proportion of debt is due in more than 1 year.
Goal: Debt Structure Ratio of ____
Net Capital Ratio =
Debt Structure Ratio =
Case Studies
Grant County Farms, LLC.
Objectives Evaluate the company’s current financial health based on the balance sheet. Based on your evaluation, what suggestions would you give Grant County Farms, LLC to better
manage their liquidity and solvency? Based on your evaluation of Grant County Farms, LLC’s liquidity and solvency, how do you feel
about a growth strategy? What other information do you need to know? Operation and Background:You are the owner of Grant County Farms, LLC. It is the end of your fiscal year, and you want to measure the health of your business through profitability analyses. Grant County Farms owns 700 acres of non-irrigated cropland on which it runs a winter wheat/fallow rotation. You also run 300 cow/calf pairs on another 700 acres.
You have an excellent reputation as a farmer, and you come from a well-establish family in the area. You are the second generation to own this farm.
Homework
Gather the information for your balance sheet.
Construct or update your balance sheet.
Calculate your financial ratios for liquidity and solvency.
Discuss the financial condition of your business with your management team.
Take a minute to write down one or two ideas or takeaways
from this lesson.
One Minute Takeaway
Sieverkropp Consulting LLC.
Contact: Elizabeth Sieverkropp [email protected] (509) 398-6858
Website: www.sieverkroppconsulting.com
Training Program Homepage:www.sieverkroppconsulting.com/fsa-borrower-training-program-homepage