The Balance Sheet
May 11, 2015
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