2. AGEC 432 – Finance Spring 2007 Structure of Financial Statements

3. Topic Coverage 1. Consolidated balance sheet 2. Consolidated income statement 3. Consolidated cash flow statement 4. Financial statement linkages 5. Debt repayment capacity statement 6. Introduction to financial statement analysis

4. Annual Consolidated Balance Sheet

5. Basic Structure of the Balance Sheet Assets:Liabilities and Net Worth: Current assetsCurrent liabilities plus Intermediate assetsplus Intermediate liabilities plus Long term assetsplus long term liabilities plus Net worth equals Total assetsequals Total liabilities and net worth Assets:Liabilities and Net Worth: Current assetsCurrent liabilities plus Intermediate assetsplus Intermediate liabilities plus Long term assetsplus long term liabilities plus Net worth equals Total assetsequals Total liabilities and net worth

6. Current Asset Segment Current assets: Cash Savings and time deposits Marketable securities Accounts receivable Short term notes receivable Unsold production inventories Unsold livestock inventories Supplies Prepaid expenses Other Total current assets $0

7. Intermediate Asset Segment Intermediate assets: Intermediate notes receivable Machinery and motor vehicles Breeding livestock Retirement accounts Cash value of life insurance Non-marketable securities Personal vehicles Household goods Other Total intermediate assets $0

8. Long Term Asset Segment Long term assets: Long term contracts and notes receivable Land Buildings Residence Non farm real estate Other Total long term assets $0

9. Current Liabilities Segment Current liabilities: Accounts payable Short term notes payable Current payment on term loans Accrued interest Accrued taxes Accrued rents and leases Contingent tax on current assets Total current liabilities $0

10. Intermediate Liabilities Segment Intermediate liabilities: Intermediate notes less current payment Sales contract less current payment Life insurance loan less current payment Contingent tax on intermediate assets Other Total intermediate liabilities $0

11. Long Term Liabilities Segment Long term liabilities: Farm mortgages less current payment Land contracts less current payment Nonfarm mortgages less current payment Contingent tax on long term assets Other Total long term liabilities $0

12. Annual Consolidated Income Statement

13. Basic Structure of Income Statement Value of farm production Minus Farm expenses Equals Income from operations Plus Gain (loss) on sale of intermediate and long term assets Equals Net farm income Plus Nonfarm income Equals Income (loss) before taxes and extraordinary items Minus Provision for income taxes Equals Income before extraordinary items Plus Extraordinary items Equals Net income Value of farm production Minus Farm expenses Equals Income from operations Plus Gain (loss) on sale of intermediate and long term assets Equals Net farm income Plus Nonfarm income Equals Income (loss) before taxes and extraordinary items Minus Provision for income taxes Equals Income before extraordinary items Plus Extraordinary items Equals Net income

14. Value of Farm Production Segment Subtotal Total Farm revenue: Crops and feed: Cash receipts$0 Value of inventory change$0 Livestock: Cash receipts$0 Value of inventory change$0 Breeding stock: Cash receipts$0 Value of inventory change$0 Livestock product receipts$0 Other cash farm revenue$0 Other noncash adjustments Subtotal Purchase of feed and livestock$0 Value of farm production $0

15. Farm Expenses Segment Subtotal Total Farm expenses: Cash operating expenses Noncash adjustments: Depreciation$0 Increase in accounts payable$0 Increase in accrued expenses$0 Decrease in unused supplies$0 Decrease in cash in growing crops$0 Decrease in prepaid expenses$0 Total operating expenses Interest on farm loans$0 Total farm expenses $0

16. Net Income Segment Subtotal Total Net farm income Nonfarm revenue: Nonfarm wages Gain (loss) on sale of nonfarm assets Other cash nonfarm revenue Total nonfarm income Income before taxes Provision for taxes Net income $0 Farm revenue – farm expenses Net farm income + nonfarm income

17. Annual and Monthly Cash Flow Statements

18. Basic Structure of Cash Flow Statement Cash available Minus Cash required Equals Cash available less cash required Plus Savings withdrawals Equals Cash position Plus Net borrowing Minus Other uses of cash Minus Additions to savings Equals Ending cash balance Cash available Minus Cash required Equals Cash available less cash required Plus Savings withdrawals Equals Cash position Plus Net borrowing Minus Other uses of cash Minus Additions to savings Equals Ending cash balance

19. Cash Available Segment Cash available: Beginning cash$0 Crop receipts$0 Livestock receipts$0 Breeding livestock receipts$0 Livestock product receipts$0 Other cash farm revenue$0 Nonfarm wages and salaries$0 Other nonfarm cash revenue$0 Gain on asset sale$0 Gifts and other cash available$0 Total cash available$0

20. Cash Required Segment Cash required: Total operating expenses$0 Income tax payments$0 Intermediate term loan payments: Interest payments$0 Principal payments$0 Long term loan payments: Interest payments$0 Principal payments$0 Capital expenditures: Machinery and motor vehicles$0 Breeding livestock$0 Buildings and improvements$0 Land$0 Family living expenses$0 Other cash required$0 Total cash required$0

21. Annual Ending Cash Balance Cash available minus cash required + Savings withdrawal$0 = Cash position + New borrowing:$0 Intermediate term loans$0 Long term loans$0 Short term loans$0 Total new borrowing - Other uses of cash:$0 Short term loan payments:$0 Interest payments$0 Principal payments$0 Additions to saving$0 = Ending cash $0

22. Monthly Cash Available January FebruaryMarch Cash available: Beginning cash Crop receipts Livestock receipts Breeding livestock receipts Livestock product receipts Other cash farm revenue Nonfarm wages and salaries Other nonfarm cash revenue Gain on asset sale Gifts and other cash available Total cash available $0

23. Monthly Cash Required Cash required: Total operating expenses$0 Income tax payments$0 Intermediate term loan payments: Interest payments$0 Principal payments$0 Long term loan payments: Interest payments$0 Principal payments$0 Capital expenditures: Machinery and motor vehicles$0 Breeding livestock$0 Buildings and improvements$0 Land$0 Family living expenses$0 Other cash required$0 Total cash required$0 January February March

24. Monthly Cash Position January February March Cash available Cash required Savings withdrawal Cash position Indicates monthly cash flow surpluses or deficits before borrowing on a LOC… Indicates monthly cash flow surpluses or deficits before borrowing on a LOC…

25. Year-End Monthly and Annual Totals NovemberDecemberYear Cash available Beginning cash Crop receipts Livestock receipts Breeding livestock receipts Livestock product receipts Other cash farm revenue Nonfarm wages and salaries Other nonfarm cash revenue Gain on asset sale Gifts and other cash available Total cash available $0

26. Monthly and Annual Balances NovemberDecemberYear Total debt outstanding Operating loan balance Intermediate loan balance Long term loan balance Accrued interest $0Operating loan $0Intermediate loans Long term loans Savings and time deposits $0

27. Financial Statement Linkages

28. Statement Linkages Cash flow statement to income statement: 1.Cash receipts for crops and livestock 2.Cash operating expenses 3.All other cash items (e.g., interest payments) Cash flow statement Income statement Balance Sheet

29. Statement Linkages Cash flow statement to balance sheet: 1.Ending cash balance 2.Loan balances (current liability portion separate from intermediate and long term portion) 3.Asset adjustments if capital expenditures are made 4.Additions and withdrawals from savings Cash flow statement Income statement Balance Sheet

30. Debt Repayment Capacity Statement

31. Repayment Capacity from Operations….. Debt Repayment Capacity Report Farm sources of term debt repayment capacity: Net income Adjustments to net income: Plus Depreciation Less (plus) the gain (loss) on sale of assets Less Nonfarm income Less Family living withdrawals Less Gifts to others Subtotal Term debt repayment capacity from operations $0

32. Remaining Capacity from Operations…. Uses of farm term debt repayment capacity: Principal payments on term debt Downpayments on new capital purchases Deliquent notes payable Current uses Farm capacity less current payments $0 Term debt repayment capacity from operations less current uses… Term debt repayment capacity from operations less current uses…

33. Total Repayment Margin Other sources of term debt repayment capacity: Gain (Loss) on sale of intermediate and long term assets Nonfarm income Other sources (e.g., gifts received) Subtotal Capital replacement and term debt margin $0 Funds available after accounting For other sources… Funds available after accounting For other sources…

34. Financial Statement Analysis

35. Financial Indicators Liquidity Solvency Profitability Debt Repayment Capacity Economic and Financial Efficiency

36. Success vs. Failure Indicators of Success: Increasing liquidity Increasing solvency Increasing debt repayment capacity Increasing profitability

37. Indicators of Failure: Declining liquidity Decreasing solvency Decreasing debt repayment capacity Decreasing profitability Indicators of Success: Increasing liquidity Increasing solvency Increasing debt repayment capacity Increasing profitability Success vs. Failure

38. Windshield or Rear View Mirror?