What the Balance Sheet Tells Us Determines –Risk-bearing ability Ability to take on current and long-term debt –Financial solvency Ability of a business to continue operating into the long-run, even with disruptions in current operations

Purposes Balance Sheet Definition Uses Structure Asset/Liability Valuation Preparation

Definition of a Balance Sheet A balance sheet is a summary of the assets, liabilities, and owner equity of a business as of a specific date (snapshot in time).

Example Balance Sheet

Assets (add pics) Anything of value owned by or owed to the farmer/client on the balance sheet date. Cash Accounts receivable Inventory Machinery Vehicles Land

Liabilities (add pics) Any financial commitments owed by the farmer/client on the balance sheet date. Accrued expenses (accounts payable) Debts Leases Contract payments Deferred taxes

Owner Equity Capital owner(s) of a business have invested in the business from his/her own pocket and reinvested income from the business Assets-Liabilities=Owner Equity

Uses of a Balance Sheet Indicates amount and type of debt and equity capital used to finance existing assets. Provides some insight into the liquidity of the business. Usually part of a loan application for securing debt. Can be used to document the financial position of a business to outside parties (lessor, lessee, family members, potential investors).

Financial Structure

Fundamental Accounting Equation Assets – Liabilities = Owner Equity

Current Assets Cash or things that are easily convertible into cash within one year without disrupting the operations of the business. Some examples include: cash, grain and forage inventories, supplies, feeder and market livestock, accounts receivable, cash investment in growing crops, and prepaid expenses

Non-Current Assets Assets used in farm/business production Assets not sold, converted into cash, or used up within one year Includes intermediate (1-10 years) and long-term (10+ years) assets Some examples include: machinery (int), equipment (int), breeding livestock (int), and land (LT)

Liabilities Current liabilities Liabilities due on demand or within one year Non-current liabilities Intermediate-term (1-10 years) Long-term (10+ years)

Two-Category Classification Current –Anything used within 1 year –Includes cash, grain inventory, market livestock, accounts payable, operating loan, etc. Non-current –Anything with a useful life of 1+ years –Includes breeding livestock, buildings, land, equipment, machinery, real estate loan, equipment loan, etc.

Three-Category Classification Current –Anything used within 1 year –Includes cash, grain inventory, market livestock, accounts payable, operating loan, etc. Intermediate –Anything with a useful life of 1-10 years –Includes breeding livestock, equipment, machinery, equipment loan, etc. Long-term –Anything with a life of 10+ years –Includes land, permanent buildings, real estate loan, etc.

Contingent Liabilities Amounts a farmer/client would owe if a particular event would occur Record in main body of balance sheet: Deferred taxes (sale of current assets) Taxes on capital gains Depreciation recapture Investment tax credit recapture Record in a footnote: Co-signed notes

Personal Assets and Liabilities If the balance sheet represents only the financial position of a business, then exclude personal assets and liabilities. Lenders may ask clients to: Add a notation/footnote Prepare a separate personal balance sheet Prepare a consolidated business and personal balance sheet

Historical Cost and Current Market Value Historical Cost  Initial cost + Improvements - Accumulated Depreciation Current Market Value  Estimated values using current prices for similar assets

Limitations Historical cost: does not accurately report value of assets on balance sheet date Market value: changes over time caused by variation in asset prices

Capitalizing a Lease

Example Balance Sheet: Current Asset Section

Example Balance Sheet: Valuing Machinery

Raised Breeding Livestock Full-cost-absorption approach: Accumulate costs of raising breeding animals, capitalize them and depreciate them over the useful life of the animal Base-value approach: Establish a “valuation” value:  Cost of raising animal  Market value on date transferred to breeding herd

Example Balance Sheet: Valuing Livestock

Example Balance Sheet: Valuing Buildings and Land

Example Balance Sheet: All Assets

Example Balance Sheet: Current Liabilities

Example Balance Sheet: Non-Current Liabilities

Example Balance Sheet: Totals

Example Balance Sheet