AGEC 407 Income Statement Summary of revenue and expenses for a given accounting period Also called: –Operating Statement –Profit and Loss Statement Measures the profit or loss of the business for a given period of time Can be before-tax or after-tax

AGEC 407 Revenue Comes from: –production of agricultural commodities –services performed –Increase in accounts receivable –Increase in inventories –the gain or loss on the sale of assets used in that production

AGEC 407 Expenses Include all related expenses (associated with producing the revenue listed for that period) Cash –Payments made for inputs Noncash –Depreciation –Accounts payable –Accrued interest

AGEC 407 Income Statement Format Total Cash Revenue less Total Cash Expenses equals Net Cash Farm Income account for Accrual Adjustments equals Net Farm Income from Operations plus gain or loss from sale of capital assets equals Net Farm Income

AGEC 407 Accrual Adjustments Cash Income –Minus beginning inventory –Plus ending inventory –Minus beginning accounts receivable –Plus ending accounts receivable Equals Gross Receipts

AGEC 407 Accrual Adjustments Cash Payments –Beginning/ending accounts payable –Beginning/ending accrued expenses –Beginning/ending prepaid expenses Equals Operating Expenses

AGEC 407 Sale of Capital Assets Gain or Loss included on the Income Statement –machinery, breeding livestock, land Difference between sale price and book value (orig. cost minus accum deprec) Corrects for previous errors in depreciation expenses

AGEC 407 Profitability How well the farm generates profit from its resources Relative to size of the business Four important measures: –Net farm income –Return on assets –Return on equity –Operating profit margin ratio

AGEC 407 Net Farm Income Return to unpaid labor and management and equity capital Not comparable across businesses of different sizes

AGEC 407 Return on Assets (ROA) Is a return to Debt and Equity Capital Measured as a percentage Is comparable across businesses and industries Must adjust Net Farm Income to account for financing and opportunity cost of unpaid labor and management

AGEC 407 Return on Equity (ROE) Rate of return to the owner’s share of capital invested Measured as a percentage Is comparable across businesses and industries Must adjust Net Farm Income to account for opportunity cost of unpaid labor and management

AGEC 407 ROA and ROE If ROA > i then ROE > ROA If ROA < i then ROE < ROA ROE is useful for owner ROA is useful for profitability

AGEC 407 Operating Profit Margin Ratio Operating profit as a percentage of total revenue How much of revenue becomes profit Operating profit = return on assets Divided by Gross Revenue

AGEC 407 Retained Farm Earnings Profits must go to at least one of four uses: –owner withdrawls/family living –payment of taxes –increase in farm assets –reduction in farm liabilities Retained farm earnings increase net worth