Financial Analysis Chapter #3

Net Worth Statement (Balance Sheet) Net Worth = Assets - Liabilities Net Worth (Owner's equity)

Current Assets can be converted to cash in less than one year –checking/savings –money owed you –inventory for sale –stocks, bonds, life insurance

Intermediate Assets –resources or production items with a life 1 to 10 years equipment machinery breeding livestock generally depreciable

Fixed Assets –(long term) permanent items : real estate improvements on buildings

Current Liabilities debts due within one year –bank notes –accounts payable –rent, taxes, interest

Intermediate Liabilities non real estate debt of 1 to 10 years

Long-Term Liabilities Mortgages and land contracts on real estate minus principal due within 12 months

Financial Tools Comparative Analysis - compare statements from one year to another Projected Analysis - compare statements to expected statements Ratio Analysis - compare statements to another farm

Financial Terms Liquidity - ability to generate cash Current Ratio = Current Assets / Current Liabilities Intermediate Ratio = (CA + IA) / (CL + IL) Solvency - if assets exceed liability –Net Capital Ratio –Debt-Equity Ratio

Ratios Net Capital Ratio = Total Assets / Total Liabilities Debt-Equity Ratio = Total Liabilities / Owners Equity

Terms Income Statement (Profit / Loss Statement) –list receipts and expenses Receipts - money received from sales during year –all incomes Expenses - money paid to operate a business

More Terms Net Cash Income = Gross Receipts - Expenses Adjustments to Income: –Expenses Payable –Prepaid Expenses –Adjustments in Inventories –Products grown & used at home Net Farm Income = Net cash income + Noncash adjustments

Ratios Operating Ratio = Total Operating Expenses / Gross Income –relates amount of gross income spent on operating expenses Fixed Ratio = Fixed Expenses / Gross Income –relates amount of gross income spent on fixed expenses Gross Ratio = Total Expenses / Gross Income –relates amount of gross income spent on all expenses

Even More Terms Capitol Turnover = (Unadjusted Gross Income + Noncash Adjustment)/ Average Capitol Investment or (Total Assets) –higher rates mean a greater chance of profit or a quicker turnover of money invested –20% per year is good

Terms Return to Equity Capital = Net Farm Income - Operator Labor Allowance amount of income for your labor

Return to Equity Capital Return On Total Capital = Net Farm Income + Interest Paid - Operator Allowance Return to Total Capital Return on Equity Capital = Return to Equity Capital / Avg Net Worth

Return to Equity Capital Compare this rate to the cost of borrowing money if interest rate is lower, it may be profitable to borrow money if interest rate is higher, do NOTborrow money