AGEC 407 Balance Sheet Describes the financial condition of the business at a point in time Gives two important financial measures of the business: –Solvency –Liquidity

AGEC 407 Balance Sheet Assets = Liabilities + Net Worth Someone has a claim on each asset of the farm business –Lender – liability –Owner - equity According to business finance laws, which claim has priority?

AGEC 407 Assets Current Assets –Cash and property that will be converted into cash during the business year –Cash, savings accounts, CDs –Inventories: e.g. feed, supplies, fertilizers –Items held for sale: e.g. hogs, feeder cattle, grain

AGEC 407 Assets Intermediate Assets –Short-lived capital resources used in farm production –Not sold or converted to cash in the coming year –Useful life of <= 7-10 years –Includes machinery and equipment, vehicles, breeding livestock

AGEC 407 Assets Long-term Assets –Land and buildings Personal Assets

AGEC 407 Liabilities Current liabilities –Debt obligations that are payable on demand or within the operating year (coming 12 months) –Accounts payable –Current portion of loans (principal) –Accrued interest, expenses, and taxes

AGEC 407 Liabilities Intermediate liabilities –Debt obligations that are due from one to 7-10 years out –Deferred accounts, principal –Loans for machinery, livestock, or non-land improvements

AGEC 407 Liabilities Long-term liabilities –Debt obligations that are due more than 7-10 years out –Loans for land, mortgage Personal Liabilities

AGEC 407 Net Worth Total assets less total liabilities Owner’s financial claims on the business assets The amount the owner would receive if the business was sold and all debts paid

AGEC 407 Valuation of Assets Two valuation methods: Market value –Use current market value of assets purchased in the past Cost basis –Use original cost less accumulated depreciation since purchase

AGEC 407 Valuation of Assets Market value –More accurate reflection of financial condition and collateral for loans –Better for soon-to-be-sold assets (e.g. market livestock, grain)

AGEC 407 Valuation of Assets Cost basis –Changes in equity from net income retained in the business (not from change in market price) –More conservative estimate of asset’s value

AGEC 407 Valuation of Assets FFSC Recommendations for farms: –Use market valuation with cost information as footnotes; OR –Use a double column balance sheet

AGEC 407 Financial Measures Solvency –Relationship between assets and liabilities –Liabilities > Assets: Insolvent Negative net worth Candidate for bankruptcy

AGEC 407 Financial Measures Liquidity –A short-run concept –Ability of the business to meet financial obligations as they come due

AGEC 407 Financial Measures Measures of Liquidity –Current Ratio Ratio of current assets to current liabilities –Working capital Difference between current assets and current liabilities

AGEC 407 Financial Measures Measures of Solvency –Net Worth –Debt/Asset Ratio Measures long-run solvency –Debt/Equity Ratio How much capital from lenders vs. owners –Equity/Asset Ratio