FARM RECORD & BALANCE SHEET

Farm Record

• As a source of physical data for use in

farm planning, budgeting and analysis.

• A complete farm record make preparation

of balance sheet and income statement
more easier.
 Inventory
• The inventory must be in dollar values.
• Taking an inventory consists of 2 part:
- Physical count
- Inventory valuation

Physical count
• Consists of listing & describing each piece of property.
• Physical unit such as bushel, tons, head & pound are used to record
the quantities of each type of property.

Inventory valuation
• Physical quantities must be converted into dollar values.
• The accounting concepts of ‘conservatism’ and ‘consistency’ in
valuation should be kept in mind.
• ‘Conservation’ is against placing too high value on any item.
• ‘Consistency’ is using the same valuation method overtime.
- Financial statement directly comparable from year to year.
 Valuation Method
1. Net market price
– An inventory item equal to its current market price
– (price x quantity inventoried) – marketing charges

2. Cost
– Valued at their original cost

3. Lower of cost or market

– Valuing an item at both its net market price and its cost and
then use whichever value is lower.

4. Farm production cost

– Item produced on the farm and still on hand when the
inventory is taken can be valued at their farm production
cost. This cost is equal to the actual cost of producing the
item.
 Valuation Method….Continue…
5. Cost less depreciation
– Property which provides services to a business over a
period of years but losses value over time because of
age, use or obsolescent should be valued at the
original cost less depreciation (eg. Machinery, building)

Depreciation is also a business expenses:

– It represents a loss in value because the item is used
in the business to produce income.
– It is an accounting procedure to spread the original
cost over the item’s useful life. It is not appropriate to
deduct the full purchase price as an expense in the
year of purchase, as the item will be used to generate
income for several years.
 Term to know
Useful life
• The expected number of years the item will be used in the
business.

Salvage value @ terminal value

• The item’s value at the end of its assigned useful life.

Book value
• The value in the current time period is equal to the original
cost less the total accumulated depreciation from
purchase date to date of inventory

“Depreciation must stop when the Book Value is equal to

Salvage Value”
 Depreciation Calculating Method
Straight Line
• Annual dep. = Cost – Salvage Value . Or
Useful life

= (Cost – Salvage Value) x (100% / Useful life)

Declining Balance
• Annual dep. = (Book value at the beginning of year x R)
• Where R is a constant % value or rate

Sum of the year’s digit

• Annual dep. = (Cost – Salvage value) x RL/SOYD
• RL is a remaining years of useful life as of the beginning of the year
for which dep. is being computed.
• SOYD is sum of all numbers from 1 through the estimated useful
life (eg. 5 years: 1 + 2 + 3 + 4 + 5 = 15)
 Examples
• Straight Line
Purchased = $10000, Salvage Value = $2000, Useful life = 10 years.
:. Annual dep. = (10000 – 2000) / 10 = $800

• Declining Balance
Percentage = (100% / 10 years) = 10%
Dep. = (10000 – 2000) x 10% = $800

Double declining, Let say R = 20%

1st year = 10000 x 20% = $2000
2nd year = (10000 – 2000) x 20% = $1600
3rd year = (8000 – 1600) x 20% = 1280

• Sum of the year’s digit

RL = Balance of useful line year
Eg. 5 years: 1st year = 5, 2nd year = 4, 3rd year = 3
SOYD = 5 + 4 + 3 + 2 + 1 = 15

RL . = 5 . , 4 . , 3 . ,…
SOYD 15 15 15
 THE BALANCE SHEET
• A systematic organization of everything ‘owned’ and ‘owed’ by a business at a given
point in time.
Asset – anything of value owned by a business.
Liability – any obligation or debt owed.

• A balance sheet is a listing of assets & liabilities concluding with an estimate of net
worth or owner’s equity.

• Completed any time during the year, usually at the end of the accounting period (eg. 31
Dec.).

• The primary use of balance sheet is to measure financial strength & position of the
business.

Solvency (kemampuan untuk membayar hutang)

Which measures whether total assets are greater than total liabilities. If insolvent –
technically bankrupt.

Liquidity (kecairan / mudah berubah)

Which measures the ability to generate cash needed to meet cash obligation without
seriously disrupting the production activities of the business.

Net worth or owner’s equity

The amount of money remaining for the owner of the business after liquidating the
business and paying all liabilities.
 The Balance Sheet….Assets….
• Can be sold to generate cash or can be used to produce other goods
which can be sold to provide cash income at some future time.
• 3 categories of assets are Current Assets, Intermediate Assets and
Fixed Assets

Current Assets
• More liquid by used or sold in the next year as a normal part of
business activities and their sale will not disrupt future production
activities. Eg: cash on hand, saving account, stock, bond.

Intermediate Assets
• Intermediate in liquidity and have a useful life greater than 1 year but
less than 10 years. Their sale will affect the future income potential of
the business. Most intermediate asset are characterized by being
depreciable. Eg: machinery, equipment.

Fixed Assets
• The least liquid of all assets; have a useful life greater than 10 years &
their sale would seriously affect the ongoing nature of a business. Eg:
real estate, land, permanent building.
 The Balance Sheet….Liabilities….
• An obligation or debt owned to someone else and it represents an
outsider’s claim against one or more business assets.
• It can be categorized into 3 : Current Liabilities, Intermediate
Liabilities and Long Term Liabilities.

Current Liabilities
• Those financial obligations which will become due and payable
within 1 year from the date of the balance sheet. Eg: account
payable, interest, full amount of principal on any short term loans.

Intermediate Liabilities
• Loans where repayment is extended over at least 2 years and up to
as long as 10 years. Eg: loan for the purchase of machinery or other
intermediate assets.

Long Term Liabilities

• Loans for purchase of real estate / land & building (have a collateral).
 The Balance Sheet…
Net Worth @ Owner’s Equity….

• Represents the amount of money left for the

owner of the business.
• It is owner’s current investment or equity in the
business & listed as a liability as it is money due
the owner upon liquidation of the business.
• Business net worth changes only when the
owner puts additional personal capital into the
business (increase net worth) or withdraw
capital for family expenses (reduce net worth).

Net Worth = Total Assets – Total Liabilities

 Balance Sheet for _______, Dec 20xx

Asset Liabilities

Current assets XXX Current liabilities XXX

Intermediate assets XXX Intermediate liabilities XXX
Fixed assets XXX Long term liabilities XXX
Total liabilities YYY
Net worth ZZZ
Total assets XXX Total liab. & net worth Y+Z
 Ratio Analysis
Net capital ratio
• A measure of the overall financial strength and solvency of the
business
= Total assets / Total liabilities.

Equal to 1 - minimum ratio to remain solvent

Less than 1 - insolvency exist.
More than 1 - safe in position

Debt / equity ratio or leverage ratio

• A measure of solvency. It shows the relationship of owned capital
to borrow capital

= Total liabilities / Owner’s equity

• A smaller value indicate a stronger financial position. It shows that

smaller value, the larger net worth.
 Ratio Analysis…Continue….
Current ratio
• A measure of the liquidity of the business.

= Current asset / Current liabilities

• It also a measure of the ability to generate cash within the next year
to meet cash payment on debts and other current liabilities.

• If current ratio = 1, means current liabilities are equal to current

assets. Higher ratio would be preferred. If less than 1, indicate a
potential liquidity problem.

Working capital ratio

• An intermediate measure of both liquidity and solvency.

= Current assets + Intermediate assets .

Current liabilities + Intermediate liabilities
 Question
Given:
• Net Capital Ratio = 4
• Current Ratio = 2
• Working Capital Ratio = 3

Asset Liabilities

Current assets 40,000 Current liabilities .

Intermediate assets . Intermediate liabilities 20,000
Fixed assets . Long term liabilities .
Total liabilities .
Net worth .
Total assets . Total liab. & net worth 400,000
 Answer
Given:
• Net Capital Ratio = 4
• Current Ratio = 2
• Working Capital Ratio = 3

Asset Liabilities

Current assets 40,000 Current liabilities 20,000 .

Intermediate assets 80,000 . Intermediate liabilities 20,000
Fixed assets 280,000 . Long term liabilities 60,000 .
Total liabilities 100,000.
Net worth 300,000.
Total assets 400,000 . Total liab. & net worth 400,000
Leverage
ratio
INCOME STATEMENT / OPERATING STATEMENT / PROFIT
& LOSS STATEMENT

• 2nd major financial statement

• Summary of income & expenses over a given time period.

• The period of time covered called “the accounting period”

• Accounting principle
Income recognized & counted in the same accounting period.

• Accrual method
Record income when it is earned & expenses when they are incurred.
Income considered earned when the product has been produce and
ready for sale even though not sold.
 Identifying Income & Expenses
Income (cash & non cash receipt)
• Receipt from sale of crops, livestock, livestock products during the
year & also from government payment & miscellaneous sources.
Included product consumed by the farm household.
• Gain and loss on sale of capital assets.
- Capital asset can be sold.
- If higher than book value / scrap, gain (positive value)
- If lower than book value / scrap, loss (negative expenses)

Expenses
• Cost involved in the operation of the business during the period
covered by the income statement. 2 types of exp. Variable and fixed
expenses.

Net Cash Farm Income

• Net cash flow from the production activities of the farm business
adjusted for any gain and loss from the sale of capital asset
• = Total cash income – total cash expenses
 Identifying Income & Expenses…Continue….
Noncash Adjustment to Income
• Depreciation : negative entry (-ve value)

• Inventory changes (End value – Beg. Value)

Inventory increase – positive value
Inventory decrease – negative value
Net change in inventory value = add all inventory value

Net Farm Income

• Profit from the year’s operation.
• Represent the return to the owner for personal and family labor,
management and equity capital used in the farm
Example: Format
Revenue: RM RM
Cash crop sales XXX
Cash livestock sales XXX
Inventories changes:
Crops (End – Beg.) XXX
Livestock (End – Beg.) XXX
Change in A/C receivable (End – Beg) XXX
TOTAL REVENUE YYY
Expenses:
Purchased seeds XXX
Purchased livestock XXX
Operating expenses
Fuel XXX
Labor XXX
Maintenance XXX
Adjustments
A/C payable (Beg – End) XXX
Prepaid expenses (Beg – End) XXX
Depreciation XXX
TOTAL EXPENSES YYY

NET FARM INCOME ZZZ

 Analysis of Net Farm Income
Profit
• A dollar value (found by calculating net farm
income)

Profitability
• Concerned with the size of this profit relative to
the size of the business / value of the resources
used to produce the profit.
 Analysis of Net Farm Income
Return to Capital (%) @ ROA @ ROI
Measure of profitability

= Return to total capital X 100%

Total farm assets

Net farm income

+ Interest paid
– Value of unpaid family labor .
= Adjusted net farm income .
– Opportunity cost of labor
– Opportunity cost of management .
= Return of capital .
 Analysis of Net Farm Income
Return to Labor & Management

• Portion of net income which remains to pay the owner for personal
labor and management (family labor) and a return on equity capital
used in the business.

Expressed in dollar and not in percentage

= Adjusted net farm income – opportunity cost on total capital

Return to Labor
• The Return to Labor and Management can be used to compute a
return to labor alone.
= Return to labor and management – opp. Cost to management

Return to Management
= Return to Labor and Management – opp. Cost of labor
 Analysis of Net Farm Income
Return to Equity
• Return to debt and equity capital (Equity capital is
capital available for alternative investment when the
business liquidated).

Net farm income

– Opportunity cost of labor
– Opportunity cost of management
– Value of unpaid family labor .
= Return to equity .

• Rate of return to equity (%)

= Return to equity . x 100%

Net worth or owner’s equity
a.
REVENUE
Cash revenue RM167,000
EXPENSES
Cash expense RM110 000
Depreciation RM8 500
Total Expenses RM118 500
Net Farm Income RM48 500
 
b.
REVENUE
Cash revenue RM167 000
Inventory changes
Ending RM28 000
Beginning RM42 000 RM(14 000)
Total Revenue RM153 000
 
c.
EXPENSES
Cash expense RM110 000
Depreciation RM8 500
Total expense RM118 500
Net Farm Income RM34 500