Introduction to Financial Statements and Their Use

Alison De MarreeWinter 2014

1. Balance Sheet

2. Income Statement (also known as P&L: Profit & Loss)

3. Cash Flow Statement

Standard Financial Statements

Assets (Own) = Liabilities

(Owe)

+ Net Worth or Owner's Equity

A Balance Sheet is the first measure of your financial condition

Shows the value of items owned (assets), all claims against the business (liabilities) and the difference (net worth) at a point in time (snapshot)

Must balance

Assets(Own)=Liabilities(Owe)+Net Worth(Owner's Equity)

Balance Sheet or Equity Statement

AssetsChecking Account $ 5,000Tractor $30,000Barn & Land $60,000

Total Assets$95,000

LiabilitiesAccounts payable $

3,000Tractor Loan $12,000Farm Mortgage $30,000

Total Liabilities $45,000

Net Worth (Assets – Liabilities) $ 50,000

The Balance Sheet

Assets: Current? (Less than 1 yr )

?

Intermediate? (>1yr < 10 yrs)

?

Long Term? (=> 10 yrs)

?

Liabilities: Current? ?

Intermediate? ?

Long Term? ?

What other things belong on the balance sheet?

To set goals

To observe trends:

Compare business to itself

Compare to other businesses

To change the business (grow, shrink, change

emphasis)

Review efficiency of investment

Using the Balance Sheet in Management

Used to measure profit, a measure of performance, over a period of time

Profit◦ Total value of goods and services produced minus

the value of resources used in production (a residual concept)

Income Statement

is the return to labor, management and capital inputs provided by the owner(s) / operators and families

is the total value of production minus the total cost of production

must be positive for the short-term improvement in the financial condition of the business and for long-term survival

Profitability

Profit =

Money received for apples

Money owed for cabbage by restaurant

Apples in storage awaiting sale

Rented out bee hives for 2 weeks minu

s

Fertilizer

Custom plowing

Consulting fees

Interest payments

Total value of production - Costs of Resources

Hired labor

Cash accounting

◦ records income when you receive it and expenses

when you pay the bill

◦ ease of use for tax management purposes

Accrual accounting

◦ records income when produced, expenses when

allocated to production

◦ time and effort required

Cash vs. Accrual Accounting

Profit =

Cash Farm Receipts

Appreciation

Change in Inventory

Change in Accounts Receivable

minus

Cash Farm ExpensesChange in Inventory and, or Prepaid Expenses

Change in Accounts Payable

Depreciation

Value of Noncash Expense Items

Total value of production - Costs of Resources

Purpose: To insure that your other financial statements are accurate!!!

Summarizes all flows of cash into the business (or family) and all flows of cash out of the business ( or family)

Covers a period of time (monthly, annually)

Has beginning and ending cash on hand (cash, checking, savings) > or = 0

Cash Flow Statement

Farm Business

Beginning Cash + Cash Inflow = Cash Outflow + Ending Cash

Cash InflowCash Farm

Receipts

Non Farm

IncomeMoney

Borrowed

Sales of Assets

Cash Outflow

Cash Farm Expenses

Principal Payments

Capital Purchases

Withdrawals for Family Living

Expenses

Cash inflows must equal cash outflows. What about imbalances?

Debt is a major means of cash flow management◦ change repayment rate◦ borrow new money◦ accounts payable

Adjustments to items and management

Managing Cash Flows

generate more farm receipts

reduce farm expenses

pay debt more slowly, stretch out payments,

etc.

reduce family living expenses (or draw)

sell farm inventory

sell capital assets

buy fewer new capital items/use credit

Enhancing Cash Flow

Measuring financial condition, and

performance are keys to achieving desired

results

Three financial statements

◦ Balance sheet (condition, position)

◦ Income statement (performance)

◦ Cash flow statement (performance)

Summary