FBM Chapter 2 - Record Keeping
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Questions and Answers

Which of the following is NOT considered an operating expense?

  • Labor
  • Depreciation
  • Fertilizer
  • Interest (correct)

What is the primary purpose of the income statement?

  • To show the revenue and expenses over a period of time, usually one year (correct)
  • To compare the farm's performance to other farms in the area
  • To illustrate the net worth of the farm
  • To track the financial position of the farm at a specific point in time

What does 'net farm income from operations' represent?

  • The difference between cash revenue and cash expenses
  • Total revenue earned by the farm from all sources
  • Profit earned from the normal day-to-day operations of the farm (correct)
  • Income from the sale of assets such as land or machinery

Which of the following is NOT included in cash revenue for the Kendalls' farm?

<p>Depreciation (A)</p> Signup and view all the answers

What is the purpose of accrual adjustments in the income statement?

<p>To ensure the income statement reflects the actual profit earned during the year (C)</p> Signup and view all the answers

What is the main distinction between the income statement and the net worth statement?

<p>The income statement shows revenue and expenses over time, while the net worth statement shows the financial position at a specific point in time. (A)</p> Signup and view all the answers

Which of the following is included in operating expenses?

<p>Feed and fertilizer expenses (C)</p> Signup and view all the answers

How is 'net farm income from operations' calculated?

<p>Total farm revenue - total farm expenses (D)</p> Signup and view all the answers

How does the value of the raised breeding livestock relate to the net worth statement?

<p>It is shown as a non-current asset. (A)</p> Signup and view all the answers

What does the 'Change' column in Figure 19 represent?

<p>The increase in the value of the raised breeding livestock from one year to the next. (D)</p> Signup and view all the answers

How is the change in value of the raised breeding livestock reflected on the income statement?

<p>As an accrual adjustment in the value of raised livestock. (D)</p> Signup and view all the answers

What is the primary assumption for the category of 'Raised Breeding Livestock'?

<p>The animals are raised for productive service for more than one year. (C)</p> Signup and view all the answers

Why would a complete account for breeding livestock have separate sections for different age groups?

<p>To differentiate the cost of raising each age group. (C)</p> Signup and view all the answers

What is the purpose of depreciating machinery and equipment used for farming?

<p>To reflect the gradual decrease in value of these assets over time. (D)</p> Signup and view all the answers

What is the recommended depreciation schedule for farm machinery and equipment based on the provided information?

<p>A schedule based on the straight-line depreciation method. (A)</p> Signup and view all the answers

What is the purpose of having a separate depreciation schedule for the chart of accounts?

<p>To assist with the planning and management of farm operations. (A)</p> Signup and view all the answers

What is another name for a net worth statement?

<p>Balance Sheet (C)</p> Signup and view all the answers

What does the net worth statement represent?

<p>The owner's claim against the business (D)</p> Signup and view all the answers

What function does an income statement serve for a business?

<p>It reflects the profitability over a specific accounting period. (A)</p> Signup and view all the answers

Which of the following is NOT a use of good farm and ranch records?

<p>Increase asset value (A)</p> Signup and view all the answers

Which of the following is included in the net worth equation?

<p>Both total assets and total liabilities (B)</p> Signup and view all the answers

What is typically used to value assets for financial management?

<p>Cost basis (B)</p> Signup and view all the answers

What is the first step in setting up a record system for a farm and ranch business?

<p>Select a record keeping system suited to their particular needs (B)</p> Signup and view all the answers

Which approach is beneficial when applying for loans?

<p>Market value approach (A)</p> Signup and view all the answers

Why is it important for Alex and Mindy to utilize a good set of farm and ranch records?

<p>To make decisions based on accurate information (A)</p> Signup and view all the answers

Which of the following accounts is typically included in the chart of accounts?

<p>Machinery account with depreciation schedules (A)</p> Signup and view all the answers

How are assets and liabilities categorized in the net worth statement?

<p>As current and non-current categories (C)</p> Signup and view all the answers

What type of statement shows the financial condition of a business at a specific time?

<p>Net Worth Statement (D)</p> Signup and view all the answers

What does the equation for net worth state?

<p>Net Worth = Total Assets - Total Liabilities (D)</p> Signup and view all the answers

How often do the Kendalls typically see their accountant for financial information?

<p>Once each year (B)</p> Signup and view all the answers

In a farm business, which of the following is considered a liability?

<p>Outstanding loans (C)</p> Signup and view all the answers

Which method assumes a specific price paid for an asset in historical records?

<p>Cost basis (C)</p> Signup and view all the answers

What amount would the Kendalls owe if they paid off their loan on December 31st of year zero?

<p>$1,400 (D)</p> Signup and view all the answers

How is accrued interest treated in the net worth statement?

<p>As a current liability (C)</p> Signup and view all the answers

Which part of the loan payment represents the principal in year three for the Kendalls?

<p>$7,963 (D)</p> Signup and view all the answers

At the end of year two, what would be included in the non-current liabilities section of the Kendalls' net worth statement?

<p>$17,638 (B)</p> Signup and view all the answers

What does the principal portion of a term loan represent?

<p>The amount to be repaid of the lender’s funds (C)</p> Signup and view all the answers

On December 31st, which portion of the loan payment is recorded as the current portion of term debt?

<p>Principal portion for the next year (C)</p> Signup and view all the answers

How is the loan balance shown after each annual payment for the Kendalls?

<p>Remaining principal excluding interest (A)</p> Signup and view all the answers

If the Kendalls were in year three of a loan, what portion would be reflected in their payment amount?

<p>Total payment including principal and interest (C)</p> Signup and view all the answers

What does the undepreciated balance of a machine represent?

<p>The book value of the machine (B)</p> Signup and view all the answers

Which statement about the depreciable balance of an asset is correct?

<p>It decreases over time. (C)</p> Signup and view all the answers

What should the values on the net worth statement reflect over time regarding land?

<p>The original net purchase price (B)</p> Signup and view all the answers

How is the depreciable total calculated if new items are purchased?

<p>It increases with the addition of new depreciable items. (A)</p> Signup and view all the answers

What characteristic distinguishes the cost basis net worth statement from a market value net worth statement?

<p>The market value statement reflects current asset prices. (B)</p> Signup and view all the answers

In which instance might the value of land differ from its original cost?

<p>When permanent improvements are made to the land (C)</p> Signup and view all the answers

What implication does the purchase of new depreciable items have on the overall assets?

<p>It potentially increases the total value of all assets. (A)</p> Signup and view all the answers

Which asset typically does not increase in value over time according to the cost basis method?

<p>Land (C)</p> Signup and view all the answers

Flashcards

Net Worth or Equity

The value of what the owner has invested in their business. This is calculated by subtracting total liabilities from total assets.

Net Worth Statement

A financial statement that summarizes a farm's assets, liabilities, and net worth at a specific point in time.

Cost Basis Valuation

An accounting method that values assets at their original purchase price.

Market Value Valuation

An accounting method that values assets at their current market price.

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Current Assets and Liabilities

Assets and liabilities that are expected to be used or paid within one year.

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Non-Current Assets and Liabilities

Assets and liabilities that are expected to be used or paid for over a longer period than one year.

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Balance Sheet Equation

The equation that represents the relationship between a farm's assets, liabilities, and net worth.

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Asset Valuation

The process of estimating the current market value of farm assets.

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Income Statement

A financial statement that shows the profitability of a business over a period of time, usually one year.

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Record Keeping

The process of recording and organizing financial transactions for a business.

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Chart of Accounts

A collection of accounts that represent the different assets, liabilities, and equity of a business.

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Financial Health

The ability to produce a profit and generate positive cash flow.

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Financial Analysis

The process of analyzing and interpreting the financial records of a business to make informed business decisions.

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Financial Management

The process of implementing strategies to manage the financial resources of a business, such as optimizing investments, managing cash flow, and minimizing expenses.

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Accounting System

A system that helps businesses track income, expenses, and assets.

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Net Farm Income From Operations

The difference between total farm revenue and total farm expenses. It represents the farm's profit from daily operations.

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Operating Expenses

The typical daily costs of running a farming operation.

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Cash Revenue

The actual income received from cash sales, such as crops, livestock, and government payments.

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Accrual Adjustments (Revenue)

Adjustments made to account for revenue earned but not yet received in cash.

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Accrual Adjustments (Expenses)

Adjustments made to account for expenses incurred but not yet paid in cash.

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Interest Expense

The costs associated with borrowing money for the farm.

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Cash Operating Expenses

Cash expenses related to running the farm, such as feed, seed, fertilizer, and labor costs.

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Breeding Livestock Valuation

The value of raised breeding livestock is recorded as an asset on the farm's financial statements.

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Breeding Livestock as Non-Current Asset

The value of breeding livestock is considered a non-current asset, meaning it's expected to be used for more than one year.

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Breeding Livestock Value Increase

The increase in value of breeding livestock is shown as an accrual adjustment on the income statement.

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Breeding Livestock Value Link

The increase in value of breeding livestock is linked to the farm's net worth statement and income statement.

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Machinery Depreciation

The value of machinery used on the farm is reflected on the balance sheet as an asset and is depreciated over time.

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Depreciation Schedule

The depreciation schedule used for farm machinery should be based on the farm's own needs and not on the methods found in the IRS Farmers Tax Guide.

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Depreciation Methods

Different methods of depreciation exist, and choosing the right method impacts the farm's financial statements.

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Straight-Line Depreciation

Straight-line depreciation is a common method used to depreciate assets over their useful life.

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What is book value?

The book value of an asset is its original purchase price minus accumulated depreciation. It reflects the asset's value based on its cost and its wear and tear over time.

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What is a depreciation schedule?

A depreciation schedule shows how much the value of a depreciable asset, like a tractor, declines each year. This helps track the asset's declining value over its useful life.

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How is land value treated?

Land value on a net worth statement should generally remain at the original purchase price. This reflects the land's inherent value, which doesn't inherently decrease over time.

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How are permanent improvements valued?

Permanent improvements like fences or drainage systems added to land can be valued separately or included with the land value. Regardless, their value should remain at the original cost.

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What is a market value net worth statement?

Building a market value net worth statement involves valuing assets at their current market prices, which can fluctuate.

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What is a cost basis net worth statement?

A cost basis net worth statement values assets at their original purchase price, regardless of their current market value.

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How does book value differ from market value?

The book value of an asset should be considered separately from its market value, which might be higher or lower depending on supply and demand.

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Can the total value of depreciable items decrease?

The total value of all depreciable assets on a farm doesn't necessarily decrease each year. It can increase if new depreciable items are purchased.

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Accrued Interest

Interest on a term loan accumulates over time. For example, on December 31st, half the year's interest has accrued even if the full payment is due later.

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Principal of a Term Loan

The portion of a term loan payment that goes towards the original principal amount borrowed.

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Current Portion of Term Debt

The principle payment due in the next year on a term loan is recorded as a current liability on the net worth statement. This signifies that the principal is due within the next year.

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Loan Amortization Schedule

A schedule that shows the breakdown of each loan payment into principal and interest over the life of the loan. This helps track how the loan balance changes over time.

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Non-Current Liabilities

The section of a net worth statement that lists all the loan balances after subtracting the current portion. This represents the total outstanding debt due in the future.

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Loan Balance

The remaining balance of the term loan after each annual payment. This only includes the principal that hasn't been repaid yet, excluding accrued interest.

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Net Worth

The value of what the owner has invested in their business. This is calculated by subtracting total liabilities from total assets.

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Study Notes

Introduction to Record Keeping

  • Without proper record keeping, managing a successful business is difficult.
  • Records are crucial for making sound business decisions.
  • Records are a valuable asset for business managers.

Why Keep Records

  • Complying with income tax reporting requirements is a key reason. (Figure 1)
  • Assisting in planning and management, such as obtaining credit, is another reason. (Figure 2)

Kinds of Records

  • Chart of Accounts: An inventory of information needed for financial statements to analyze farm business health and profitability. Includes income/expense ledger, current assets inventory, machinery depreciation, loans, and land.
  • Net Worth Statement: A snapshot of business financial condition at a specific time. Lists assets, values, and liabilities (balance sheet, financial statement, or statement of financial condition).
  • Income Statement: Shows a business's profitability over a specific period, usually annually. Also known as a profit and loss statement or operating statement.

Useful Records

  • Measure the financial health of the farm.
  • Evaluate profitability.
  • Aid in making business decisions.
  • Obtaining loans is made easier.
  • Aids in investment analysis.
  • Assists in tax returns and tax management.

Record Systems

  • Financial Records: Include receipts, expenses, assets, and liabilities. Used to construct financial statements for analysis. (Figure 3)
  • Physical Records: Show the production of crops and livestock, along with usage of inputs, like crop yields, calving percentages, and machinery use. (Figure 4)
  • Levels of Record Keeping Systems:
    • Income tax purposes only
    • Income taxes plus some business analysis
    • Complete farm or ranch business analysis

Accounting Systems

  • Accounting Period: Calendar year (January 1st to December 31st) is common, though other fiscal years can be used.
  • Cash vs. Accrual Accounting:
    • Cash method: Records income and expenses based on actual cash transactions.
    • Accrual method: Records income and expenses when they occur, irrespective of cash inflows/outflows.
  • Single vs. Double Entry Accounting: A single entry system records just one entry per transaction while a double entry system has a debit and corresponding credit entry per transaction.

Financial Statements

  • Net worth statement (balance sheet): Shows the assets, liabilities, and equity (net worth) of a business at a specific point in time.
  • Income statement (profit and loss statement): Shows the revenues and expenses of a business over a period of time (e.g., one year).

Charts of Accounts

  • A well-designed chart of accounts provides the data needed for financial statements.
  • Computerized farm accounting systems automatically create the link.

Cash Account

  • Simple recording of cash on hand.
  • Separate from personal cash.

Revenue and Expenses

  • Accounts are created to record dates, vendors, units, prices, and totals.
  • Categorization by type.

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Description

Test your understanding of the income statement, operating expenses, and net farm income in agricultural finance. This quiz covers key concepts such as accrual adjustments, cash revenue, and the significance of breeding livestock in financial reports. Challenge yourself to see how well you know these critical financial elements.

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