The Farm Financial Standards Committee recommends four measures of profitability:

1.  Net Farm Income

2.  ROA

3.  ROE

4.  OPMR

Notes:

______

Income Statement

Are you making a profit?

The income statement is used to determine the profit or loss during an accounting period.

The income statement tells you the financial position of the business over a ______(your fiscal year).

______= ______– ______

Income Statement Adjustments

The Farm Financial Standards Committee (FFSC) recommends that anyone using cash accounting convert net farm income to accrual-adjusted net farm income.

Accrual- adjusted net farm income is:

·  More ______

·  Better for ______

Answer Key:

·  Period of Time

·  Profit

·  Revenue

·  Expenses

·  Accurate

·  Management Purposes

Use the following information to fill out the balance sheet:

  Accounts receivable balance 1/1/13 was $4,110; balance 12/31/13 was $4,785

  Property taxes for the year of $5,650

  Accounts payable balance 1/1/13 was $6,131; balance 12/31/13 was $7,800

  Utilities expenses were $2,195

  Sold 530 tons of hay for $235 per ton

  Depreciation expense for the year was $59,600

  Change in interest payable for 2013 is +$650

  Cash interest paid during the year $14,175

  Received $12,400 in farm program payments

  Sold a tractor for $24,000, the book value was $23,400

Income Statement
Grant County Farms Co.
Year Ending December 31, 2013
Revenue: / Expenses:
Cash crop sales / Purchased feed and grain
Cash livestock sales / Purchased market livestock
Inventory changes / Other Operating Expenses:
Crops / Seed and fertilizer
Market livestock / Repairs, maintenance
Government payments / Fuel and lube
Change in value of raised breeding stock / Property taxes
Gain/loss sale of culled breeding stock / Hired labor
Change in accounts receivable / Utilities
Adjustments
Total Revenue / Accounts payable
Accrued expenses
Depreciation
Total Operating Expenses
Interest paid
Change in interest payable
Total interest expense
Total Expenses
Net Farm Income From Operations
Gain/loss on sale of capital assets:
Machinery
Total Gain/Loss on capital assets
Net Farm Income

* Average Total Assets can be found on your beginning and end of year balance sheets.

Average Total Assets = Beginning Total Assets+Ending Total Assets2

** Average Total Equity can be found on your beginning and end of year balance sheets.

Average Total Equity = Beginning Total Equity+Ending Total Equity2

* Average Total Assets can be found on your beginning and end of year balance sheets.

Average Total Assets = Beginning Total Assets+Ending Total Assets2

** Average Total Equity can be found on your beginning and end of year balance sheets.

Average Total Equity = Beginning Total Equity+Ending Total Equity2

“[Net farm income] should be considered more as a starting point for analyzing profitability than as a good measure of profitability itself.”

~Kay, Edwards, Duffy

Farm Management

Profitability is concerned with the size of the business. Equal profit in two farms is not equal if one used twice as much labor, land, and inputs.

ROA indicates how efficiently assets are producing profits while ROE indicates how well your invested capital generating profits

* Average Total Assets can be found on your beginning and end of year balance sheets.

Average Total Assets = Beginning Total Assets+Ending Total Assets2

** Average Total Equity can be found on your beginning and end of year balance sheets.

Average Total Equity = Beginning Total Equity+Ending Total Equity2

Income Statement Analysis

Profitability is a measure of efficiency in how the farm business is utilizing its resources in producing profit.

Measures of profitability:

Return to Assets/Equity = Adjusted Net Farm Income from Operations-Opportunity Cost of Unpaid Labor-Opportunity Cost of Managment

Once you have determined your Return to Assets, you can calculate your farm’s profitability ratios.

Return on Assets (ROA) = Return to AssetsAverage Total Assets*

Goal: ROA greater than 0.05. Compare to similar operations and farm’s historical ROA.

Return on Equity (ROE) = Return to EquityAverage Owner Equity**

Goal: ROE greater than ______. Compare to similar operations and farm’s historical ROE. Want ROE > ROA.

Operating Profit = Adjusted Net Farm Income from Operations-Interest Expense-Opportunity Cost of Managment

Once you have determined your Operating Profit, you can calculate your farm’s profitability ratios.

Operating Profit Margin Ratio = Operating ProfitTotal Revenue

Goal: Operating Profit Margin Ratio greater than 0.25.

Homework:

ð  Complete an income statement for your farm.

Construct an income statement or make sure your current income statement is thorough and correct using your financial software.

ð  Calculate your ROA, ROE, and OPMR.

Use these ratios to determine the financial health of your farm. What ratios are healthy and what ratios do you need to work on? How will you go about improving your ratios?

ð  Set targets for ROA, ROE, and OPMR.

After setting targets for your ROA, ROE, and OPMR, develop a plan of action for moving your business towards these targets.

ð  Discuss the financial condition of your business with your management team.

Brainstorm ways that you can improve or sustain the health of your farm business. Use information from both the income statement unit and the balance sheet unit.