INCOME STATEMENT

1. INCOME STATEMENT KEY CONCEPTS • NET INCOME IS THE BEST MEASURE OF BUSINESS PERFORMANCE • ACCRUAL NET INCOME IS A MORE ACCURATE MEASURE OF PROFITABILITY THAN CASH NET INCOME • CASH RECEIPTS AND EXPENDITURES DO NOT ALWAYS REPRESENT INCOME AND EXPENSES • EXPENSES SHOULD BE MATCHED TO THE REVENUE THEY GENERATE IN THE SAME ACCOUNTING PERIOD

2. NET INCOME • THE SINGLE MOST IMPORTANT MEASURE OF PERFORMANCE FOR A FARM BUSINESS • REPRESENTS A RETURN TO UNPAID LABOR AND MANAGEMENT AND OWNER EQUITY CAPITAL IN THE BUSINESS

3. NET INCOME IS DEFINED TO INCLUDE BOTH FARM AND NONFARM INCOME ON AN AFTER-TAX BASIS. • NET INCOME MAYBE THOUGHT OF AS REVENUE MINUS EXPENSES.

4. CASH VS. ACCRUAL • THE IRS ALLOWS FARMERS AND RANCHERS TO FILL THEIR INCOME TAX RETURNS ON A CASH BASIS • THIS ALLOWS CONSIDERABLE FLEXIBILITY IN MANAGING TAXES PAID IN A GIVEN YEAR • CASH BASIS ACCOUNTING WILL OFTEN DIFFER FROM ACCRUAL RESULTS • MANAGEMENT DECISIONS CAN BEST BE MADE FROM AN ACCRUAL BASED ACCOUNTING SYSTEM

5. ACCRUAL VS. CASH ACCOUNTING • THE ACCRUAL METHOD OF ACCOUNTING RECOGNIZES REVENUES AND EXPENSES AS THEY OCCUR • THE CASH METHOD OF ACCOUNTING RECOGNIZES REVENUES AND EXPENSES WHEN CASH ACTUALLY CHANGES HANDS

6. ACCRUAL CONCEPT • INCOME IS MEASURED BY OPERATING TRANSACTIONS THAT AFFECT OWNER EQUITY • ANY INCREASE IN OWNERS EQUITY RESULTING FROM OPERATIONS IS TERMED REVENUE • ANY DECREASE IN OWNERS EQUITY IS CALLED AN EXPENSE • NET INCOME IS THE DIFFERENCE BETWEEN THE TWO • AN EXPENSE CAN BE EITHER A CASH OR NON-CASH ITEM

7. WITH CASH-BASIS, REVENUE AND EXPENSES ARE DETERMINED BY THE TIMING OF PAYMENT. • WITH ACCRUAL-BASIS, IT MAKES NO DIFFERENCE WHEN THE SALE IS MADE. • INVENTORIES ARE VALUED AT YEAR-END, AND COMPARED TO THE INVENTORIES AT THE BEGINNING OF THE YEAR.

8. IF INVENTORIES HAVE INCREASED, THE AMOUNT OF INCREASE IS CONSIDERED A POSITIVE REVENUE. • IF INVENTORIES HAVE DECREASED, THE AMOUNT OF DECREASE IS CONSIDERED A NEGATIVE REVENUE.

9. REVENUE • REVENUE IS GENERATED BY BOTH CASH SALES AND CHANGES IN INVENTORY. • FEEDER LIVESTOCK AND FEED PURCHASES DURING THE YEAR ARE SUBTRACTED FROM GROSS REVENUE TO GET "VALUE OF FARM PRODUCTION."

10. VALUE OF FARM PRODUCTION • A TERM UNIQUE TO FARM EARNINGS STATEMENTS • COMPUTED AS THE GROSS REVENUES OF AN OPERATION LESS THE PURCHASES OF ASSETS THAT ARE INCLUDED IN THE CALCULATION OF GROSS REVENUE

11. ADVANTAGES: • GROSS REVENUE IS NOT DISTORTED BY PURCHASES OF INVENTORY LATE IN THE OPERATING CYCLE • MORE ACCURATE COMPARISONS BETWEEN CERTAIN TYPES OF OPERATIONS.

12. EXPENSES • CASH OPERATING EXPENSES • ACCRUAL EXPENSE ADJUSTMENTS • DEPRECIATION • INTEREST • CAPITAL ASSET ACCOUNT ADJUSTMENTS

13. NET INCOME FROM FARM OPERATIONS IS TOTAL GROSS FARM REVENUE LESS TOTAL FARM EXPENSES. • THE GAIN OR LOSS FROM THE SALE OF CAPITAL ASSETS IS ACCOUNTED FOR TO ARRIVE AT THE NET FARM INCOME.

14. NON-FARM REVENUE IS ADDED TO NET FARM INCOME TO ARRIVE AT INCOME BEFORE-TAXES. • INCOME TAXES ARE DEDUCTED TO ARRIVE AT NET INCOME AFTER-TAXES.

15. ACCRUAL INCOME STATEMENT ADJUSTMENT • ACCRUAL ADJUSTMENTS TO REVENUE • INVENTORY CHANGE (crops, feed and livestock) • ACCOUNTS RECEIVABLE • ACCRUED INTEREST EARNED • FUTURES/OPTION ACCOUNT EQUITY

16. ACCRUAL ADJUSTMENTS TO EXPENSES • UNUSED ASSETS • PREPAID EXPENSES • SUPPLIES • INVESTMENTS IN GROWING CROPS • UNPAID ITEMS • ACCOUNTS PAYABLE • ACCRUED PROPERTY TAXES AND WITHHOLDING • ACCRUED INTEREST • ACCRUED TAXS • INCOME AND SOCIAL SECURITY • DEFERRED TAXES ON CURRENT ASSETS

17. THE RELATIONSHIP OF THE INCOME STATEMENT TO THE BALANCE SHEET

18. NET FARM INCOME LESS • FAMILY LIVING EXPENSES, INCOME AND SOCIAL SECURITY TAXES AND OTHER WITHDRAWALS EQUALS • CHANGE IN COST BASIS EQUITY

19. ADJUSTMENTS FOR CHANGES IN MARKET VALUATIONS EQUALS • CHANGE IN MARKET BASIS EQUITY