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INCOME STATEMENT - PowerPoint PPT Presentation


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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

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income statement
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
net income
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

slide3
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.
cash vs accrual
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
accrual vs cash accounting
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
accrual concept
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
slide7
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.
slide8
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.
revenue
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."
value of farm production
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
slide11
ADVANTAGES:
    • GROSS REVENUE IS NOT DISTORTED BY PURCHASES OF INVENTORY LATE IN THE OPERATING CYCLE
    • MORE ACCURATE COMPARISONS BETWEEN CERTAIN TYPES OF OPERATIONS.
expenses
EXPENSES
  • CASH OPERATING EXPENSES
  • ACCRUAL EXPENSE ADJUSTMENTS
  • DEPRECIATION
  • INTEREST
  • CAPITAL ASSET ACCOUNT ADJUSTMENTS
slide13
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.
slide14
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.
accrual income statement adjustment
ACCRUAL INCOME STATEMENT ADJUSTMENT
  • ACCRUAL ADJUSTMENTS TO REVENUE
    • INVENTORY CHANGE (crops, feed and livestock)
    • ACCOUNTS RECEIVABLE
    • ACCRUED INTEREST EARNED
    • FUTURES/OPTION ACCOUNT EQUITY
slide16
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
slide18
NET FARM INCOME

LESS

  • FAMILY LIVING EXPENSES, INCOME AND SOCIAL SECURITY TAXES AND OTHER WITHDRAWALS

EQUALS

  • CHANGE IN COST BASIS EQUITY
slide19
ADJUSTMENTS FOR CHANGES IN MARKET VALUATIONS

EQUALS

  • CHANGE IN MARKET BASIS EQUITY