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Chapter 12 Basic Accounting Documents
Accounting andAgribusiness Managers • Accounting: the process of recording, classifying, and summarizing business transactions • The balance sheet and the profit-and-loss statement are the starting points of most financial analysis • Agribusiness managers must understand these documents in order to evaluate the financial performance of their business
The Purpose of an Accounting System • Present an accurate picture of the firm’s current profitability • Give an estimate of the firm’s current and future financial position • Provide input to the firm’s management information system • Provide an accurate record of past financial performance
The Balance Sheet • A statement of the financial conditions of a business on a specific date • Assets: something of value the firm owns or uses • Current assets: current cash holdings or something that will turn into cash within the current accounting period • Fixed assets: something the firm owns or uses that will not turn into cash within the accounting period
The Balance Sheet • Liabilities: an obligation to pay a debt • Current liabilities: a debt that must paid within the next accounting period • Long-term liabilities: a debt that must be paid after the next accounting period • Owners’ Equity (net worth) • The accounting equation: Assets = Liabilities + Owners’ Equity
Balance Sheet AgBiz Corporation December 31, 20__ Assets Liabilities Current Assets Current Liabilities - Notes Payable - Cash - Accounts Payable - Accounts Receivable - $ Due this YR on LT Debt - Inventories Long-Term Liabilities Fixed Assets - Land Owners’ Equity - Buildings and Equipment - Stock - Retained Earnings Investments Total Assets = Total Liabilities and OE
The Profit-and-Loss Statement • Summarizes the revenue and expenses of a business over a given period • Revenue: refers to the amount of money the firm earned from the sale of its goods and service this period • Cost of goods sold: represents the direct costs to the business of just the goods that are sold this period
The Profit-and-Loss Statement • Gross Margin: what remains after subtractingcost of goods sold from revenues • Operating expenses: the general costs of operating and administering the business, outside of the direct cost of goods sold — Overhead • Profit: equal to gross margin minus operating expenses • Net profit: profit after income taxes have been paid, and is what is actually available for the business
+ Purchases Goods Available –Ending Inventory Profit & Loss Statement AgBiz Corporation For the Year Ending December 31, 20__ Revenues from Sales Less: Cost of Goods Sold Beginning Inventory Cost of Goods Sold Gross Margin Less: Operating Expenses Income Before Taxes Less: Allowance for Income Taxes Net Income (to Retained Earnings)
Discussion Questions • Explain why it is important for managers to understand financial management in order to be effective. Why does this process start with the balance sheet and the profit-and-loss statement? • In your own words, describe the balance sheet and what it tells managers. What does it not tell managers about their business? • In your own words, describe the profit-and-loss statement and what it tells managers about their business. • Explain why the accounting period and the fiscal year may not coincide with the calendar year.
Explain the difference between current and fixed assets on the balance sheet. Why are they arranged this way? In your own words describe the depreciation process used by accountants and why accountants use it. Explain when a business is solvent and insolvent. Develop an example for an agribusiness when it might be solvent in one part of year and insolvent in another. Explain why an insolvent business may not need to file for bankruptcy. In your words, explain how to calculate the value for cost of goods sold on a profit-and-loss statement. Explain why this works. What would be an alternative way to calculate cost of goods sold?
Explain how you would decide if a cost should be allocated to cost of goods sold or operating expenses. Give an example of each. Define and explain the difference profits, net profits, and retained earnings. Why are retained earning transferred to owners’ equity on the balance sheet after they are calculated?