Agribusiness Decisions & Dollars

Agribusiness Decisions & Dollars Chapter 4 – Income Statement

Terms To Know • Accounts Payable • Accrual Accounting • Accrued Interest • Balance Sheet • Cash Accounting • Expense • Income • Income Statement • Net Income • Profit • Revenue • Statement of Cash Flows • Statement of Owner Equity • Unused Supplies

I. Importance of an Income Statement • A. Answers two basic questions: • 1. Did the business end the year with a profit or a loss? • 2. How much was the profit or the loss? B. Used to calculate a variety of financial ratios

I. Importance of an Income Statement - Uses • 1. Summary of revenues and associated expenses • 1. Revenue: cash receipts from product sales or dividends on interest income • a. Short or long term asset sales • b. Inventory adjustments (non-cash) • 2. Expenses • a. Operating • b. Interest • c. Non-cash expense adjustments

I. Importance of an Income Statement - Uses • 2. Determine profit or loss • 3. Explain changes in owner equity • 4. Calculate financial measures: • Profitability • Financial efficiency • Repayment capacity • 5. Support loan application for refinancing

I. Importance of an Income Statement • C. Net Income = revenue – expenses • 1. Net income usually calculated annually • 2. Corresponds with income tax reporting dates

Relationship with other base financial statements • The income statement is important for evaluating the firm’s financial performance and making management decisions. It should be completed for the same time period as that of the balance sheet and other financial statements.

II. Cash and Accural accounting • A. Cash vs. accural • 1. Cash accounting reflects cash income received and cash expenses paid in current year. (actually received) • 2. Accural accounting reflects cash actual value of inventory as assets and non-current debts as liabilities. (incurred rather than received)

II. Cash and accural accounting • B. Business income/revenue • 1. Proceeds received or value created from current business operations • 2. Both cash and accural methods include cash revenues • a. Cash and sales of plants • b. Crops • c. Livestock • d. Government payments • e. Custom work, etc. • 3. Using the accural accounting method, non-cash sources of revenue from current business operations would also be included • a. Changes in inventories • b. Changes in accounts receivable

II. Cash and accural accounting • C. Expenses • 1. Includes all business expenses during the period paid in cash and depreciation • 2. Both cash and accural methods include cash expenses • a. Chemicals • b. Seeds • c. Fertilizer, etc. • 3. Using the accural accounting method, no-cash expenses include: • a. Unused supplies • b. Accounts payable • c. Accured interest • d. Accured taxes

Techniques used when a business is in financial difficulty • Selling inventory • Selling capital assets • Living off of depreciation • Accruing expenses • Accumulating accounts payable • Refinancing operating losses

Revenue • 1. Cash Sales • Bedding plants • Crops • Marketable fish • Custom work/services • Government payments • 2. Non-Cash • Inventory Adjustments • Capital gain or loss (change in inventories, crops/plants, livestock, supplies) • Accounts receivable

Income and Expense Summary • Purpose: to make adjustments to income and expenses • Revenue Entries = also called the chart of accounts, lists the revenue so it can be coded and sorted • Accounts Receivable = sales/service rendered for which the business has not actually received payment

Expenses • Cash • Seed, fertilizer, chemicals • Non-cash • Depreciation • Changes in (used in accrual accounting): • Unused supplies • Accounts payable • Accrued interest • Accrued taxes

Net Income = Profit • Your income prior to paying income and social security taxes • Net Income from Operations: • Revenue - Expenses and depreciation • Net Business Income: • Net Income from Operations - Gain/loss of capital assets

Agribusiness Decisions & Dollars