The BASICS of FINANCIAL STATEMENTS For Agricultural Producers EXERCISES

Authors: Ja es Mc!ra"" Fra"cisco A#ell$ %oug Richardso" Christ& 'aggo"er

%e(art e"t of Agricultural Eco"o ics Te)as Coo(erati*e E)te"sio" Te)as A+M ,"i*ersit& Ma& -./ 0112

The Basics of Fi"a"cial State e"ts E)ercises

I"structio"s This section contains a series of questions and exercises used to gain a better understanding of the basic concepts behind financial statements. The questions and exercises addressed in this section focus on the four main financial statements: (1) Balance Sheet; (2) ncome Statement; (!) Statement of "ash #lo$s; (%) Statement of &$ner's (quit). (ach of these statements combine the tools that can be used to e*aluate the performance and pro*ide other useful information to better guide decision ma+ing in a farm or ranch business. The first set of exercises is a list of multiple choice and fill in the blan+ questions that help identif) the main components of the four different financial statements. These questions should also allo$ the user to understand $hat the differences and similarities are bet$een each of the statements and ho$ this can ser*e as a basis for communication about the performance of a business. The second set of exercises allo$ the user to piece together an actual set of financial statements b) using the information pro*ided from an example ranch business. The ,est Texas -anch. in this case. has a list of accounts associated $ith each of the four main financial statements. t is required that the user places each account into its proper classification $ithin each financial statement. The last page of this exercise contains the information necessar) to calculate the performance ratios of the business. The basic goal of this exercise is to be able to identif) proper placement of each of the accounts associated $ith their respecti*e financial statements. f done properl). the numbers used in calculating the financial ratios should match up $ith some of the ones generated from the financial statements.

Multi(le Choice a"d Fill i" the Bla"3 4uestio"s 1) "omplete the follo$ing sentences. a) ,hat the business has: . b) /o$ much the business o$es: 00000000. c) ,hat the business is $orth: 000000000. 2) "ircle each of the follo$ing equations that are correct. (1 2 1ssets. 3 2 3iabilities. ( 2 (quit)) a) ( 2 1 4 3 b) 1 2 ( 5 3 c) 1 2 ( 4 3 d) ( 2 1 5 3 e) 3 2 1 4 ( Ta#le -5
Assets Accrued Expenses Long Term Investments. Accrued Interest - Non Real Estate Loans and Notes Raised Breeding Stoc Investments in gro!ing and "inis#ing livestoc $overnment %a&ment Receivable Credit Card' (per. Loan' Curr. Note %a&able %urc#ased Breeding Stoc . %repaid Expenses Crops'Raised )eed "or Sale. Cas# * C#ec ing Breeding +orses Accounts Receivable. %rincipal ,ue - Non Real Estate Loans and Notes Savings and Time ,eposits Income Taxes %a&able Accounts %a&able %rincipal Balance- Non Real Estate Loans and Notes Liabilities Current Non-Current

!)

n the table abo*e. mar+ $hich of the accounts are assets or liabilities. and if the) are current or non6current.

%) /o$ are assets displa)ed in the asset section of the balance sheet7 a) 1scending order of liquidit) b) 8escending order of amount

c) 1scending order of amount d) 8escending order of liquidit) e) B) order of practicalit)

9) ,hich account identifies mone) o$ed to the business but has )et to be collected. a) "ash and "hec+ing b) Suppl). :repaid (xpenses and 3eases c) n*estments. Bonds and Securities d) 1ccounts -ecei*able e) Sa*ing and Time 8eposits ;) "ircle each of the follo$ing that are included as "urrent n*entor) 1ssets7 a) 3i*estoc+ for Sale b) "rops < -aised #eed for Sale c) :urchased Breeding Stoc+ d) =ehicles. >achiner) ? (quipment e) -aised or :urchased #eed. intended to be used in li*estoc+ production. @) ,hich describes prepaid expenses7 a) Supplies -ecei*ed b) Bills paid. but ser*ices not )et recei*ed c) "urrent 1ssets that can be turned into cash A) "omplete the follo$ing sentences that describe the "urrent 1sset ")cle. a) n*entor) $hen sold becomes 0000000. b) 1ccounts recei*able upon collection becomes 000000000. c) "ash bu)s inputs that produce 00000000. B) ,hich of the follo$ing is the main characteristic that describes a non6current asset7 a) -epresent a great amount of mone) for the business. b) "on*erted into cash in less than 12 months. c) Cot con*erted into cash during the normal course of the business. d) 1ssets that are intended for sale. 1D) /o$ is a non6current asset reported on the balance sheet7 a) Con "urrent 1sset at cost 4 Eear depreciation b) Con "urrent 1sset at mar+et *alue 4 Eear depreciation

c) Con "urrent 1sset at mar+et *alue 4 1ccumulated depreciation d) Con "urrent 1sset at cost 4 1ccumulated depreciation 11) "omplete the follo$ing definitions. a) 00000000 depreciation (on the balance sheet) is the 000000000 of all the depreciation charges ta+en since the asset $as 0000000 . b) 8epreciation charges ta+en in a period 00000000 profits for the period. but do not 000000000 cash.

12) /o$ are liabilities categoriFed for presentation on the balance sheet7 ("ircle all that appl)) a) To $hom the debt is o$ed. b) 1scending order of liquidit) c) 8escending order of liquidit) d) B) order of practicalit) 1!) "omplete the follo$ing sentences. (Gse increase or decrease) a) "urrent liabilities decrease. and<or current assets increase. $hen $or+ing capital 00000000 in the normal course of the business. b) "urrent assets decrease. and<or current liabilities increase. $hen $or+ing capital 00000000 in the normal course of the business. 1%) ,hich of the follo$ing are components of o$ner's equit)7 ("ircle all that appl)) a) -etained (arnings b) "apital "ontributions c) 3and d) "ash 19) ,hich of these equations is correct for -etained (arnings (-()7 a) -( 2 Sum of all profits 5 "apital contributions 4 "apital 8istributions b) -( 2 Sum of all profits 4 Sum of all di*idends or $ithdra$als c) -( 2 (quit) 5 Sum of all di*idend d) -( 2 Sum of all profits 5 Sum of all di*idends or $ithdra$als 1;) "omplete the follo$ing sentences. (Gse increase or decrease) a) The *alue of o$ner's equit) 00000000 $hen the business ma+es a profit. thereb) increasing retained earnings; or assets 00000000 more than liabilities.

b) The *alue of o$ner's equit) 00000000 $hen the business has a 000000000 . thereb) lo$ering retained earnings; or assets 0000000 more than liabilities. 1@) ,hich of these statements are true about the income statement7 a) t includes cash and non6cash *alues. b) s calculated after taxes. c) Gsed to measure the change of &$ner (quit). d) Gsed to measure Cet ncome. e) Ho*ernment pa)ments $ould not be included f) t enables the farm operator to +no$ the sources of income. 1A) /o$ do $e organiFe the income statement7 a) 1ssets and liabilities. b) "urrents and non current assets. and current and non6current liabilities. c) "ash for operations. cash for in*estments and expenses. d) -e*enues and expenses 1B) "omplete the follo$ing equation. (Gsing 5. 6 or 2) ,hat is sold in the period ( ) ,hat it cost to ma+e ( ) Heneral ? 1dministrati*e expenses for the period ( ) ncome for the period 2D) ,hich of these items belong to the "ash -eceipt 1ccount7 ("ircle all that appl)) a) n*entor) ? 1ccounts -ecei*able "hange b) -aised 3i*estoc+ :roducts c) Steers transferred out to another business entit) d) "ash recei*ed from the sale of products e) =et ser*ices f) Hain (3oss) on Sale<8eath of Breeding 3i*estoc+ g) 1gricultural :rogram :a)ments h) "rops<-aised #eed Sales. 21) ,hich of these accounts $ould be included in calculating the total &perating (xpense7 ("ircle all that appl)) a) n*entor) change ((xpenses).

b) c) d) e) f)

Hains or 3osses from breeding stoc+. -epairs and >aintenance. #eed. 8epreciation 1ccounts -ecei*able

22) ,hich of these equations is correct7 a) Cet income from operations 2 Hross -e*enue 4 &perating (xpenses 5 nterest b) Cet income from operations 2 Hross -e*enue 4 &perating (xpenses 5 "apital Hain or 3osses 4 Taxes c) Cet income from operations 2 Hross -e*enue 4 &perating (xpenses 4 nterest d) Cet income from operations 2 Hross -e*enue 4 &perating (xpenses 5 nterest 5 "apital Hain or 3osses 4 Taxes 2!) ,hich of these equations is correct on the Statement of "ash #lo$s7 a) Cet cash from financing 2 Ce$ borro$ings 4 8ebt :a)ments 4 nterest (xpense b) Cet "ash from operations 2 -eceipts 4 (xpenses 4 nterest (xpenses 4 Taxes c) Cet "ash from in*esting 2 Sales 4 :urchases 4 (xpenses d) Cet "ash from in*esting 2 Sales 4 :urchases 4 8epreciation 2%) "omplete the follo$ing equation $ith (5 < 4) signs that are missing. "ash on hand at the start of the period ( ) "ash recei*ed in the period ( ) "ash spent during the period 2 "ash on hand at the end of the period. 29) n $hich financial statements do non6cash transactions ha*e an effect7 ("ircle all that appl)) a) Balance Sheet b) ncome Statement c) Statement of "ash #lo$s d) Statements of &$ner's (quit) 2;) Based on the Statement of "ash #lo$s. label each of the follo$ings as a source of "ash nflo$s (" ) or "ash &utflo$s ("&). a) -ecei*ing pa)ments from customers. 00000 b) Borro$ing mone). 00000 c) :a)ing interest and principal on debt. 00000 d) :a)ing for Supplies and emplo)ees. 00000 e) >a+ing maIor capital in*estment in long6li*ed producti*e assets li+e breeding stoc+ or farm machiner). 00000 f) :a)ing ncome Taxes. 000000

g) Sales of breeding stoc+. 000000 2@) "ash receipts. cash expenses. cash interest expenses and cash tax expenses on the Statement of "ash #lo$ must match data $ith $hich other financial statements7 a) Balance Sheet b) ncome Statement c) Statement of &$ner (quit) 2A) "omplete the follo$ing sentence. The Statement of &$ner's (quit) reconciles the 0000000 and 0000000 o$ner's equit) through determining the changes in 0000000 . and net change in capital contributions and distributions. 2B) JBeginning o$ner equit)K on the Statement of &$ner's (quit) must match data $ith $hich other financial statements7 a) Balance Sheet b) ncome Statement c) Statement of "ash #lo$s !D) The ending o$ner's equit) on the Statement of &$ner's (quit) could be compared to the o$ner's equit) calculated from the L. a) Balance Sheet b) ncome Statement c) Statement of "ash #lo$s

!1) #rom $hich of the main financial statements gi*e the data required to calculate the follo$ing ratios7 a) "urrent -atio 00000. b) -eturn on (quit) 00000. c) 8ebt6to61sset -atio 00000. d) (quit)6to61sset -atio 00000. e) -eturn on 1ssets 00000. !2) The follo$ing definitions describe either profitabilit). liquidit) or sol*enc). 3abel each of the follo$ing definitions $ith the correct performance measure.

a) 1bilit) of the business to generate sufficient cash to meet cash demands $ithout disturbing the on6going operation of the business. 0000000 b) 1bilit) of the business to generate income in excess of expenses. 0000000 c) 1bilit) to repa) all financial obligations if all assets $ere sold and abilit) to continue operations as a *iable business after a financial ad*ersit). 0000000

The 'est Te)as Ra"ch

BASIC BALANCE S6EET ASSETS 1

Curre"t Assets

B " 8 A7B7C7%8E # H / ;F : !< 7 6 8 I E7I8J

Net No":Curre"t Assets Total Assets LIABILITIES

9 9

: :

Curre"t Lia#ilities

M 3 > C =7L7M7N8> : N P74 >7P748R

No":curre"t Lia#ilities Total Lia#ilities EQUITY >?"er@s EAuit& Total Lia#ilities + EAuit&

J:R8S R7S8T

9 9 'est Te)as Ra"ch -

: :

Accounts %a&able Accounts Receivable Accrued expenses Inventor& Non Current Liabilities Land ,ebt Current %ortion o" debt Non Current Assets at cost Cas# Accumulated ,epreciation %repaid expenses Land

./011.11 ./111.11 2/311.11 .1/111.11 .04/50..11 3/050.11 634/571.11 00/824.11 0./701.11 2/111.11 ./811/111.11

Income Taxes %a&able

BASIC INC>ME STATEMENT

GROSS REVENUE 1 B " A7B7C8% TOTAL

!ross Re*e"ue EXPENSES

( # H / P M E7F7!767I7J7=8L > % : ;L 7 M< 8 N & : NET INCOME N7>:P84 9 :

Total >(erati"g E)(e"se

Net I"co e fro

>(eratio"s

'est Te)as Ra"ch

Total 9tilities ,epreciation Non Cas# Trans"er out Capital $ains :Losses; Labor <eterinar& Taxes Inventor& C#ange :Expenses; Interest Expense Repairs and =aintenance Cas# Receipts )eed Inventor& * Accounts Receivable C#ange .1/.35.11 52/701.11 67/111.11 :.5/546.11; 67/111.11 8/728.11 .1/811.11 8/601.11 .7/686.11 57/423.11 .08/757.11 25/611.11 2/311.11

BASIC STATEMENT >F CAS6 FL>'S

CASH FROM OPERATIONS 1 B " 8 A:B:C:%8E TOTAL

Net Cash Fro

>(eratio"s

CASH FROM INVESTING # H F:!86

Net Cash Fro

I"*esti"g

CASH FROM FINANCING P I:J8= 3 > NET CASH FLOW E767=:L7M8N 9 :

Net Cash Fro

Fi"a"ci"g

'est Te)as Ra"ch

Total %urc#ases ,ebt %a&ments Interest Expenses Cas# Contributions Taxes Cas# >it#dra!als Sales Expenses Ne! Borro!ings Receipts 27/111.11 7/355.11 .7/646.11 .1/811.11 56/454.11 .5./8.0.11 .08/757.11

BASIC STATEMENT >F >'NER@S E4,ITB

RETAINED EARNINGS 1 B A:B8C TOTAL

Net Cha"ge i" Retai"ed Ear"i"gs CAPITAL CONTRIBUTIONS

Total CAPITAL DISTRIBUTIONS

( # H E7F7!86

Total Net Cha"ge i" Ca(ital OWNER EQUITY RECONCILIATION Total EAuit& Cha"ge E"di"g >?"er EAuit&

P M I7J7=8L 6:L8M

9 9

: :

C C7M8> N7>8P

9 9

: :

'est Te)as Ra"ch

Total >it#dra!als Beginning (!ner E?uit& Capital ,istributions Cas# * Investment Building/ =ac#iner& * E?uipment Land Capital Contribuitons Cas# * Investment Building/ =ac#iner& * E?uipment Land Net Income ./041/138.11 51/111.11 21/155.11

RATI>S
RETURN ON ASSETS (ROA) 1 B " ;A 7 B< C C 8 %

Retur" o" Assets RETURN ON EQUITY

Retur" o" EAuit& CURRENT RATIO

1 ( ACE8F

Curre"t Ratio DEBT-TO-ASSET RATIO

H / !C68I

%e#t:to:Asset Ratio EQUITY-TO-ASSET RATIO

P " JCC8=

EAuit&:to:Asset Ratio

( " ECC8M

'est Te)as Ra"ch

Total Current Assets Total Current Liabilities Total Liabilities Total Assets Total E?uit& Net Income "rom (perations Interest Expenses Total 75/624.11 ../650.11 .30/717.11 2/110/354.11 ./7.1/.27.11 71/730.11 .7/686.11

The B1S "S of # C1C" 13 ST1T(>(CTS #or 1gricultural :roducers 1CS,(-S

A"s?ers >ultiple choice and fill in the blan+ questions. 1) a) assets b) liabilities c) equit) 2) a. b. e !)
Assets Accrued Expenses Long Term Investments. Accrued Interest - Non Real Estate Loans and Notes Raised Breeding Stoc Investments in gro!ing and "inis#ing livestoc $overnment %a&ment Receivable Credit Card' (per. Loan' Curr. Note %a&able %urc#ased Breeding Stoc . %repaid Expenses Crops'Raised )eed "or Sale. Cas# * C#ec ing Breeding +orses Accounts Receivable. %rincipal ,ue - Non Real Estate Loans and Notes Savings and Time ,eposits Income Taxes %a&able Accounts %a&able %rincipal Balance- Non Real Estate Loans and Notes x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x Liabilities x Current x Non-Current x

%) 9) ;) @) A)

d d a. b. e b a) 1ccounts -ecei*able b) "ash c) n*entor) B) c 1D) d 11) a) 1ccumulated; sum; first acquired b) decrease; decrease 12) a. c 1!) a) increase b) decrease 1%) a. b 19) b 1;) a) increases; increase b) decreases; decrease 1@) a. b. d. f

1A) d 1B) (6). (6). (2) 2D) b. d. g. h 21) a. c. d. e 22) c 2!) b 2%) (5). (6) 29) a. b. d 2;) a) " b) " c) "& d) "& e) "& f) "& g) " 2@) b 2A) Beginning; ending; retained earnings; contributed capital; distributed capital 2B) a !D) a !1) a) Balance Sheet b) Balance Sheet and ncome Statement c) Balance Sheet d) Balance Sheet e) Balance Sheet. ncome Statement !2) a) 3iquidit) b) :rofitabilit) c) Sol*enc)

The ,est Texas -anch

BASIC BALANCE S6EET

ASSETS "ash 1ccounts -ecei*able n*entor) :repaid expenses Curre"t Assets Con "urrent 1ssets at cost 1ccumulated 8epreciation 3and No" Curre"t Assets Total Assets LIABILITIES 1ccounts :a)able 1ccrued expenses "urrent :ortion of debt ncome Taxes :a)able Curre"t Lia#ilities No":Curre"t Lia#ilities 3and 8ebt Total Lia#ilities >?"erIs EAuit& Total Lia#ilities + EAuit& O O O O 9 @@.92;.DD 1.DDD.DD 2.BDD.DD 2.DDD.DD D2/E0F511

O %B;.!AD.DD O @1.A@D.DD O 1.9DD.DDD.DD 9 -/.0E/G-1511 9 0/11H/.2F511

O O O O 9 O O 9

1.@DD.DD 6 B.@!@.DD 6 --/E2H511 1D.DDD.DD 1@;.!@1.DD -.H/D1D511

9 -/D-1/-0D511 9 0/11H/.2F511

BASIC INC>ME STATEMEMT

GROSS REVENUE "ash -eceipts Con "ash Transfer out n*entor) ? 1ccounts -ecei*able "hange !ross Re*e"ue EXPENSES n*entor) "hange ((xpenses) -epairs and >aintenance 3abor #eed 8epreciation =eterinar) Gtilities Total >(erati"g E)(e"ses nterest (xpense Net I"co e fro >(eratio"s "apital Hains (3osses) Taxes NET INCOME O O O 9 1@9.A!A.DD %A.DDD.DD 2.BDD.DD 00F/H2D511

O O O O O O O 9 O 9 O O 9

9.%@D.DD !A.;2B.DD %A.DDD.DD 2!.%DD.DD !2.A@D.DD 9.A29.DD 1D.1B!.DD -FE/2DH511 1A.%9%.DD E2/D.H511 (1!.!;%.DD) 1D.9DD.DD 01/122511

BASIC STATEMENT >F CAS6 FL>'S

CASH FROM OPERATIONS -eceipts (xpenses nterest (xpenses Taxes Net Cash Fro >(eratio"s CASH FROM INVESTING Sales :urchases Net Cash Fro I"*esti"g CASH FROM FINANCING Ce$ Borro$ings 8ebt :a)ments Net Cash Fro Fi"a"ci"g "ash ,ithdra$als "ash "ontributions NET CAS6 FL>' O O O O 9 1@9.A!A.DD 1!1.91@.DD 1A.%;%.DD 1D.9DD.DD -G/2GH511

O O 9

!%.;!;.DD 2A.DDD.DD F/F2F511

O O 9 O O 9

6 A.B!!.DD ;D/.22511< 6 6 -2/1F1511

BASIC STATEMENT >F >'NER E4,ITB

RETAINED EARNINGS Cet ncome ,ithdra$als Net Cha"ge i" Retai"ed Ear"i"gs CAPITAL CONTRIBUTIONS "ash ? n*estment Building. >achiner) ? (quipment 3and Total CAPITAL DISTRIBUTIONS "ash ? n*estment Building. >achiner) ? (quipment 3and Total Net Cha"ge i" Ca(ital OWNER EQUITY RECONCILIATION Beginning &$ner (quit) Total (quit) "hanges (nding &$ner (quit) O O 9 2D.D!!.DD 6 01/122511

O O O 9

6 !D.DDD.DD 6 21/111511

O O O 9 9

6 6 6 : 21/111511

O 1.@;D.DB9.DD O 9D.D!!.DD O 1.A1D.12A.DD

RATI>S
RETURN ON ASSETS (ROA) Cet ncome from &perations nterest (xpenses Total 1ssets Retur" o" Assets RETURN ON EQUITY Cet ncome from &perations Total (quit) Retur" o" EAuit& CURRENT RATIO Total "urrent 1ssets Total "urrent 3iabilities Curre"t Ratio DEBT-TO-ASSET RATIO Total 3iabilities Total 1ssets %e#t:to:Asset Ratio EQUITY-TO-ASSET RATIO Total (quit) Total 1ssets EAuit&:to:Asset Ratio O %!.AB@.DD O 1A.%9%.DD O 2.DD@.B!;.DD 25-J

O %!.AB@.DD O 1.A1D.12A.DD 05EJ

O O

A!.%2;.DD 11.%!@.DD 9H50.

O 1B@.ADA.DD O 2.DD@.B!;.DD -1J

O 1.A1D.12A.DD O 2.DD@.B!;.DD .1J