YOUR BALANCE SHEET

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YOUR BALANCE SHEET

• Roger Betz, Sherrill Nott, Gerald Schwab, Barbara
  Dartt
• FIRM AoE team

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In the United States
Four Basic Financial Documents

• Balance Sheet (Net Worth Statement)
• Income Statement
• Statement of Cash Flows
• and a newer one -- Statement of Owner Equity

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Balance Sheet Purpose

• Determines solvency of business

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Balance Sheet Defined

• List of Assets Owned and Debts Owed
• At a point in time
• With dollar values attached

Assets - Liabilities (Debts) Net Worth
or Equity
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The Balance Sheet

• Name -- What does this represent?
• Partnership, individual, combined
• Needs to be consistent over time
• Date -- This is as of what date?
• Listing of all assets and all liabilities
• Balances at the bottom of form
• Assets - Liabilities Equity

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Balance Sheet PreparationSome Issues

• IDENTIFY clearly the person(s) or the business
  entity being described
• SEPARATE the business assets and liabilities from
  the personal
• Be CONSISTENT as to WHEN the Balance Sheet is
  prepared
• at a minimum, prepare a net worth statement when
  your accounting year ends
• Valuation of Assets -- costs and/or market
• recommend two column balance sheet
• The Balance Sheet is the Cornerstone to Financial
  Management

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Balance SheetAsset Types

• Current assets (lt1 year)
• Consumed or converted to cash in 12 months e.g.
  crops, market livestock, prepaid expenses,cash,
  savings
• Intermediate (1-10 years)
• e.g. machinery, breeding livestock, equipment,
  stocks, some buildings
• Long Term (gt10 years)
• e.g. land, buildings, stocks
• Selling would typically decrease volume or size
  of business

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Asset Value Determination

• Book Value (cost basis)
• Useful for trend analysis
• Fair Market Value
• Useful to determine liquidation value

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Balance SheetDebt Types

• Current liabilities (lt1 year)
• To pay in the next 12 months e.g. bills, accrued
  interest, taxes, operating loans
• Intermediate (1-10 years)
• What is scheduled to be paid in 1 to 10 years
  e.g. machinery loans, special use buildings
• Long Term (gt10 years)
• Scheduled originally to be paid in 11 or more
  years e.g. land debt, house payments

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Parts of the Balance Sheet(Current)Liabilities
-- What you owe someone else (against what you
own)

• Current Liabilities
• What you are scheduled to pay in the next 12
  months
• Unpaid bills, accrued interest, property taxes
• Operating loans
• Principal payments on term debts to be made in
  the next 12 months

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Parts of the Balance Sheet(Intermediate)Liabili
ties -- What you owe to someone else (against
what you own)

• Intermediate Liabilities
• What is scheduled to be paid in 1 to 10 years
  (subtract out the current position)
• Typically, machinery loans, breeding livestock,
  special use buildings
• Match up to the intermediate assets

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Parts of the Balance Sheet(Long
Term)Liabilities -- What you owe to someone
else (against what you own)

• Long Term Liabilities
• What was scheduled originally as 11 or more years
• Land debt, house payments
• Match up to the long term assets

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Parts of a Balance Sheet(Term)

• Definition
• Term Debts are
• Intermediate liabilities
• (Intermediate term)
• Long term liabilities
• Term debts are NOT current loans

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How to Build a Balance Sheet

• 1) Do a count
• Crops bushels, tons, etc.
• Animals head
• Supplies
• Buildings
• Land acres
• 2) Prices for each of the above.
• Recommend both cost and market value for term
  assets

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How to Build a Balance Sheet
3) Machinery list (depreciation schedule?) Cost
less depreciation book value 4) Assemble the
above into the format 5) Add up the assets 6) Add
up the debts 7) Assets minus debts net worth or
equity
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How to Build a Balance Sheet

• 3) Machinery list (depreciation schedule)
  Cost minus depreciation book value
• 4) Assemble the above into the format
• 5) Add up the assets
• 6) Add up the debts
• 7)Assets minus debts net worth, or equity

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Take out a Piece of Paper
Draw some lines and label like this
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What is the Balance Sheet?

• Picture in time -- a specific point, as in
  Midnight, 12/31/20XX.
• Shows financial position--ability to handle risk
• Net result of past
• Very important component to track and monitor
  financial progress
• Basic building block for financial analysis

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What a Balance Sheet is NOT

• Does NOT necessarily tell you if the business is
  making money
• Does NOT tell you where net worth came from

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Change in Net Worthdue to

• Retained Earnings
• from profits earned and retained in business
• Market Valuation Equity
• from change in market value of assets

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Retained Earnings(contributed capital)

• Dollars earned by the business that are kept or
  retained for reinvestment in the business
• Calculated by
• Total Assets _at_ Cost Value Basis
• Total Liabilities before Contingent
  Liabilities

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Balance Sheet Specials

• 1. Rented assets
• 1) Belong on landlords balance sheet
• 2) Footnote on tenants
• 3) If payable, rent is short-term debt

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Balance Sheet Specials

• 2. Growing Crops
• 1) Date sets the list
• 2) Winter Wheat
• 3) Value Cost of variable inputs

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Balance Sheet Specials

• 3. Leased Items (tractors, pickups, buildings)
• Assets
• A) On users balance sheet
• lease payments due
• Liabilities
• B) On users balance sheet
• lease payments due

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Balance Sheet Specials

• 4. Government Commodity Loans

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Valuation Equity

• Dollars of asset value that are created because
  the market value of term assets is greater than
  the book value
• Calculated by
• Total assets _at_ Market Value basis
• - Total Liabilities inc. Contingent
  Liabilities
• - Retained Earnings (contributed Capital)

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A Good Balance Sheet

• 1) One page summary
• 2) Name and date
• 3) Shows type of farm
• 4) Cost and market columns

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A Good Balance Sheet

• 5) Indicates physical quantities of major items
• 6) Sequence of items
  Sale time quick ---gt long
• 7) Assets less debts equals net worth (Own - Owe
  Equity)

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The Balance SheetBuilding Block forFinancial
Analysis

• Financial Position
• Trend Analysis
• Feeds Into the Income Statement
• Communication to Self
• Communicating with those outside the business
• Needs Good Detail