YOUR BALANCE SHEET Roger Betz, Sherrill Nott, Gerald Schwab, Barbara Dartt FIRM AoE team.
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Transcript of YOUR BALANCE SHEET Roger Betz, Sherrill Nott, Gerald Schwab, Barbara Dartt FIRM AoE team.
YOUR BALANCE SHEET
Roger Betz, Sherrill Nott, Gerald Schwab, Barbara Dartt
FIRM AoE team
In the United States
• Balance Sheet (Net Worth Statement)
• Income Statement
• Statement of Cash Flows
• and a newer one -- Statement of Owner Equity
Four Basic Financial Documents:
Balance Sheet Purpose
• Determines solvency of business
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
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
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
Balance SheetAsset Types
• Current assets (<1 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 (>10 years)
– e.g. land, buildings, stocks– Selling would typically decrease volume or
size of business
Asset Value Determination
• Book Value (cost basis)– Useful for trend analysis
• Fair Market Value– Useful to determine liquidation value
• Current liabilities (<1 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 (>10 years)– Scheduled originally to be paid in 11 or more
years e.g. land debt, house payments
Balance SheetDebt Types
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
Parts of the Balance Sheet(Intermediate)
Liabilities -- 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
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
Parts of a Balance Sheet(Term)
Definition:
• Term Debts are Intermediate liabilities
(Intermediate term)
Long term liabilities
Term debts are NOT current loans
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
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
How to Build a Balance Sheet
3) Machinery list (depreciation schedule) Cost minus depreciation = book value
4) Assemble the above into the format5) Add up the assets6) Add up the debts7)Assets minus debts = net worth, or
equity
How to Build a Balance Sheet
Take out a Piece of Paper
Assets Liabilities
Current Current
Intermediate Intermediate
Long Term Long Term
Draw some lines and label like this:
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
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
Change in Net Worthdue to:
• Retained Earnings– from profits earned and retained in
business
• Market Valuation Equity– from change in market value of assets
Retained Earnings(contributed capital)
Dollars earned by the business that are kept or retained for reinvestment in the business
Calculated by:
+ $ Total Assets @ Cost Value Basis
- $ Total Liabilities before Contingent Liabilities
Balance Sheet Specials
1. Rented assets
1) Belong on landlord’s balance sheet
2) Footnote on tenant’s
3) If payable, rent is short-term debt
Balance Sheet Specials
2. Growing Crops
1) Date sets the list
2) Winter Wheat
3) Value = Cost of variable inputs
Balance Sheet Specials
3. Leased Items (tractors, pickups, buildings) Assets:
A) On user’s balance sheet= lease payments due
LiabilitiesB) On user’s balance sheet
= lease payments due
Balance Sheet Specials
4. Government Commodity Loans
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 @ Market Value basis - $ Total Liabilities inc. Contingent Liabilities - $ Retained Earnings (contributed Capital)
A Good Balance Sheet
1) One page summary
2) Name and date
3) Shows type of farm
4) Cost and market columns
A Good Balance Sheet
5) Indicates physical quantities of major items
6) Sequence of items Sale time: quick ---> long
7) Assets less debts equals net worth(Own - Owe = Equity)
The Balance Sheet:Building Block forFinancial Analysis
• Financial Position
• Trend Analysis
• Feeds Into the Income Statement
• Communication to Self
• Communicating with those outside the business
• Needs Good Detail