Farm Management

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Farm Management Powered By Docstoc
					Acquiring and Organizing
Management Resources
     Farm Records

1.   Measure profit and assess financial condition
2.   Provide data for business analysis
3.   Assist in obtaining loans
4.   Measure the profitability of individual enterprises
5.   Assist in the analysis of new investments
6.   Prepare income tax returns

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Measure Profit and
Assess Financial Condition

   Profit is estimated
    by developing an
    income Statement.

   The financial
    condition is shown
    on the balance

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     Provide Data for Business

Use the information from the balance sheet
and income statement to perform an
in-depth analysis.

Analysis of past decisions is useful for
making current and future decisions.

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Assist in Obtaining Loans
   Lenders require financial
    information about the farm
    business to assist them in
    their lending decisions.

   lenders are requiring more
    and better records.

   Good records increase the
    odds of getting a loan.

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Prepare Income Tax Returns
                     Internal Revenue
                      Service (IRS)

                     Tax records are often
                      inadequate for
                      management purposes.

                     Sound record-keeping
                      can also help reduce
                     income tax obligations.
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Farm Business Activities
   Production Activities

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Farm Business Activities
   Investment Activities

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Farm Business Activities
   Financing Activities

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Figure 3-1
Farm business activities included
in an accounting system

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Production Activities
                     These accounting
                      transactions involve
                      activities related to the

                      Revenue from product

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Production Activities
                     These accounting
                      transactions involve
                      activities related to the

                     Production expenses.

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      Investment Activities
These activities relate to the purchase,
depreciation, and sale of long-lived assets,
such as land, equipment, or breeding livestock.

1. purchase date and price,
2. annual depreciation,
3. book value
4. current market value
5. sale date and price
6. gain or loss when sold.

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     Financing Activities
1. borrowing money,
2. paying the interest and principal

• Financing activities include money borrowed to
• finance new investments
• money borrowed to finance production activities.

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Basic Accounting Terms
   Account payable         Inventory
   Account receivable      Liability
   Accrued expense         Net Farm Income
   Asset                   Owner Equity
   Credit                  Prepaid Expense
   Debt                    Profit
   Expense                 Revenue

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   Account Payable
An expense that has been incurred but
not yet paid.

30 to 90 days to pay the amount due.

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 Account Receivable
Revenue for a product that has been sold
or a service provided but for which no
payment has yet been received.

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Accrued Expense
 An expense that accrues or accumulates
 daily but which has not yet been paid.

 property taxes.

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tangible or financial.
1. machinery
2. Land
3. Buildings
4. grain,
5. Livestock
6. bank accounts

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An accounting entry in the right-hand
side of a double-entry ledger.

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An accounting entry in the left-hand
side of a double-entry ledger.

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  A cost or expenditure incurred in the
  production of revenue.

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The physical quantity and financial
value of products produced for sale that
have not yet been sold.

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A debt or other financial obligation that
must be paid at some point in the future.

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Net Farm Income
  Revenue minus expenses. The same
  as profit.

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  Owner Equity
The difference between business assets
and business liabilities. It represents the
net value of the business to the owner(s)
of the business.

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Prepaid Expense
A payment made for a product or service
in an accounting period before the one
in which it will be used to produce

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Revenue minus expenses. The same as net
farm income.

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  The value of products and services
  produced by a business during an
  accounting period. Revenue may
  be either cash or noncash.

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Options in Choosing
an Accounting System

   What accounting period should be
   Should it be cash or accrual?
   Should it be single or double entry?
   Should it be basic or complete?

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  Accounting Period
A period of time used to summarize revenue
and expenses and estimate profit. It can be
either a calendar year or a fiscal year.

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   Single vs. Double Entry

With single-entry, only one entry is made for
each transaction.

A double-entry system records changes in values of assets and
liabilities as well as revenue and expenses.

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    Basic vs. Complete
The most basic accounting system is one
that is very simple and uses cash accounting.

A complete system would be computerized
with capabilities for both cash and accrual
accounting,and with the ability to track
inventories, loans, and depreciation, and to
handle payroll accounting and perform
enterprise analysis.

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How Complete?
   How much accounting knowledge does
    the user have?
   How large and complex is the farm?
   How much and what kind of information
    is needed or desired for management
    decision making?

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Basics of Cash Accounting
   Revenue: recorded when and only when cash is
    received for sale of product or service
   Expenses: recorded when they are paid, even if that
    is not when the item is bought or used to produce a
   Advantages: simple and easy-to-use
   Disadvantages: recorded revenues and expenses
    may not be accurate reflections of activities during
    the accounting period

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Basics of Accrual Accounting
   Revenue: recorded when the item is
    produced, regardless of when sold
   Expenses: “matched” to revenue;
    recorded when used to produce
   Advantage: accurate
   Disadvantage: requires more time and
    knowledge than cash system
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       Cash vs. Accrual Example
   November 2003: Purchased, paid for and applied fertilizer for the
    2004 grain crop. $8,000.
   May 2004: Purchased and paid for seed, chemicals, fuel, etc.
   October 2004: Purchased and charged to account fuel for drying.
   November 2004: One half of grain sold for $50,000. The rest
    placed in storage and valued at $50,000.
   January 2005: Paid bill for fuel used to dry grain. $3,000.
   May 2005: Remaining 2004 grain sold. $60,000.

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2004 Profit
                            Cash Accounting     Accrual Accounting

 Cash grain sales            50,000             50,000
 Grain inventory increase       N/A             50,000
  Total Revenue                       $50,000             $100,000

 Fertilizer                       0              8,000
 Seed, chemicals, fuel       25,000             25,000
 Drying fuel                      0              3,000
  Total Expenses                       25,000               36,000
   Net Farm Profit                    $25,000              $64,000

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      Farm Financial Standards Council

   Accrual-based system recommended, but cash system
    accepted, with end-of-year adjustments

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Output from an Accounting
   Balance Sheet: report that shows the financial
    condition of the farm at a point in time
   Income Statement: report of revenue and expenses
    over the accounting period
   Other reports, depending on complexity of system

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Figure 3-2
Twelve possible reports

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