Farm Management Flashcards
(234 cards)
1
Q
Functions of management
A
- Planning
- Implementation
- Control
- Adjustment
2
Q
Planning
A
- Planning means choosing a course of action
- to plan, a manager must establish goals, identify resources, and allocate the resources to competing uses
3
Q
Implementation
A
- One a plan is developed, it must be implemented, or set in motion
- to implement, the manager must acquire the resources needed for the plan and oversee the process. coordinating, staffing, purchasing, and supervising fit under this function
4
Q
Control
A
- Control is the “feedback” function
- To control, the manager must monitor results, record information, compare results to a standard, and take corrective action as needed
5
Q
Adjustment
A
If outcomes are not meeting the objectives, adjustments need to be made. Adjustment may involve fine-tuning the technology or changing enterprise. In some cases, additional information will be needed to diagnose the problem
6
Q
STRATEGIC FARM MANAGEMENT
A
-Strategic management consists of charting the overall long-term course of business
7
Q
TACTICAL MANAGEMENT
A
- TACTICAL MANAGEMENT consists of taking short-run actions that keep the business moving along that course until the destination is reached
8
Q
Goals
A
- Goals should be written
- Goals should be specific
- Goals should be measurable
- Goals should have a timetable
9
Q
Possible Goals (Examples)
A
- survive, stay in business
- maximize profits
- maintain or increase standard of living
- own land, accumulate assets
- reduce debt, become debt free
- maintain stable income
- pass farm to next generation
- increase free time
- increase farm size (“growth”)
- maintain or improve environmental quality
- own and manage my own business
10
Q
Prioritizing goals
A
- Goals may change with age, financial condition, family status, and experience
- Long-run goals may differ from short-run goals
- Profit maximizing is often assumed to be the primary goal of all businesses
- However, farm operators often rank survival as most important
- Reducing risk may conflict with maximizing profit
- Other goals may also affect profit maximization
11
Q
Assessing Resources
A
- Physical resources: land, buildings, fences, breeding livestock, machinery and equipment, established perennial crops
- Human resources: skills of the operator and other employees, likes and dislikes of individuals
- Financial resources: cash, other capital and available credit
12
Q
Surveying the business environment
A
- Called “external scanning”
- The major types of crops produced haven’t changed much, but their characteristics are changing
- A change may provide an opportunity or a threat
13
Q
Identifying and selecting strategies
A
Some businesses have more potential routes for reaching their goals than others because resources are more flexible. As the number of alternative uses for resources increases, so does the complexity of the manager’s decisions.
14
Q
Implementing and Refining the selected strategies
A
- Manager must formulate action steps to implement the plan
- Manager must decide which information to collect to evaluate the success or failure of the plan
- Strategic management is an ongoing activity
15
Q
Tactical management
A
- After an overall strategy has been developed, the manager must make tactical decisions.
- Such decisions include when and where to market, which rations to feed, when to trade machinery, and whom to hire
- Small decisions, such as what field to till on a given day, are also part of tactical management
16
Q
Decision Making Step 1
A
- Identify and define the problem or opportunity
17
Q
Decision making step 2
A
- Identify alternative solution
18
Q
Decision Making Step 3
A
- Collect data and information
19
Q
Decision making step 4
A
- Analyze the alternatives and choose one
20
Q
Decision making Step 5
A
- Implement the decision
21
Q
Decision Making Step 6
A
- Monitor and evaluate results
22
Q
Decision making Step 7
A
- Accept responsibility for the decision
23
Q
Characteristics of decisions
A
- Importance
- Frequency
- Imminence
- Revocability
- Number of alternatives
24
Q
The decision making alternatives
A
- Fixed supply of land: Land base is essentially fixed, making decisions about land use, sale, or acquisition is critical
- Biological processes and weather: Laws of nature place limits on manager’s decisions
- Small size: Often one person serves as management and labor
- Perfect competition: producers are price takers
25
Purpose and Use of 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
26
Measure profit and asses financial condition
- These are among the most important reasons for keeping records
- Profit is estimated by developing an income statement
- The financial condition is shown on the balance sheet
27
Provide data for business analysis
- 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
28
Assist in obtaining loans
- Lenders require financial information about the farm business to assist them in their lending decisions
- following the farm financial difficulties during the 1980s, many agricultural lenders are requiring more and better records
- Good records increase the odds of getting a loan
29
Prepare Income Tax Returns
- Internal revenue Service (IRS) regulations require keeping records for tax purposes
- Tax records are often inadequate for management purposes
- Sound record-keeping can also help reduce income tax obligations
30
Farm Business Activities
- Production Activities
- Investment Activities
- Financing Activities
31
Production Activities
- These accounting transactions involve activities related to the production of crops and livestock
- Revenue from product sales or other farm revenue is included here, as are production expenses
32
Investment Activities
- These activities relate to the purchase, depreciation, and sale of long-lived assets, such as land, equipment, or breeding livestock.
- Records should include purchase date and price, annual depreciation, book value, current market value, sale date and price, and gain or loss when sold
33
Financing Activities
- These transactions relate to borrowing money, and paying the interest and principal on loans.
- Financing activities include money borrowed to finance new investments and money borrowed to finance production activities.
34
Account payable
- An expense that has been occurred and not yet paid. Typical accounts payable are for items charged at farm supply stores where the purchaser is given 30 to 90 days to pay the amount due
35
Account receivable
- Revenue for a product that has been sold or a service provided but for which no payment has yet been received.
- An example would be custom work for a neighbor who has agreed to make payment at a future time.
36
Accrued expense
- An expense that accrues or accumulates daily, but which has not yet been paid.
- Examples are interest on loans and property taxes.
37
Asset
- An item of value, tangible or financial.
| - examples would include machinery, land, bank accounts, buildings, grain, and livestock
38
Credit
- An accounting entry in the right-hand side of a double-entry ledger.
- A credit entry records a decrease in the value of an asset.
- It records an increase in liability, owner equity, or an income account
39
Debit
- An accounting entry in the left-hand side of a double-entry ledger.
- A debit entry records an increase in an asset or expense account
- It records a decrease in liability or owner equity
40
Expense
- A cost or expenditure incurred in the production of revenue
41
Inventory
- The physical quantity and financial value of products produced for sale that have not yet been sold.
42
Liability
- A debt or other financial obligation that must be paid at some point in the future.
43
Net farm income
- Revenue - (minus) expenses
| - The same as profit
44
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
- Also called "net worth"
- business assets - (minus) business liabilities
45
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 revenue
46
Profit
- Revenue - (minus) expenses
| - the same as net farm income
47
Revenue
- The value of products and services produced by a business during an accounting period.
- Revenue may be either cash or noncash.
48
Options in choosing an Accounting System
- What accounting period should be used?
- Should it be cash or accrual?
- Should it be single or double entry?
- Should it be basic or complete?
49
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.
- It is generally recommended that a firm's accounting period follow the production cycle of the major enterprises.
50
Single entry
- With single-entry, only one entry is made for each transaction
51
Double entry
- A double-entry system records changes in values of assets and liabilities as well as revenue and expenses.
- In double-entry, there are equal and off-setting entries for every transaction.
- Double-entry accounting requires more effort, but it is also more accurate.
52
Basic accounting method
- The most basic accounting system is one that is very simple and uses cash accounting
53
Complete accounting method
- 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
- Between the basic and complete methods there are many possibilities
54
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?
55
Cash Accounting: revenue
Recorded when and only when cash is received for sale of product or service
56
Cash accounting: Expenses
Recorded when they are paid, even if that is not when the item is bought or used to produce a product
57
Cash accounting : Advantages
simple and easy-to-use
58
Cash accounting: Disadvantages
recorded revenues and expenses may not be accurate reflections of activities during the accounting period
59
Accrual accounting: Revenue
recorded when the item is produced, regardless of when sold
60
Accrual accounting: expenses
"matched" to revenue; recorded when used to produce
61
Accrual accounting: advantage
accurate
62
Accrual accounting: disadvanatge
requires more time and knowledge than the cash system
63
Farm financial standards council recommendations
- accrual-based system recommended, but cash system accepted, with end-of-year adjustments
64
chart of accounts
- lists and organizes all accounts used by the accounting system
- includes broad categories and sub-accounts
- each account assigned a number
- can coordinate account names to match schedule f for tax purposes
65
output from accounting system:balance sheet
- report that shows the financial condition of the farm at a point in time
66
output from accounting system: income statement
- report of revenue and expenses over the accounting period
67
output from accounting system
other reports depending on complexity of system
68
purpose and use of a balance sheet
- systematic organization of everything "owned" and "owed"
- assets equal liabilities plus owner equity
- owner equity equals assets minus liabilities
- can complete at any time, but most prepared at end of accounting period
- provides measures of solvency and liquidity
69
solvency
= ability to pay off debt in the long run
- solvency measures the liabilities of the business relative to the amount of owner equity invested in the business
- it provides an indication of the ability to pay off all financial obligations or liabilities if all assets were sold
- IF ASSETS ARE NOT GREATER THAN LIABILITIES, THE BUSINESS IS INSOLVENT
= if it is liquid, it can withstand being insolvent for a little while
70
liquidity
- liquidity measures the ability of the business to meet financial obligations as they come due without disrupting the normal operations of the business
- liquidity measures the ability to generate cash needed to pay obligations
- liquidity is generally measured over the next accounting period and is a short-run concept
71
balance sheet formal
- assets are shown on left or top
- liabilities are shown on right or below assets
- owner equity shown on balance sheet and liabilities plus owner equity equals assets
72
Assets
- an asset has value for one of two reasons
- it can be sold to generate cash, or
- it can be used to produce other goods that in turn can be sold for cash in the future
73
liquid assets
-assets that can be sold easily to generate cash are liquid assets
74
current assets
- the more liquid assets the be separated from other assets on the balance sheet.
- current assets include: cash, marketable stocks and bonds, accounts receivable, and inventories of feed, grain, supplies and feeder livestock
75
hedging gain and loss
- if there is hedging gain or loss, it is shown under the current asset section
- for example, if the farmer sold 10,000 bushels of corn in the futures market for $3.50 per bushel and the current futures is $3.40, a gain of $1,000 would be reported.
76
noncurrent assets
- assets that are not current assets are classified as noncurrent assets. They are more difficult to sell and/or their sale would be more likely to disrupt the business.
- noncurrent assets include: machinery, equipment, breeding livestock, buildings, and land
77
liabilities
- a liability is an obligation or debt owed to someone else
| - it represents an outsider's claim on the business
78
current liabilities
- accounting principles require that current liabilities be separated from other liabilities on the balance sheet
- current liabilities are financial obligations that will become due and payable within one year from the date on the balance sheet
- examples: accounts payable, principal and accrued interest on short-term loans, and principal due within one year on longer term loans
79
noncurrent liabilities
- any liability that is not current is classified as a noncurrent liability
- these financial obligations will become due and payable some time after one year from the date on the balance sheet
80
owner equity
- if all assets were to be sold and all debts paid on the date of the balance sheet, the owner's equity would be the amount left over
81
owner equity changes when:
1. the business has a profit or loss
2. the owner invests more capital from outside the business or withdraws money from the business
3. assets change value
82
owner equity does not change when:
cash is used to buy other assets or a loan is taken out to purchase an assets or a loan is taken out to purchase an asset with value equal to the loan
83
alternative format
- current assets and liabilities are defined in the same way as previously
- intermediate assets are expected to have a life of 1 to 10 years and intermediate liabilities are due and payable after 1 year but before 10 years
- fixed assets have a useful life of more than 10 years and long-term liabilities are due after 10 years
= useful for when land prices are volatile
84
market value
fair market prices less any transactions cost (for items normally sold)
85
cost
for purchased items that do not normally lose value
| = inputs in production process
86
lower of cost or market
conservative method
87
farm production cost
accumulated cost of producing the item (immature crops growing in fields, livestock)
88
cost less accumulated depreciation
book value, for items that depreciate
89
cost-basis balance sheet
has all assets valued following the cost, cost less depreciation (items that depreciate, or farm production cost methods. The one exception would be inventories of grain and market livestock, which are valued on the market basis
90
market-basis balance sheet
has all assets valued at market value less estimated selling costs, with the only exception being growing crops (which have no market value), which are valued at cost of production
91
cost-basis valuation of raised breeding livestock
-the ffsc recommends either the "full-cost absorption" method or the "base value" approach
92
full-cost absorption
all the costs of raising breeding livestock are accumulated over time until the animal reaches its current status (e.g. brood cow)
93
base value method
the producer uses a specific value that remains relatively fixed over time so that changes in the value of breeding stock reflect changes in the number of assets
94
which method of valuation
- cost-basis balance sheets conform to general accounting standards and are thus comparable to balance sheets from other types of businesses
- market-basis balance sheets more accurately reflect the actual financial position
- FFSC says both types of balance sheets are needed for proper business analysis
95
balance sheet: assets
most differences show up in valuation of noncurrent assets
96
balance sheet: liabilities
little difference in liabilities sections, other than deferred taxes
97
balance sheet: owner equity
valuation adjustment on market-basis balance sheet accounts for change in assets' worth over time because of changes in market conditions for item
98
deferred taxes
-taxes deferred because assets have not been sold or expenses paid (cash accounting)
- taxes deferred because of capital gains
=farmers have tax concession where they don't have to pay taxes unless they sell the item
99
current portion
- figure out income increasing items
- subtract income decreasing item
- apply estimated tax rate
- add any capital gains tax that would result from sale of any current assets
100
income increasing
1. inventories of crops, feed, feeder livestock, and livestock products
2. accounts receivable
3. cash investment in growing crops
4. prepaid expenses
101
income decreasing
- accounts payable
- the accrued interest
- other accrued expenses
102
adjustments for markets
difference in market and cost value for marketable securities
103
noncurrent deferred taxes
only likely source is raised breeding livestock
104
noncurrent deferred under market
calculate the taxes on the market value of the breeding stock
-take the difference between cost and market for other items and apply tax rate: machines, purchased breeding stock, buildings, and land
105
balance sheet analysis: liquidity measures
current ratio, working capital
106
balance sheet analysis: solvency measures
debt/asset ratio, equity/asset ratio, debt/equity ratio, net capital ratio
107
balance sheet: other measure
debt structure ratio
108
current ratio
current ratio equals the current asset value divided by the current liability value
VALUES GREATER THAN 1.0 ARE PREFERRED (much greater are ideal)
109
Working capital
found by subtracting the value of current liabilities from the value of current assets
110
debt to asset ratio
the debt to asset ratio is found by dividing total liabilities by total assets
- ratios greater than 1.0 indicate insolvency
- good solvency ~40-50%
111
equity to asset ratio
this ratio is found by dividing total equity by total assets
112
debt to equity ratio
- this ratio is also called the leverage ratio
| - it is found by dividing total liabilities by owner equity
113
net capital ratio
found by dividing total assets by total liabilities
114
debt structure ratios
found by dividing current liabilities by total liabilities
| -- % of liabilities that are current
115
statement of owner equity
- the FFSC recommends that a statement of owner equity be part of a complex set of financial records.
- the statement shows the sources of change in owner equity over the accounting period
116
key points
- a balance sheet shows the financial position of a business at a point in time
- an important consideration is the method used to value assets.
- cost methods reflect the original investment value. Market valuation reflect current collateral values.
- the FFSC recommends listing both cost and market values for complete information
117
current ratio
current asset value/current liability value
118
working capital
current assets-current liability
119
debt/asset ratio
total liabilities/total assets
120
equity/asset ratio
owner equity/total assets
121
debt/equity ratio
total liabilities/owner equity
122
net capital ratio
total assets/total liabilities
123
debt structure ratio
current liabilities/total liabilities
124
Statement of owner equity
The FFSC recommends that a statement of owner equity be part of a complete set of financial records. The statement shows the sources of change in owner equity over the accounting period.
125
income statement
a summary of revenues and expenses as recorded over a period of time
126
revenue
revenue should be recognized as soon as a commodity is ready for sale, whether or not it is actually sold
127
gain or loss on sale of capital assets
difference between sale price and book value
128
expenses
all expenses incurred in producing the revenue for an accounting period should be included
129
depreciation
- defined as the annual loss in value of durable assets due to use, wear, tear, age, and obsolescence
- a business expense that reduces annual profit
- a reduction in the value of an asset
130
assets that may be depreciated
- a useful life of more than one year
- a determinable useful life but not an unlimited life
- a use in business
- examples: machinery, equipment, building, fences, purchased breeding livestock, wells. Land is not depreciable, but some improvements to land (e.g. drains) are depreciable
131
cost
the price paid for an asset
132
useful life
number of years the asset is expected to be used in business
133
salvage value
expected market value of the asset at the end of its useful life
134
book value
the asset's original cost less accumulated depreciation
135
depreciation methods
- straight line
| - declining balance
136
straight line depreciation
- annual depreciation is found by subtracting the salvage value from the cost and dividing by the useful life.
- annual depreciation = (cost-salvage value)/ useful life
- or the following equivalent formula can be used:
- annual depreciation = (cost- salvage value) X R
- where R is 100 percent divided by the useful life
137
declining balance
- annual depreciation = beginning year book value times R
- R is a constant percentage rate. Its value depends on useful life and the type of declining balance chosen. It is a multiple of the straight line rate.
138
using double declining balance
- for double declining balance R is twice the straight line rate
- In year 1, depreciation the item by 20% (in example) and then subtract that from the book value at the end of the year and then take the 20% of the total from the book value of year 2
139
using 150% declining balance
- R is 15%
140
when using declining balance
- if there is a salvage value greater than zero, declining balance methods can result in the salvage value being reached before the end of the useful life. Depreciation must stop when book value equals salvage value.
- if salvage value is zero, it is necessary to switch from declining balance to straight line ( on the remaining value and remaining life) at some point to get all the depreciation allowed.
141
partial year depreciation
- if an asset is purchased during the year, rather than at the beginning of the year, depreciation must be prorated
- a tractor purchased April 1 would be eligible for 9/12 of a full year;s depreciation in the first year
142
things to notice for depreciation
- do not subtract the salvage value for double declining balance
- the book value changes (gets smaller) every year, so depreciation gets smaller every year as well.
- don't allow the book value to fall below the salvage value
- if the salvage value is zero, you must switch to straight line at some point
143
alternative depreciation
- an alternative is to switch to straight- line at some point and depreciate for all ears
- take all remaining depreciation just before you hit the salvage value
144
switching to straight line
- if an object has a salvage value of zero, you must switch to straight line at some point
- switch when straight line, on the remaining value over the remaining life, gives the same or higher depreciation than DDB would give
145
easier way to figure out when to switch
- divide the years of remaining life into the number "1"
| - when that fraction is greater than 2/L, switch
146
example if 5 years of useful life
2/5=.4 switch in year 4
147
in 7 years useful life
switch in year 5
148
constructing an income statement
- you need revenues
- you need expenses
- typically revenues and expenses involve some accrual adjustments
149
income statement format
Basic structure:
- total revenue
- minus total expenses
- equals net farm income from operations
- plus or minus gain/loss on sale of capital assets
- equals net farm income
150
accrual adjustments to a cash-basis income statement
- the FFSC recommends that anyone using cash accounting convert the resulting net farm income to an accrual-adjusted net farm income at the end of each year
- two adjustments to cash receipts: change in inventory values and accounts receivable
- several adjustments to expenses, including accounts payable and accrued expenses
151
net farm income
- the amount by which revenue exceeds expenses, plus any gain or loss on the sale of capital items
- it represents the return to the operator for unpaid labor, management, and equity capital
152
analysis of net farm income
- rate of return on assets
- rate of return of equity
- operating profit margin ratio
- return to labor and management
- return to labor
- return to management
153
adjusted net farm income from operations
net farm income of operations
+ interest expense
= adjusted net farm income from operations
154
opportunity cost of labor
the opportunity cost of unpaid labor is the estimated amount that any unpaid farm labor could have earned elsewhere
155
opportunity cost of management
the estimated amount that the operator could have earned for that management time had it been used in paid work
156
return to assets
adjusted net farm income from operations
- opportunity cost of unpaid labor
- opportunity cost of unpaid management
= return to assets
157
rate of return on assets
- the final step is to convert the dollar return on assets to a percentage of total assets
- the market-basis value of assets is generally used
- the average asset value for the year is calculated by taking the ending of the year and beginning of the year value, adding them, and dividing by two
158
RETURN ON EQUITY
net farm income from operations
- opportunity cost of labor
- opportunity cost of management
= return on equity
159
rate of return on equity
- convert the dollar return on equity to a percentage by dividing by average equity value
- assume an average equity value
- rate of return on equity is found by dividing the return on equity by average equity value and multiplying by 100%
160
comparing ROA and ROE
- If ROA > i then ROE> ROA
- if ROAROE borrowed capital is earning, on average less than the interest rate
- if ROA
161
operating profit margin ratio
-this ratio computes operating profit as a percent of total revenue
net farm income from operations
+interest expense
-opportunity costs of labor and management
=operating profit
-to compute the ratio, divide operating profit by the total (gross revenue)
162
opportunity cost of capital
- to find the opportunity cost of capital,
- multiply the opportunity interest rate (e.g. what the capital could earn elsewhere) times the average total asset value
163
return to labor and management
adjusted net farm income from operations
-opportunity cost from capital
=return to labor and management
164
return to labor
-to find return to labor, subtract the opportunity cost of management from the return to labor and management
165
return to management
return to labor and management
| - opportunity cost of labor
166
retained farm earnings
the part of farm earnings, after taxes and personal withdrawals, that is retained for use in the farm business
167
change in owner equity
- a positive retained farm earnings increases owner equity
| - if taxes and living expenses are greater than total earnings, owner equity will fall
168
statement of cash flows
a summary of actual cash inflows and outflows over an accounting period
-balancing section
169
operating cash flow
cash farm income and expenses
170
investing cash flow
capital assets
171
financing cash flows
loans and repayments
172
nonfarm items:
nonfarm income and expenditures
173
summary of income statement
an income statement organizes and summarizes revenue and expenses for an accounting period. Net farm income, or profit, is a dollar amount, whereas profitability relates profits to the sizes of the business
174
types of farm business analysis
profitability
farm size
financial
efficiency
175
standards of comparison
- once a measure has been calculated, the problem becomes one of evaluating the result
- is the value good, bad, or average?
- compared with what?
- can it be improved?
176
three basic standards of comparison
budgets
comparative farms
historical trends
177
budgets
measures are compared against budgeted goals or objectives identified during planning
178
comparative farms
measures are compared against actual results from similar farms
179
historical trends
the manager looks for improvement over time
180
diagnosing a farm business problem
- a whole-farm business analysis can be carried out systematically
- profitability is generally the first area of concern
- inadequate resources may be a problem
- if resources are adequate, efficiency may be a problem
181
measures of profitability
- net farm income
- return to labor and management
- return to management
- rate of return on farm assets
- rate of return on farm equity
- operating profit margin ration
182
cautions of returns to labor, management, assets, and equity
- the estimation of opportunity costs used in calculating returns is somewhat arbitrary
- the returns are average returns to factors, not the marginal returns
183
measures of size
- total gross revenue
- value of farm production
- total farm assets
- total acres farmed
- livestock numbers
- total labor used
- quantity of sales
184
value of farm production
```
a convenient way to compare the size of different types of farms
total (gross) revenue
-- livestock purchases
--feed purchases
= value of farm production
```
185
efficiency measures
- efficiency measures output in relation to input
- overall efficiency can be found by dividing the value of total production over the value of total resources used
- further measures are also useful
186
dividing the gross revenue
- some is net farm income
- some is depreciation expense
- some is interest expense
- some is "operating" expense (all expenses other than depreciation and interest)
- depreciation +interest + operating expense + NFI= Gross revenue (1)
187
asset turnover ratio
gross revenue/market value of total farm assets
188
operating expense ratio
total operating expenses/gross revenue
189
depreciation expense ratio
total depreciation expense/gross revenue
190
interest expense ratio
total farm interest expense/gross revenue
191
net farm income from operations ratio
net farm income/gross revenue
192
economic efficiency
```
livestock production per $100 feed fed
feed cost per 100 pounds of gain
crop value per acre
gross revenue per person
machinery cost per crop acre
```
193
physical efficiency
- poor economic efficiency can result from poor physical efficiency
- physical efficiency measures bushels harvested per acre, pigs weaned per sow, and pounds of milk sold per cow
194
solvency
debt to asset, change in equity
195
liquidity
current ratio, working capital
196
measures of repayment capacity
capital debt repayment margin, term debt and capital lease coverage ratio
197
term debt and capital lease coverage ratio
- this ratio is computed by dividing the cash available for term debt payments for the last year by the total term debt payments due next year. The ratio should be greater than 1.
- "term debt" refers to liabilities with scheduled, amortized payments
198
summary of farm business analysis
- a whole-farm business analysis is like a complete medical examination
- it should be conducted periodically to check for symptoms that indicate the business is not functioning as it should
199
types of income taxes
- ordinary income tax
- capital gains tax
- self-employment tax
200
ordinary income tax
```
net farm profit
+other taxable income
-personal deductions and exemptions
- 1/2 of self-employment tax
=taxable income
taxable income * ordinary income tax rate equals ordinary income tax to pay
```
201
capital gains tax
- income from the sales of certain assets, called capital gains, is reported separately and taxed at a lower rate than ordinary income
- capital gains taxes to pay is found by subtracting the original tax basis from the capital gains income and multiplying the difference by the capital gains tax rate
capital gains income
-original tax basis
= * capital gains tax rate
202
self-employment tax
- income earned through self-employment activities is subject to taxes for social security and medicare
- net farm profit times self-employment tax rate equals self-employment tax to pay
203
objectives of tax management
- the goal of the manager should be to maximize the long-run, after-tax profit
- effective tax management requires continuous evaluation of how decisions will affect income taxes
- the manager will want to avoid payment of any taxes not legally due and to postpone payment of taxes whenever possible
204
tax accounting methods
- the cash method
| - the accrual method
205
the cash method
- income is taxable when it is received as cash or "constructively received"
- income is constructively received when it is made available for use before the end of a tax period
- expenses are deducted when they are paid
- inventories do not figure into taxable income
206
advantages of cash method
1. simplicity
2. flexibility
3. sale of raised breeding livestock likely to qualify for capital gains treatment
4. delaying tax on growing inventory
207
the accrual method
- income is taxable when earned or produced
- expenses deductible when incurred
- inventories figure into taxable income
208
advantages of accrual method
1. better measure of income
2. reduces income fluctuations
3. less taxes paid during times of declining inventories
209
tax record requirements
- complete and accurate records are essential for good tax management and proper reporting of taxable income
- complete records include a list of receipts and expenses for the year, a depreciation schedule, and records on real estate and other capital items.
- computerized systems can be helpful
210
the tax system and tax rates
- federal taxes are based on marginal rates
- rates and income brackets for rates change and need to be checked each year
- taxable income includes farm income as well as income from all other sources minus personal exemptions and deductions
- self-employment tax includes social security and medicare taxes
211
personal exemptions and standard deductions
$3,950 per person (filers and dependents) in 2014 ($3900 in 2013)
the personal exemptions reduce taxable income
standard deduction is $12,400 for married filing jointly and $6,200 for single ($12,200/$6,100 in 2013)
many taxpayers itemize deductions
212
calculating taxable income
```
total earnings/income
-1/2 self employment tax (to get adjusted gross income)
-standardized deduction
-personal exemptions
check IRS for other possible deductions
=taxable income
```
213
tax management strategies
- form of business organization
- income leveling
- income averaging
- deferring or postponing taxes
- net operating loss (NOL)
- tax-free exchanges
214
depreciation
- depreciation plays an important role in tax management
- it is a non-cash, tax deductible expense
- some flexibility is permitted in calculating tax depreciation
215
tax basis
the tax basis of an asset is its value for tax purposes at a point in time
216
beginning tax basis
the asset and its value at the time of purchase
217
adjusted tax basis
the asset and its value as it changes
218
beginning tax basis info
- any asset, new or used, purchased directly has a beginning tax basis equal to the purchase price
- when an asset purchase includes a trade-in, the traded-in asset continues to be depreciated as if it were still owned
- beginning basis on the new asset is equal to the cash paid to complete the trade (called the "cash boot")
219
macrs depreciation 3 years
breeding hogs
220
macrs depreciation 5 years
cars, pickups, breeding cattle and sheep, dairy cattle, computers, and trucks
221
macrs depreciation 7 years
most machinery and equipment, fences, grain bins, silos, furniture
222
macrs depreciation 10 years
single-purpose agricultural and horticultural structures, fruit or nut trees
223
macrs depreciation 15 years
paved lots, wells, drainage tile
224
macrs depreciation 20 years
general purpose buildings
225
alternative depreciation methods
- regular macrs class life or recovery period, with straight-line depreciation
- alternative macrs recovery periods (usually longer than regular macrs) and 150 percent declining balance
- alternative macrs recovery periods with straight-line depreciation
226
macrs recovery rate
assume 1/2 year conversion for every purchase, regardless of date
227
expensing
- -section 179 of tax regulations provides for "expensing", an optional deduction which can be taken only in the year an asset is purchased
- most 3-, 5-, 7-, and 10- year class property is eligible
- the maximum allowed in one year is set by congress each year
- the tax basis of the item is reduced by the amount of section 179 expensing taken
228
capital gains
- capital gains can result from the sale or exchange of certain types of qualified assets.
- it is the gain or profit made by selling an asset for more than its original purchase price
- to qualify for long-term capital gains tax treatment, the asset has to have been held for a specified minimum amount of time
229
taxation of long-term capital gains
1. capital gains income is not subject to the self-employment tax
2. capital gains income is generally taxed at a lower rate than ordinary income
230
capital gains and livestock
- cash-basis farmers have a basis of zero on raised breeding or working livestock; hence the entire sales value can often be treated as capital gains.
- purchased livestock may also be eligible, but only if sales price is above original purchase price
231
alternative minimum tax
- taxpayers with incomes above the exemption with regular federal income tax below the amount of AMT must pay the higher amount
- shrply limits deductions and exemptions
- $78,750 ( households) or $50,600 (individual) exemption (now indexed to inflation)
- 26% and 28% rates
232
summary of managing income taxes
- a business manager should seek to maximize long-run, after-tax income
- a number of tax management strategies are available
233
alternative minimum tax
- taxpayers with incomes above the exemption with regular federal income tax below the amount of AMT must pay the higher amount
- shrply limits deductions and exemptions
- $78,750 ( households) or $50,600 (individual) exemption (now indexed to inflation)
- 26% and 28% rates
234
summary of managing income taxes
- a business manager should seek to maximize long-run, after-tax income
- a number of tax management strategies are available
