Quiz 1 Flashcards
1
Q
What is a part-time farmer?
A
A farmer that has other jobs on top of their farm.
2
Q
What is a low-volume, high-value producer? Give an example.
A
A producer with less access to land or labour, and produces higher valued products.
Examples: Emus, bison, asparagus, pumpkins, organically grown produce, tofu soybeans, free-range poultry, seed crops.
3
Q
What is a high-volume, low-margin producer? Give an example.
A
A producer that produces generic products, but expands production to increase income.
Examples: generic feed grains, oil seeds, fruits and vegetables, cotton, livestock products.
4
Q
What is a specialty product and service producer? Give an example.
A
When someone specializes in a couple skills and becomes one of the best at preforming them.
Examples: Custom harvesting, custom cattle feeding, raising seed stock, raising replacement breeding stock, repairing equipment, hauling and applying manure, applying pesticides and fertilizers.
5
Q
What is account payable?
A
An expense that has been incurred but not yet paid.
6
Q
What is account receivable?
A
Income that has been earned but for which no cash payment has been received.
7
Q
What is accrued expense?
A
An expense that has been incurred, sometimes accumulating over time, but has not been paid.
Example: interest on loans or property taxes
8
Q
Which of the following might be inventory? Check all that apply.
A) Stored grain
B) Feeder pigs
C) Fertilizer
D) Diesel fuel
E) All of the Above
F) None of the above
A
E) All of the above
9
Q
What is a prepaid expense?
A
A payment made for a product or service prior to the accounting period in which it will be used.
10
Q
True or false, equity is when assets and liabilities are equal.
A
False
11
Q
What is an expense?
A
A cost incurred in the production of revenue.
12
Q
What is an asset?
A
Physical or financial property that has value and is owned by a business or individual.
13
Q
Selling some of your feeder calves to your neighbor would be an example of what type of activity?
A) Financial
B) Investment
C) Production
A
C) Production
14
Q
True of false, A balance sheet tells you how profitable a business is.
A
False
15
Q
True or false, current assets are more valuable than noncurrent assets.
A
False
16
Q
What is a liability?
A
A debt or other financial obligation that must be paid at some point in the future.
17
Q
What is owner equity?
A
The difference between the total value of the assets of a business and the total value of its liabilities; also called net worth.
Assets - Liabilities = Owner Equity
18
Q
Cost basis balance sheets are best
A) to show the present value of a business.
B) to secure a new loan.
C) to determine the best financial strategy.
D) to see how owner equity changes over time.
A
D) to see how owner equity changes over time.
19
Q
What is revenue?
A
The value of products and services produced by a business during an accounting period.
20
Q
True or false, market-basis and cost-basis balance sheets evaluate farm machinery differently.
A
True
21
Q
What is inventory?
A
The physical quantity and financial value of products produced for sale that have not yet been sold (part of your assets and revenue if during the accounting period).
22
Q
True or false, the biggest difference between cost-basis and market-basis balance sheets is in how they value crops still growing in the field.
A
False
23
Q
What is net farm income?
A
The difference between gross revenue and total expenses, including gain or loss on the sale of all capital assets; also the return to owner equity, unpaid labor, and management.
24
Q
What is profit?
A
Total revenue minus total expenses, including opportunity costs of labour and capital.
25
What is an accounting period?
A period of time used to summarize revenue and expenses and estimate profit; can be either a calendar year or a fiscal year.
26
What is cash accounting?
An accounting system that recognizes income when it is actually received and expenses when they are actually paid.
27
What is accrual accounting?
An accounting system that recognizes income when it is earned and expenses when they are incurred.
28
What is enterprise?
An individual crop or type of livestock, such as wheat, dairy, or lettuce. A farm's production plan will often consist of several enterprises.
29
What is a whole-farm plan?
A summary of all the intended types and size of enterprises to be carried on by a farm business.
30
What is the difference between basic vs complete accounting?
Basic accounting is simple and uses cash accounting.
Complete accounting uses software with capabilities for both cash and accrual accounting. It can track a bunch of different things, such as inventory, loans, depreciation.
31
What is a balance sheet?
A snapshot of finances at a point in time. Listing what the assets are and what the liabilities are and the farms equity. It also provides measures of solvency and liquidity.
32
What is the Basic equation of accounting?
Equity = Assets - Liabilities
The basic equation of accounting shows how much an owner would get (equity) if they went bankrupt and the assets were sold to cover the debts.
33
What is a current asset?
Something that can be sold quickly without disrupting business, this includes cash, accounts receivable, and inventories of feed, grain, supplies, and feeder livestock. This is sold within the next year as part of normal business.
34
What is a noncurrent asset?
Something that cannot be sold quickly or easily and would disrupt business. This would include an asset that is being used in the production of goods or services such as machinery, breeding stock, fences, buildings, land and quota.
35
What are the four methods used for valuating assets?
Market value
Cost value
Farm production cost
Cost minus accumulated depreciation (book value)
36
What is market Value? Give examples.
A way that values assets at current market prices minus marketing fees. Works for items to be sold soon with current prices.
Examples: Grain, market livestock, and hay.
37
What is Cost value? Give examples.
A way that values purchased assets at their original cost. Works for recently purchased items.
Examples: Feed, fertilizers, and fuel.
38
What is farm production cost? Give examples.
The accumulated cost of producing an item.
Example: Crops in field.
39
What is cost minus accumulated depreciation (book value)? Give examples.
Used for assets that decline in value.
Examples: Machinery, buildings, purchased breeding livestock.
40
What is a cost basis balance sheet and what is an advantage?
This balance sheet shows the position of the business without considering any value gain on assets.
The advantage is that it reflects the original investment value on your business.
41
What is a market basis balance sheet and what is an advantage?
This balance sheet values all assets at market value so there are less estimated selling costs.
The advantage is that it shows a better picture of value of collateral to secure loans.
42
What is a current liability?
Financial debts that will become due and payable within one year from the date on the balance sheet. This would include payments for leased assets, property and income taxes, accounts payable.
43
What is a noncurrent liability?
Financial debts that will become due and payable more than one year from the date on the balance sheet.
44
What are the three major sections of a balance sheet and where is it located?
Assets -> Located on the left side.
Liabilities -> Located on the right side.
Equity -> Located on the bottom right side.
45
What can be the most difficult part in constructing a balance sheet?
Evaluating assets.
46
Which type of balance sheet, cost-basis or market-basis, is most likely to show a higher owner equity?
Market-basis.
47
What is liquidity?
Measures a business's ability to pay bills when they become due without disrupting normal operations. Can your business pay its bills?
48
What is solvency?
Is the business able to pay off all their debts if all assets were sold? If liabilities are greater than assets your business is insolvent. Is anything left after a bankruptcy?
49
What is the current ratio equation and what is considered healthy?
Current ratio = Current Assets / Current Liabilities
The larger the ratio the more liquid the business is. A current ratio greater than 1.5 is healthy. A current ratio of less than 1.0 cannot cover short-term liabilities. If ratio is too high, you probably are not using your money efficiently.
50
What is the Working Capital equation and what does it mean?
Working Capital = Current Assets - Current Liabilities
Working capital is a measure of how much capital is available in the short-term to cover short-term liabilities and unforeseen negative economic changes. It is a margin of safety for liquidity, measured in dollars.
51
What is the Debt Structure ratio equation and what is considered strong?
Debt Structure = Current Liabilities / Total Liabilities
A ratio of less than 0.20 is considered strong and anything above 0.35 is considered weak. The higher the value means there is a larger total debt due in the next 12 months which makes it harder for the business.
52
What does it mean if Current Ratio low and Debt Structure ratio is high?
There is some room to refinance a liquidity problem.
53
What does it mean if Current Ratio high and Debt Structure ratio is high?
There is probably no need to refinance.
54
What does it mean if Current Ratio low and Debt Structure ratio is low?
You can’t refinance if you encounter liquidity problems.
55
What does it mean if Current Ratio high and Debt Structure ratio is low?
There is no need to refinance.
56
What is the Debt to Asset ratio equation and what does it mean?
Debt to Asset ratio = Total Liabilities / Total Assets
This ratio shows what proportion of total assets are funded by outsiders. The lower the number the better (< 0.25 is strong) it means there is less debt.
57
What is the Equity to Asset ratio equation and what does it mean?
Equity to Asset ratio = Total Equity / Total Assets
This ratio shows how much an owner has invested into their business. The higher this value is (> 0.75 is strong) the more solvent and better able to pay debts the business is.
58
Why does the Debt to Asset ratio and Equity to Asset ratio add up to 1?
These ratios show how much the owners have put into the business and how much other sources (bank) put into your business.
Banks proportion + Owners Proportion = 1
59
What is the Leverage ratio (Debt to Equity ratio) and what does it mean?
Leverage ratio = Total Liabilities / Total Equity
The leverage ratio shows how much outside sources are financing the business compared to the owner. If the ratio is low (< 0.40 is strong) then that means there is low debt, and the owner has the flexibility to expand. if the ratio is = 1 then the lenders and owner share an equal amount of financing.
60
What does it mean if a business is highly leveraged?
This means that the total debt is high relative to equity. For example, if the leverage ratio of a farm is 1.5, it means creditors have invested $1.50 in the business for every $1.00 that the owner has.
61
How is profit shown?
Profit shows by how much revenue you get from your resources that is greater than the costs.
62
What is depreciation?
An annual, noncash expense to recognize the amount by which an asset loses value due to use, age, and obsolescence. It also spreads the original cost of the asset over its useful life.
63
What are the two ways depreciation is used in farm business management?
Economic depreciation and Tax depreciation.
64
How is economic depreciation used?
We want good (evidence-based) depreciation cost estimates to be able to accurately calculate net farm income, assets, profit, etc.
65
How is tax depreciation used?
We want to strategically use allowable tax depreciation rates to minimize business tax.
66
What is cost?
Price paid for asset including taxes, delivery, installation, etc.
67
What is useful life?
Number of year you expect to use item in business.
68
What is the Operating Profit Margin ratio equation and what does it measure?
Operating Profit Margin ratio = (Net income - Unpaid labour and management + Interest paid) / Gross revenue
This measures the proportion of gross revenue left after paying all expenses.
69
What is salvage value?
Estimated expected market value of a depreciable asset at the end of "useful life".
70
What is book value?
The original cost of an asset minus the total accumulated depreciation expense taken to date. May or may not equal market value.
71
What is straight-line depreciation?
A depreciation method that results in an equal amount of depreciation for each year of an asset's useful life. (same $ decline in value each year)
72
What is a declining balance?
A depreciation method that results in high depreciation in the early years of life and smaller amounts in the later years. (same % decline in value each year)
73
Why does Operating Profit Margin ratio and ROA need to be used together?
These ratios show how much of the assets are owned and how much are rented. If one is high and the other low, it shows the mix of owned and rented assets. If both are low, then there might be a problem.
74
What is capital cost allowance (CCA)?
Depreciation for CRA tax purposes.
75
How would you calculate straight-line depreciation for a $200,000 tractor that is planned to be used for 15 years? After 15 years it should be worth $50,000.
$200,000 - $50,000 = $150,000
Over 15 years, you will be losing $150,000 in value.
$150,000/15 = $10,000
Each year you will lose $10,000 in value. This is your annual depreciation for the tractor.
76
What is the formula for annual straight-line depreciation?
Annual Straight Line Depreciation = (Cost - Salvage Value) / Useful Life
OR
Calculate the % decline in value/year (straight-line percentage depreciation rate, R) as 100%/years of useful life = R
Straight Line Depreciation - (Cost - Salvage Value) * R
77
What is the Asset Turnover ratio equation and what does it mean?
Asset Turnover ratio = Gross revenue / Average total assets
This ratio is a measure of financial efficiency.
78
What is the Operating Expense ratio (OER) equation and what is considered healthy?
OER = (Total operating expenses - Depreciation) / Gross revenue
If land is mostly owned less than 0.65 is considered healthy. If land is mostly rented less than 0.75 is considered healthy.
79
How to calculate declining balance depreciation?
Annual depreciation = (book value at beginning of year) * R
Percentage R is usually a multiple of straight-line rate (e.g. double declining balance depreciation is 2X straight-line depreciation rate)
80
Which is a better representation of actual depreciation? Straight-line depreciation or declining balance depreciation?
Declining balance better represents actual depreciation (i.e. high is early years, lower in later years)
However, straight-line is easier to caluclate.
81
What is the Interest Expense ratio equation and what is considered strong?
Interest Expense ratio = Interest expense / Gross revenue
This shows for every dollar of production, how much goes to pay loan interest. <12% is considered strong.
82
What is the Equipment Investment ratio equation and what does it mean?
Equipment Investment ratio = Market value of equipment / Cultivated acres
Low value indicates the machinery too old or too small for acres farmed.
High value indicates investment may be excessive, risk of machinery debt or leasing costs causing financial troubles.
83
What is gain or loss on sale of capital assets?
Assets used for production activities (land, breeding livestock, machinery)
84
True or False: is a principal paid on loan an expense?
False!
85
What 3 things determine economic efficiency?
Physical efficiency
-How efficiently do your physical inputs become outputs? (yield/acre, weaned calves/cow)
Selling prices
-How do your selling prices compare to those of your neighbours?
Purchase prices
-Are prices you pay for land rental, feeder cattle, machinery, interest higher than they could be?
86
True or False: is cash paid to purchase depreciable assets (machinery, breeding livestock) an expense?
False!
It is converted to an expense over time as annual depreciation.
87
True or False: cash paid for land purchase is not an expense?
True!
It is an investment.
88
True or False: Interest on loan is an expense.
True!
89
When is gain or loss on sale of capital items recognized?
It is only recognized when the asset is sold.
90
What are two uses of net income (after tax)?
1. Shareholder dividends or family living withdrawels in sole proprietorship.
2. Retained earnings
91
What is profitability?
The degree or extent to which the value of the income derived from a set of resources exceed their cost.
92
What is the equation for Rate of Return on Assets (ROA)?
ROA = (Net Farm Income - Unpaid Labour&Mgmt + Interest Paid) / (Average Total Assets)
93
What is return on assets (ROA)?
The value represented by net farm income from operations, plus interest expense, minus the opportunity cost of operator labour and management. It is usually expressed as a percentage of the average value of total assets.
ROA represent return on all capital invested in business. Business profitability can now be compared to: other farms, other investment opportunities, past ROA's of same farm.
Typical farm ROA = 2-5%
94
What is return on equity (ROE)?
The net return generated by the business before gains or losses on capital assets are realized, but after the value of unpaid labour and management is subtracted. Usually expressed as a percent of the average value of owner's equity.
ROE represents return only to YOUR investment in the enterprise (assets = liabilities + equity).
Farm managers especially want to maximize ROE, as equity is THEIR investment in the business.
Typical ROE for farms = 4-8%
95
What is the equation for Rate of Return on Equity (ROE)?
ROE = (Net Farm Income - Unpaid Labour&Mgmt) / Average Total Equity
96
What is the Cost of Debt (COD) equation?
COD = Total Interest Paid on Debt / Yearly Average Total Liabilities
Total Interest Paid on Debt - from income statement
Yearly Average Total Liabilities - from two years of balance sheets
97
What is cost of debt (COD)?
COD gives you a yearly average interest rate paid on debt (i).
98
What does it mean if ROE < ROA?
Borrowed capital is earning, on average, less than the interest rate and equity is not doing well.
:(
99
What does it mean if ROE > ROA?
Borrowed capital is earning, on average, more than the interest rate and equity is doing well.
:)
100
What is the ideal relationship you want between ROA, ROE, i?
ROE > ROA > i
101
What is the Operating Profit Margin Ratio? Equation and definition.
Operating Profit Margin Ratio = (Net Income - Unpaid Labour + Interest) / Gross Revenue
The value represented by net farm income from operations, plus interest expense, minus opportunity cost of operatory labour and management, expressed as a percentage of total revenue.
Net income alone does not allow comparison to evaluate profit as farms have big differences in total assets. This ratio measures operating profit per dollar of total revenue to allow comparisons and profit evaluations.
Operating profit margin ratio of 20% is considered a benchmark. (Every dollar of gross revenue = $0.20 remained as profit)
102
Why is a cash flow statement an important financial statement?
1. A business may make a profit, but at crucial moments not have enough cash to operate.
2. A cash flow statement can give a clearer picture of liquidity and solvency than a balance sheet.
3. Cash has conflicting uses
a) family withdrawals
b) loan repayment
c) investment in new capital assets
103
What is a statement of cash flows and what are three reports of uses of cash?
It is a summary of the actual cash inflows and cash outflows experienced by a business during an accounting period. Info from cash flow statement is used to develop cash flow budget for upcoming year.
1. Operating : cash farm income and expenses
2. Financing : loans and repayment
3. Investing : capital assets
104
Explain the inflows and outflows of the three reports on statements of cash flows : Operating, financing, investing?
Operating
Inflows - commodity sales
Outflows - farm expenses, interest paid
Financing (loans)
Inflows - new owner contributions, new long-term debt
Outflows - principal payments
Investing ( capital assets)
Inflows - sale of equipment, land, buildings
Outflows - purchase of equipment, land, buildings
105
What is a Cash Balance Change and a Retained Earnings Change?
Cash Balance Change is a change between beginning cash values on consecutive Balance Sheets, explained by cash changes reported in Cash Flow Statement.
Retained Earnings Change is a change between retained earnings on consecutive Balance Sheets, explained by net income less dividends on Income Statement.
106
What is profit maximization and what do you use to maximize profit?
A major goal of farm managers is to maximize profit for the business. This requires the correct combination and amount of inputs and resources to produce marketable outputs.
Use production data along with input and output prices to determine optimum input/output levels to maximize profit.
107
What is production function?
A physical or biological relation showing how much output results from using certain quantities of inputs.
Can be shown as a table, a graph, or a mathematical function. May be called a response curve, yield curve, or input/output relation.
108
What is total physical product (TPP)?
The amount of production (corn) at each input level (N).
109
What is average physical product (APP)?
Average amount of output produced per unit of input used. It is found by dividing TPP by the input level.
110
What is marginal physical product (MPP)?
The additional physical product resulting from the use of an additional unit of input. It is found by taking the change in TPP and dividing by the change in input level.
*The term marginal refers to incremental changes, either increases or decreases, that occur at the edge or at the "margin"*
111
What is marginal revenue (MR)?
The additional income received from selling one additional unit of output.
Change is total revenue from producing and selling one more unit of output. (If output price is constant = MR is the output price)
112
What is marginal cost (MC)?
The additional cost incurred from producing an additional unit of output.
Change in cost from producing one more unit of output.
113
What is profit max? What is the relationship between MR and MC?
Profit Max is where MR = MC
(revenue from producing 1 more bu tires = cost change to produce 1 more bu tires)
a) If MR > MC - increasing output increases profit
b) If MR< MC - producing an additional unit of output decreases profit
114
What happens if input and output costs change?
As input cost increases, optimum fertilization level decreases.
As output price increases, optimum fertilization level increase.
115
What is the equation for marginal physical product (MPP)?
MPP = Pinput / Poutput
At profit max MC = MR
MR = P(output) and MC = P(input)/MPP
P(output) = P(input)/MPP
