Balance Sheet

What is a Balance Sheet?  What is a balance sheet? –A balance sheet or commonly called “net worth statement” is a snapshot of a financial situation that lists assets, liabilities, and net worth. The accounting equation states that net worth = assets – liabilities. –A balance sheet is further divided into current assets, current liabilities, non-current assets, and non-current liabilities in order to analyze a farm or ranch financially. –Remember that current assets are those that have a useful life of one year. Example: Hay for cows. Current liabilities are those that are due within the current year. Example: Portion of term loan due this year. –Remember that non-current assets are those that have a useful life of more than one year. Example: Tractor. Non-current liabilities are those that are due beyond the current year. Example: Portion of term loan due beyond this year

Three kinds of analysis.  What are the three kinds of analysis to use on a balance sheet? –Comparative analysis – Comparison of figures from the same dates each year to determine if the business equity is growing or shrinking. –Projected analysis – This consists of making balance sheets for the future for expected farm situations and analyzing them to see probable trends. –Ratio analysis – A tool to measure the financial condition of one farm business against another using financial ratios.

What are the three areas a balance sheet financially analyzes.  Liquidity  Solvency  Equity

Liquidity + Ratios To Analyze –Liquidity – The ability of a business to generate enough cash to pay bills without disrupting business. Liquidity measures determine the ability to meet short term debt and other obligations from available cash. Ratios that help determine liquidity are as follows:  Current ratio = Current assets/Current liabilities. Therefore a ratio of $3.85:$1.00 means that there would by $3.85 worth of current assets for every $1.00 of current debt. This means that a business with this type of ratio would be liquid.  Working capital = Current assets – current liabilities. Therefore a business that has $62,550 worth of current assets and $16,254 worth of current liabilities would have a working capital of $46,296. This is also a reflection of a business that is liquid.  Debt Structure = Current Liabilities/Total Liabilities. The higher this percentage the more current assets will have to be used to service debt.

Solvency + Ratios to Analyze –Solvency – Measures the ability of all assets, if sold at market value, to cover all debts. A business is solvent if there are more assets than liabilities. Ratios that help determine solvency are as follows:  Debt-to-Asset ratio = Total liabilities/Total Assets. Lenders usually prefer to provide loans that are equal to or less than 50% of assets. Therefore a ratio of.50:1 or less is preferred.  Debt to Equity ratio = Total liabilities/Net Worth (Owner’s Equity). Lenders prefer a debt to equity ratio of less than one. This shows the owners contribution is more than the borrowed funds.  Equity to Asset ratio = Net worth/Total assets. A ratio of.50:1 would mean that for every $1.00 of assets there is.50 in equity.

Equity  Measures the portion of the business that is actually owned.  Evaluating the solvency ratios can help determine equity in a business.

Now let’s discover what the Tucker Farm Business is All About!!  Compile a beginning and end of the year balance sheet!