INCOME STATEMENT KEY CONCEPTS NET INCOME IS THE BEST MEASURE OF BUSINESS PERFORMANCE ACCRUAL NET INCOME IS A MORE ACCURATE MEASURE OF PROFITABILITY THAN CASH NET INCOME CASH RECEIPTS AND EXPENDITURES DO NOT ALWAYS REPRESENT INCOME AND EXPENSES EXPENSES SHOULD BE MATCHED TO THE REVENUE THEY GENERATE IN THE SAME ACCOUNTING PERIOD

NET INCOME THE SINGLE MOST IMPORTANT MEASURE OF PERFORMANCE FOR A FARM BUSINESS REPRESENTS A RETURN TO UNPAID LABOR AND MANAGEMENT AND OWNER EQUITY CAPITAL IN THE BUSINESS

NET INCOME IS DEFINED TO INCLUDE BOTH FARM AND NONFARM INCOME ON AN AFTER- TAX BASIS. NET INCOME MAYBE THOUGHT OF AS REVENUE MINUS EXPENSES.

CASH VS. ACCRUAL THE IRS ALLOWS FARMERS AND RANCHERS TO FILL THEIR INCOME TAX RETURNS ON A CASH BASIS THIS ALLOWS CONSIDERABLE FLEXIBILITY IN MANAGING TAXES PAID IN A GIVEN YEAR CASH BASIS ACCOUNTING WILL OFTEN DIFFER FROM ACCRUAL RESULTS MANAGEMENT DECISIONS CAN BEST BE MADE FROM AN ACCRUAL BASED ACCOUNTING SYSTEM

ACCRUAL VS. CASH ACCOUNTING THE ACCRUAL METHOD OF ACCOUNTING RECOGNIZES REVENUES AND EXPENSES AS THEY OCCUR THE CASH METHOD OF ACCOUNTING RECOGNIZES REVENUES AND EXPENSES WHEN CASH ACTUALLY CHANGES HANDS

ACCRUAL CONCEPT INCOME IS MEASURED BY OPERATING TRANSACTIONS THAT AFFECT OWNER EQUITY ANY INCREASE IN OWNERS EQUITY RESULTING FROM OPERATIONS IS TERMED REVENUE ANY DECREASE IN OWNERS EQUITY IS CALLED AN EXPENSE NET INCOME IS THE DIFFERENCE BETWEEN THE TWO AN EXPENSE CAN BE EITHER A CASH OR NON- CASH ITEM

WITH CASH-BASIS, REVENUE AND EXPENSES ARE DETERMINED BY THE TIMING OF PAYMENT. WITH ACCRUAL-BASIS, IT MAKES NO DIFFERENCE WHEN THE SALE IS MADE. INVENTORIES ARE VALUED AT YEAR-END, AND COMPARED TO THE INVENTORIES AT THE BEGINNING OF THE YEAR.

IF INVENTORIES HAVE INCREASED, THE AMOUNT OF INCREASE IS CONSIDERED A POSITIVE REVENUE. IF INVENTORIES HAVE DECREASED, THE AMOUNT OF DECREASE IS CONSIDERED A NEGATIVE REVENUE.

REVENUE REVENUE IS GENERATED BY BOTH CASH SALES AND CHANGES IN INVENTORY. FEEDER LIVESTOCK AND FEED PURCHASES DURING THE YEAR ARE SUBTRACTED FROM GROSS REVENUE TO GET "VALUE OF FARM PRODUCTION."

VALUE OF FARM PRODUCTION A TERM UNIQUE TO FARM EARNINGS STATEMENTS COMPUTED AS THE GROSS REVENUES OF AN OPERATION LESS THE PURCHASES OF ASSETS THAT ARE INCLUDED IN THE CALCULATION OF GROSS REVENUE

ADVANTAGES: GROSS REVENUE IS NOT DISTORTED BY PURCHASES OF INVENTORY LATE IN THE OPERATING CYCLE MORE ACCURATE COMPARISONS BETWEEN CERTAIN TYPES OF OPERATIONS.

EXPENSES CASH OPERATING EXPENSES ACCRUAL EXPENSE ADJUSTMENTS DEPRECIATION INTEREST CAPITAL ASSET ACCOUNT ADJUSTMENTS

NET INCOME FROM FARM OPERATIONS IS TOTAL GROSS FARM REVENUE LESS TOTAL FARM EXPENSES. THE GAIN OR LOSS FROM THE SALE OF CAPITAL ASSETS IS ACCOUNTED FOR TO ARRIVE AT THE NET FARM INCOME.

NON-FARM REVENUE IS ADDED TO NET FARM INCOME TO ARRIVE AT INCOME BEFORE-TAXES. INCOME TAXES ARE DEDUCTED TO ARRIVE AT NET INCOME AFTER- TAXES.

ACCRUAL INCOME STATEMENT ADJUSTMENT ACCRUAL ADJUSTMENTS TO REVENUE INVENTORY CHANGE (crops, feed and livestock) ACCOUNTS RECEIVABLE ACCRUED INTEREST EARNED FUTURES/OPTION ACCOUNT EQUITY

ACCRUAL ADJUSTMENTS TO EXPENSES UNUSED ASSETS PREPAID EXPENSES SUPPLIES INVESTMENTS IN GROWING CROPS UNPAID ITEMS ACCOUNTS PAYABLE ACCRUED PROPERTY TAXES AND WITHHOLDING ACCRUED INTEREST ACCRUED TAXS INCOME AND SOCIAL SECURITY DEFERRED TAXES ON CURRENT ASSETS

THE RELATIONSHIP OF THE INCOME STATEMENT TO THE BALANCE SHEET

NET FARM INCOME LESS FAMILY LIVING EXPENSES, INCOME AND SOCIAL SECURITY TAXES AND OTHER WITHDRAWALS EQUALS CHANGE IN COST BASIS EQUITY

ADJUSTMENTS FOR CHANGES IN MARKET VALUATIONS EQUALS CHANGE IN MARKET BASIS EQUITY