YOUR BALANCE SHEET

1. YOUR BALANCE SHEET Roger Betz, Sherrill Nott, Gerald Schwab, Barbara Dartt FIRM AoE team

2. In the United States Four Basic Financial Documents: • Balance Sheet (Net Worth Statement) • Income Statement • Statement of Cash Flows • and a newer one -- Statement of Owner Equity

3. Balance Sheet Purpose • Determines solvency of business

4. Balance Sheet Defined • List of Assets Owned and Debts Owed • At a point in time • With dollar values attached + $ Assets - $ Liabilities (Debts) = $ Net Worth or Equity

5. The Balance Sheet • Name -- What does this represent? • Partnership, individual, combined • Needs to be consistent over time • Date -- This is as of what date? • Listing of all assets and all liabilities • Balances at the bottom of form • Assets - Liabilities = Equity

6. Balance Sheet PreparationSome Issues • IDENTIFY clearly the person(s) or the business entity being described • SEPARATE the business assets and liabilities from the personal • Be CONSISTENT as to WHEN the Balance Sheet is prepared • at a minimum, prepare a net worth statement when your accounting year ends • Valuation of Assets -- costs and/or market • recommend two column balance sheet • The Balance Sheet is the Cornerstone to Financial Management

7. Balance SheetAsset Types • Current assets (<1 year) • Consumed or converted to cash in 12 months e.g. crops, market livestock, prepaid expenses,cash, savings • Intermediate (1-10 years) • e.g. machinery, breeding livestock, equipment, stocks, some buildings • Long Term (>10 years) • e.g. land, buildings, stocks • Selling would typically decrease volume or size of business

8. Asset Value Determination • Book Value (cost basis) • Useful for trend analysis • Fair Market Value • Useful to determine liquidation value

9. Balance SheetDebt Types • Current liabilities (<1 year) • To pay in the next 12 months e.g. bills, accrued interest, taxes, operating loans • Intermediate (1-10 years) • What is scheduled to be paid in 1 to 10 years e.g. machinery loans, special use buildings • Long Term (>10 years) • Scheduled originally to be paid in 11 or more years e.g. land debt, house payments

10. Parts of the Balance Sheet(Current)Liabilities -- What you owe someone else (against what you own) • Current Liabilities • What you are scheduled to pay in the next 12 months • Unpaid bills, accrued interest, property taxes • Operating loans • Principal payments on term debts to be made in the next 12 months

11. Parts of the Balance Sheet(Intermediate)Liabilities -- What you owe to someone else (against what you own) • Intermediate Liabilities • What is scheduled to be paid in 1 to 10 years (subtract out the current position) • Typically, machinery loans, breeding livestock, special use buildings • Match up to the intermediate assets

12. Parts of the Balance Sheet(Long Term)Liabilities -- What you owe to someone else (against what you own) • Long Term Liabilities • What was scheduled originally as 11 or more years • Land debt, house payments • Match up to the long term assets

13. Parts of a Balance Sheet(Term) Definition: • Term Debts are • Intermediate liabilities (Intermediate term) • Long term liabilities Term debts are NOT current loans

14. How to Build a Balance Sheet 1) Do a count: Crops: bushels, tons, etc. Animals: head Supplies Buildings Land: acres 2) $ Prices for each of the above. Recommend both cost and market value for term assets

15. How to Build a Balance Sheet 3) Machinery list (depreciation schedule?) Cost less depreciation = book value 4) Assemble the above into the format 5) Add up the assets 6) Add up the debts 7) Assets minus debts = net worth or equity

16. How to Build a Balance Sheet 3) Machinery list (depreciation schedule) Cost minus depreciation = book value 4) Assemble the above into the format 5) Add up the assets 6) Add up the debts 7)Assets minus debts = net worth, or equity

17. Take out a Piece of Paper Draw some lines and label like this:

18. What is the Balance Sheet? • Picture in time -- a specific point, as in “Midnight, 12/31/20XX.” • Shows financial position--ability to handle risk • Net result of past • Very important component to track and monitor financial progress • Basic building block for financial analysis

19. What a Balance Sheet is NOT • Does NOT necessarily tell you if the business is making money • Does NOT tell you where net worth came from

20. Change in Net Worthdue to: • Retained Earnings • from profits earned and retained in business • Market Valuation Equity • from change in market value of assets

21. Retained Earnings(contributed capital) • Dollars earned by the business that are kept or retained for reinvestment in the business • Calculated by: + $ Total Assets @ Cost Value Basis • $ Total Liabilities before Contingent Liabilities

22. Balance Sheet Specials 1. Rented assets 1) Belong on landlord’s balance sheet 2) Footnote on tenant’s 3) If payable, rent is short-term debt

23. Balance Sheet Specials 2. Growing Crops 1) Date sets the list 2) Winter Wheat 3) Value = Cost of variable inputs

24. Balance Sheet Specials • 3. Leased Items (tractors, pickups, buildings) • Assets: A) On user’s balance sheet = lease payments due • Liabilities B) On user’s balance sheet = lease payments due

25. Balance Sheet Specials 4. Government Commodity Loans

26. Valuation Equity • Dollars of asset value that are created because the market value of term assets is greater than the book value • Calculated by: • + $ Total assets @ Market Value basis • - $ Total Liabilities inc. Contingent Liabilities • - $ Retained Earnings (contributed Capital)

27. A Good Balance Sheet 1) One page summary 2) Name and date 3) Shows type of farm 4) Cost and market columns

28. A Good Balance Sheet 5) Indicates physical quantities of major items 6) Sequence of items Sale time: quick ---> long 7) Assets less debts equals net worth (Own - Owe = Equity)

29. The Balance Sheet:Building Block forFinancial Analysis • Financial Position • Trend Analysis • Feeds Into the Income Statement • Communication to Self • Communicating with those outside the business • Needs Good Detail