Agriculture Reference
In-Depth Information
9
Understanding fi nancial
statements
Objectives
•
Describe the importance of a fi nancial information system in an agribusiness
•
Develop a working knowledge of how fi nancial statements aid the agribusiness
manager's decision-making process
•
Understand fi nancial statement terminology as it is used by an agribusiness manager
•
Describe the balance sheet and illustrate how the agribusiness manager uses it
•
Describe the income statement and illustrate how the agribusiness manager uses it
•
Understand the accrual basis of accounting
•
Describe the statement of owner's equity and illustrate how agribusiness managers use it
•
Describe the statement of cash fl ows and illustrate how the agribusiness manager uses it
•
Understand how managers develop and use pro forma fi nancial statements to make
decisions affecting the future of the agribusiness
Introduction
Probably no term is used more often among managers than the word profi t, or “the bottom
line.” For any business, the bottom line on the income statement is crucial. This fi gure rep-
resents a composite of how the fi rm, and its management, has performed over the past year.
It is a guideline to measure the relative success or failure of the fi rm over this period of time.
Profi t
, the amount remaining from a sale after cost of the product and operating expenses
have been paid, is often used as a historical benchmark to provide evidence of the skill and
ability demonstrated by decision-makers within the organization. The fi rm's CEO (chief
executive offi cer), corporate board members, and management team are all enamored with
this word “profi t.” The importance of this fi gure over time can be related to the ability of the
fi rm to grow, enter new markets, and introduce new products.
Although the bottom line is of great importance in itself, other types of fi nancial data
are also needed to properly evaluate a fi rm's performance. The successful agribusiness
manager must understand what the fi rm did (or did not do) that led to the resulting bottom
line, and the successful manager uses this understanding to improve the bottom line in
the future. This is what the study of fi nancial management is all about. The successful man-
ager understands the fi nancial operations of the fi rm well enough to use this information
as a tool for improving fi rm performance. Although the bottom line provides a benchmark
for comparison, successful agribusiness managers must understand the interrelationships
of other accounts on the balance sheet and the income statement to properly manage the
business.
