Agriculture Reference
In-Depth Information
and for each expense category. These accounts are summarized in a fi nancial statement
called an income statement. Ledger accounts, then, provide for the separating, categorizing,
and recording of related transactions or activities within the business, and they do so in an
organized manner. Maintaining fi nancial information in separate ledger accounts not only
makes these data more usable, but provides information that is more easily understood by
the agribusiness manager.
The accounts in the ledger are summarized on a predetermined regular basis called the
accounting period
. The accounting period typically represents a one-year time span in the
operation of the business. This may be a calendar year (January-December) for some fi rms
or a fi scal year for other fi rms (July-June). Many agribusinesses are seasonal in nature. A
calendar year accounting period may not make sense for a seed corn fi rm since this really
cuts across two different production and marketing seasons. Hence, fi rms tend to report
fi nancial information for one year that includes a single production period. Management in
medium and large fi rms typically request updated monthly and/or quarterly fi nancial state-
ments. These updates represent summaries of the accounts in the ledger and help generate
the key fi nancial statements for the fi rm.
Financial statements
Financial statements
are a summarized statement of the fi nancial status of a business, usu-
ally prepared as a summary of
accounts
from the ledger. The primary fi nancial statements
usually consist of the balance sheet and income statement. As discussed previously, a balance
sheet shows what a business owns, what it owes, and what investment the owners have in the
business. It can be likened to a snapshot that shows the fi nancial makeup and condition of the
business at a specifi c point in time. The
income statement
, on the other hand, is a summary
of business operations over a certain period, usually the period between the dates of two bal-
ance sheets. It could be compared to a video of the fi rm that details the fi nancial activities as
they occurred over a period of time. Generally, the balance sheet illustrates the current fi nan-
cial position of the business. The income statement, alternatively, demonstrates fi nancial
changes since the last time a balance sheet was prepared. The income statement is also known
as the operating statement, the profi t and loss statement, or simply the P&L statement.
The length of the accounting period and the dates for issuing fi nancial statements are
particularly important in agribusinesses that are highly seasonal in nature. In most parts of
the country, fertilizer and chemical operations conduct a very large portion of their annual
business in the three to four months before and during the planting season. For example, a
balance sheet constructed just prior to the rush season is likely to show large amounts of
fertilizer on hand and little money owed by customers. If this same statement is drawn up
just after the busy season, it is likely to show less fertilizer on hand and larger amounts of
money owed by customers. Such fi nancial statements can be very misleading, if they are not
interpreted in light of the seasonal characteristics of the business. Consequently, the agri-
business manager must understand why variations in fi nancial statements are inescapable in
highly seasonal agribusinesses. Previous years' fi nancial statements often provide a more
valid comparison than a simple month-by-month comparison.
Brookstone Feed and Grain company: an example
Brookstone Feed and Grain (BF&G) company typifi es many smaller agribusiness fi rms.
BF&G is a retail agribusiness fi rm located in the Midwest. It sells a wide range of fertilizers,
