Agriculture Reference
In-Depth Information
prior to planting nursery stock. Owners might experience great diffi culty raising the funds
for this emergency because their current assets are limited.
The major current asset accounts may include the following:
Cash (c)
:
Cash
funds are those that are immediately available for use without restriction.
These funds are usually in the form of checking account deposits in banks, cash register
money, and petty cash. Cash amounts should be large enough to meet any obligations
that fall due immediately. BF&G has cash balances of only $175,000 as of December
the fi rst of the year, BF&G may have to borrow additional short-term funds to meet its
purchasing obligations.
Accounts receivable (d)
:
Accounts receivable
represents the total amount owed to the com-
pany by customers for past purchases. Essentially, these accounts result from the grant-
ing of credit to customers. They may take the form of charge accounts on which no
interest or service charge is made or they may be of an interest-bearing nature. In either
case, they are a drain on the cash position of the fi rm. The larger the outstanding amount
in accounts receivable, the less money the company will have available to meet current
needs. The amount of money in this account depends on the fi rm's credit policy, that is,
how much credit is extended to customers and how effi cient the business is at collecting
these outstanding accounts.
Some agribusinesses depend heavily on credit as a selling tool. Agricultural production
is a seasonal business, and many customers prefer to postpone payment until after har-
vest and/or selling of crops. BF&G is in an industry in which selling on credit is common.
As
Table 9.1
indicates, on December 31 Brookstone's customers still owed a total of
$1,600,000 from sales made during the past year or earlier. This is a fi gure that BF&G's
management and creditors will watch closely, since borrowing money to pay the fi rm's
obligations is an added expense that reduces the profi tably of the business. The chal-
lenge is for BF&G to offer enough credit so as not to hurt sales, while at the same time
keeping its credit policy tight enough not to jeopardize its own cash-fl ow position. (This
is described in more detail in
Chapter 11
.
)
Inventory (e)
:
Inventory
is defi ned as those items that are held for sale in the ordinary
course of business or that are to be consumed in the process of producing goods
and services to be sold. Inventory items are usually valued at cost (actual funds expended)
or market value (what they are worth), whichever is lower. BF&G has $2,500,000
worth of inventory (at cost) as of December 31. The fi rm may already be building
some inventory for spring sales. The objective of its managers is to keep inventory
as low as possible in order to minimize the cash investment while still maintaining an
adequate supply of products to meet their customers' needs. Control of inventory and
related inventory expenses is one of management's most important jobs, particularly for
retailers. Good accounting records are particularly useful in controlling inventory.
As BF&G becomes better at matching supplies of product with customers' demands,
the fi rm will lower its inventory investment and increase its return to investment in
inventory.
Prepaid expenses (f)
:
Prepaid expenses
represent assets that have been paid for in advance;
usually, their usefulness is due to end after a short time. A good example would be
prepaid insurance. A business often pays for insurance protection for as much as three
to six months in advance. The right to this protection is a thing of value (an asset), and
the prepaid or unused portion can be refunded or converted to cash. BF&G has $7,000
