Agriculture Reference
In-Depth Information
in prepaid expenses, insurance in this case. Other examples that fi t this category would
include prepaid rent and prepaid taxes.
Other current assets (g)
: A fi rm may have various other assets that can easily be converted
into cash. For example, BF&G has $5,000 in “
marketable securities
.” An example of
other current assets
could be an outside investment in another company's stocks or
bonds, an investment that can be converted to cash during the accounting year if
needed.
Fixed assets (i)
Fixed assets
are those items that the business owns that have a relatively long life. Fixed
assets are typically used to produce or sell other goods and services. If they were to be held
for resale, they would have to be classifi ed as inventory (current assets), even though
the assets might be long-lived. Normally, fi xed assets are categorized into the accounts:
land, buildings, and equipment. However, some managers may list types of buildings and
equipment separately on the balance sheet.
BF&G's balance sheet could be made more specifi c if its equipment (n) items were
divided into three main categories: fertilizer equipment, grain storage and handling equip-
ment, and rolling stock (trucks, spreaders, etc.). Some companies even list large, especially
expensive equipment, such as self-propelled fertilizer applicators which may cost $250,000
or more, as separate entries on the balance sheet.
One other important aspect of tracking fi xed assets for the balance sheet that should
be considered is depreciation (l and o). Generally, all fi xed assets, with the exception of
land, depreciate (decrease in value) over time. For example, BF&G's largest applicator,
which is three years old and showing wear, may be worth only $100,000, much less than
its original $250,000 purchase cost. For a balance sheet to show the true value of the com-
pany's assets, it must refl ect the asset's loss in value over this three-year period. This loss in
value due to use, wear, and tear on the fi xed asset is called depreciation. The net fi xed asset
value on the balance sheet refl ects only the “accounting” value of the asset in its present
state. The real value of fi xed assets may be considerably different. The actual market value
could be accurately established only by selling the asset, but an ongoing business cannot
sell its assets.
Several methods may be used to determine the amount of depreciation. Annual deprecia-
tion is allowed as an expense item on the income statement (discussed later), and so it sig-
nifi cantly affects total expenses, profi ts, and, consequently, taxes. Internal Revenue Service
regulations typically determine the method used to calculate depreciation. But for both tax
and accounting purposes the business can deduct the loss in the value of an asset each year
during the useful life of the asset, until it reaches the point where the total purchase price
(plus transportation and assembly costs) has been fully depreciated.
Land is usually entered at its purchase cost, even though its current value may be
much greater. Accountants argue that because it is impossible to accurately determine
its real market value without selling the land, the balance sheet should refl ect its original
purchase cost so as not to overstate the value and mislead the reader. Obviously, when
agribusiness fi rms have signifi cant land assets whose value has increased greatly, the
balance sheet may vastly understate the real market value. For example, Jody Snyder's
landscaping business is located on ten acres of land that her father purchased in 1941 for
$10,000. A short time ago owners of a local retail store offered her $300,000 for the same
ten acres. If Jody could revalue her land, her owner's equity would be much greater.
