Agriculture Reference
In-Depth Information
land, accounts payable, and accrued expenses are assumed to remain the same as reported on
the balance sheet prepared as of 12/31/2011. Second, the cash balance increases from $0 on
the 12/31/2011 balance sheet to $5,000 on the 12/31/2012 balance sheet as reported on the
statement of cash fl ows. Third, the original amount reported for equipment of $100,000 was
reduced by $50,000 from the sale of the depreciated piece of equipment, and then increased
by $55,000 from the purchase of the new piece of equipment. So, the amount reported on the
pro forma balance sheet is $105,000. Also, the accumulated depreciation reported on the
12/31/2011 balance sheet of $80,000 (includes the depreciation taken on the depreciated
piece of equipment) is reduced by $50,000 due to the sale of that piece of equipment, and
then is increased by the depreciation taken during 2012 ($25,000), resulting in $55,000 of
accumulated depreciation reported on 12/31/2012. Fourth, the total long-term liabilities
reported on 12/31/2011 were $50,000 ($10,000 reported as current and $40,000 reported as
long-term). The equipment loan would be increased by the $50,000 borrowed for the new
piece of equipment, but then $20,000 would be paid by the end of 2012 ($10,000 on the
original loan and $10,000 on the new equipment loan) leaving a total long-term loan balance
of $80,000 ($40,000 on the original loan and $40,000 on the new loan). Of that amount,
$20,000 would be owed during 2013 and the remainder would be reported as long-term lia-
bilities. Finally, the withdrawal for family living amount equals net income after taxes that
will arise from the operation of the fi rm, so owner's equity would increase by only the
$5,000 gain on the sale of equipment.
Ted's estimated statement of cash fl ows balances if he requests a loan of $50,000, of
which $10,000 plus interest is due by the end of 2012. This is an absolute minimum for the
loan request, however. As can be seen by examining the pro forma statement of cash fl ows,
Ted will need all of the profi ts for personal living expenses, and he has made no allowance
for contingencies. In addition, at the end of the period the fi rst payment on the new loan will
be due. In reality, Ted's request to the bank must be a fi gure that both he and the banker can
live with. A conservative approach to estimating profi ts and other relevant changes in the
fi rm's fi nancial statements is probably the best approach.
Some important accounting principles
It is important that agribusiness managers understand the following principles and ideas
about fi nancial accounting:
1.
Only facts that can be recorded in monetary terms should be reported on the balance
sheet and income statement.
2.
Records or accounts are kept for business entities. Personal and business transactions
must be carefully separated.
3.
Accounting methods assume the business will continue to operate indefi nitely.
4.
Resources (called assets) owned by the business are ordinarily recorded at their cost or
market value—whichever is lower. This practice is called the cost basis of valuation.
The amounts listed on the fi nancial statement do not necessarily refl ect the true market
value of the asset.
5.
Every accounting event is composed of two transactions: changes in assets and changes
in liabilities and/or owner's equity. All assets are claimed by someone; therefore, claims
against assets must always equal the assets listed for the fi rm. These claims can be found
among banks, suppliers, owners, stockholders, etc.
