Agriculture Reference
In-Depth Information
6.
Most accounting is handled on the accrual basis of accounting. The objective of the
accrual method is to report revenue in the income statement for the period during which
it is earned (regardless of when the cash payment is received), and to report an expense
in the period when it is incurred (regardless of when the cash disbursement is made).
This procedure more clearly refl ects the profi ts of the business.
7.
The format for the income statement must refl ect the unique needs of the organization.
To do this requires the continued help of competent fi nancial professionals.
8.
Once a format is developed, it is not sacred and should be changed as necessary to meet
changing conditions. However, a degree of consistency should also be maintained to
allow comparison on a historical basis to previous fi nancial statements.
9.
Finally, one of the major purposes of records and fi nancial information is to provide the
necessary information for informed decision-making on the part of agribusiness managers.
Summary
Profi t is the focal point of any business, but it is the net result of many factors, many of which
are refl ected on the two primary fi nancial statements. Agribusiness managers rely on fi nan-
cial statements to evaluate how the business is doing, to suggest the direction it should take,
and to report its fi nancial condition and performance to outside entities. It is important that
this fi nancial data be current, complete, and accurate to facilitate fi nancial decision-making
within the fi rm.
All fi nancial statements rely on a systematic record-keeping system. Accountants have
developed highly refi ned sets of rules for handling every conceivable fi nancial transaction.
The daily transactions are summarized in balance sheets, income statements, and other fi nan-
cial reports for owners, managers, and other concerned parties.
A balance sheet shows assets, or what the business owns, at a certain point in time. It also
shows liabilities, or claims of creditors against those assets, and the value of owners' claims
against the assets. Assets always equal liabilities plus owners' equity as all of the assets must
be claimed by someone. Both assets and liabilities are broken down into several classes to
provide a useful fi nancial picture of the business.
The income statement summarizes the revenue over a period of time and then carefully
matches the appropriate expenses incurred in generating that revenue. Any excess of reve-
nue over expenses is profi t. The format of the income statement emphasizes gross margin, or
revenue left after the cost of goods sold has been covered. The gross margin represents dol-
lars left to pay operating expenses and the interest expense, which are generally itemized on
this report, and the remaining amount is net income or profi t.
The statement of owners' equity and the statement of cash fl ows are useful in helping
understand changes in these two key areas. The two statements help managers understand
why changes occurred in those two areas on the two corresponding balance sheets.
Pro forma statements are projections, based on careful forecasts of key variables. Such
statements help managers use fi nancial data to make decisions that will impact the future of
the organization. Agribusiness managers must be familiar with the intricacies of all of these
statements, both actual and pro forma, since they become the core of many management
decisions.
Discussion questions
1.
Why is fi nancial data important to the agribusiness fi rm and the agribusiness manager?
