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preparation of financial statements
- 2. Submitted to: Dr. S B Vekariya Dept. Of agril economics College of agriculture JAU, Junagadh. Presented by: Jyothi P M.Sc.(agri) I yr College of agriculture JAU, Junagadh.
- 4. INTRODUCTION Financial statements (or financial report) is a formal record of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form easy to understand.
- 5. The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements should be understandable, relevant, reliable and comparable.
- 6. BASIC FINANCIAL STATEMENTS ARE: Balance sheet or statement of financial position or Net Worth Statement Income statement or statement of comprehensive income, statement of revenue & expense, profit and loss report Cash flow statement or flow of fund statement
- 7. BALANCE SHEET The balance sheet is a statement of financial position at a specific point in time or a financial snapshot of the business. The balance sheet reflects the result of all past transactions but not how the current financial position was obtained. The balance sheet consists of three main parts: •Assets •Liabilities •Net worth (owner equity)
- 8. ASSETS Assets include anything that is owned by the entity that has monetary value. Assets has to be valued on a cost basis or on the basis of market value. Assets should be separated into three categories: i) current assets ii) intermediate assets iii) long term assets
- 9. CURRENT ASSETS Current assets include items such as cash or assets that can and will be turned into cash within a year. Examples of current assets include: Cash Marketable securities Purchased feed, supplies Prepaid expenses Growing crops
- 10. INTERMEDIATE ASSETS These assets can not be converted or sold for cash in short period of time Ex: milch and draught animals, small equipments, etc. These assets are not consumed within the year and continue to give returns beyond one year.
- 11. LONG TERM ASSETS These assets support production activities and are considered to have a life greater than one year. They are of permanent nature. In agriculture, common long term assets include •Buildings •Land •Shares in other entities
- 12. LIABILITIES Liabilities are financial obligations of the business, such as money owed to lenders, suppliers, employees, etc. Any type of borrowing from persons or banks for improving a business or personal income that is payable during short or long time Liabilities should be separated into three categories: i) current liabilities ii) intermediate liabilities iii) long term liabilities
- 13. CURRENT LIABILITIES Current liabilities include all debts and obligations that are due within the next 12 months. Examples of some common current liabilities are: Accounts payable (bills, taxes, etc.) Operating loan balances Principal portion of term loans due within the next year Accrued interest on all loans
- 14. INTERMEDIATE LIABILITIES These are also called as medium-term liabilities Medium term loans/liability are those whose maturity is between 1 and 7 years Ex: cattle loan, sheep loan Long term liabilities Long term loans/liability are those whose maturity period is more than 7 years. Ex: land mortgage
- 15. OWNER EQUITY Owner equity, or net worth, is the difference between total assets and total liabilities. It reflects the owner’s stake in the business and includes investment capital and retained profits. total assets –total liabilities = Equity “have” “owe” “what you are worth”
- 17. FINANCIAL TESTS AND RATIOS The financial ratio analysis can also be done based on balance-sheet data which monitors the financial structure of the farm business or farm operator. These financial ratios provide information pertaining to extent of risk involved in lending to the farmer and can be divided as: a) liquidity ratios, b) solvency ratios.
- 18. (A) LIQUIDITY RATIOS These ratios indicate the ability of the farmer to generate sufficient cash in order to meet the debt obligations without disrupting his farm business. These are: (i) Current ratio = (ii)Working ratio = Current assets Current liabilities Sum of current plus working assets Sum of current plus working liabilities
- 19. (iii) Debt-structure ratio = (iv) Acid test ratio or quick ratio = Current liabilities Total liabilities Current assets minus inventories and supplies Current liabilities
- 20. (B) SOLVENCY RATIOS Solvency is a measure of financial security, i.e. what would be left in case all the assets are converted into cash and debts are paid. (i) Leverage ratio (or) debt-to-equity ratio = (ii) Net capital ratio = Total liabilities Net worth Total assets Total liabilities
- 21. Equity-to-asset value ratio = Since total assets = total debt + owner’s equity, the leverage ratio, net capital ratio and equity-to asset value ratio are alternative ways of expressing the overall leverage position of a farm business. Value of assets Farmer’s equity or net worth
- 22. INCOME STATEMENT (OR) PROFIT AND LOSS STATEMENT It is a measure of revenue and expenses during a specified accounting period (usually a year). It provides a fairly good picture of income earning and managerial ability of the farmer, in case drawn over a number of years. Moreover, an income-statement can be constructed either for a farm business or of a farm operator. Once prepared for a farm business, it reveals the success or failure story over time together with the costs and returns associated in the use of capital or credit.
- 23. Usually, the income statement considers the various types of income such as (a) cash revenue from sale of crops, livestock and its products, earnings from custom hiring and cash receivables, (b) kind income such as, value of farm produce consumed by the family, the rental value of farm dwellings, (c) unrealized income such as inventory changes, (d) miscellaneous sources,
- 25. EFFICIENCY RATIOS These ratios measure the degree to which a farm operator uses his farm resources in order to obtain the optimum results. (i) Operating ratio = It reflects the proportion of operating farm expenses into the gross farm income. Total operating farm expenses Gross farm income
- 26. (ii) Fixed ratio = It represents the share of fixed farm expenses per rupee of gross farm income. (iii) Gross ratio = It expresses the proportions of gross farm income being absorbed by the total costs. Total fixed farm expenses Gross farm income Total farm expenses Gross farm income
- 27. (iv) Expense structure ratio = Higher the value of expense structure ratio, the more inflexible the farm operator is to adjust quickly and efficiently with the changing market conditions. Fixed cash expenses Total cash expenses
- 28. PROFITABILITY RATIOS (i) Capital turnover ratio = It measures the gross farm income generated per rupee of capital investment. It is used to quickly appraise the efficiency of capital. (ii) Rate of return on debt and equity capital = Gross income Total capital investment Net return to capital Total capital investment
- 29. (iii) Rate of return on equity capital = It describes the returns per rupee of equity invested and provides a basis for comparison with the rates of return on non-farm investments. “Greater than one profitability ratios indicate that borrowed loan has generated the additional returns reflecting” Return to equity Net worth
- 30. CASH FLOW STATEMENT It is also called as the sources and uses of funds or flow of funds statement. It is prepared either for a farm business or to a farm operator’s family. In Cash flow statement both the cash in flows and out- flows are summarized over a given period of time. In a cash flow statement the total cash inflows must equal to the total cash out flows.
- 31. (i) Total cash available which excludes borrowings, (ii) new operating loans (iii) new medium and long-terms loans as well as the consumption loan The total cash outflows consist of: (i) total cash required which excludes principal repayments (ii) Principal repayments (iii) ending cash balance The total cash in flows include:
- 32. A B
- 33. In fact, it is the ending cash balance entry which really balances the account. The problem of untimely repayment of loan instalments can be diagnosed and resolved by the cash flow statement of a farm business. Thus, from an annual cash flow, a farmer can foresee when he will actually need the loan and when he will be able to repay it. A flow also helps the farmer in checking his farm expenses and in assessing the possibility of reducing his costs.