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Chapter 12

Basic Accounting Documents

Accounting and Agribusiness Managers


Accounting: the process of recording,

classifying, and summarizing business transactions The balance sheet and the profit-and-loss statement are the starting points of most financial analysis Agribusiness managers must understand these documents in order to evaluate the financial performance of their business

The Purpose of an Accounting System


Present an accurate picture of the

firms current profitability

Give an estimate of the firms current

and future financial position


Provide input to the firms

management information system


Provide an accurate record of past

financial performance

The Balance Sheet


A statement of the financial conditions

of a business on a specific date


Assets: something of value the firm

owns or uses
Current assets: current cash holdings or something that will turn into cash within the current accounting period Fixed assets: something the firm owns or uses that will not turn into cash within the accounting period

The Balance Sheet


Liabilities: an obligation to pay a debt Current liabilities: a debt that must paid within the next accounting period Long-term liabilities: a debt that must be paid after the next accounting period Owners Equity (net worth) The accounting equation:

Assets = Liabilities + Owners Equity

Balance Sheet AgBiz Corporation December 31, 20__ Assets Current Assets - Cash - Accounts Receivable - Inventories Fixed Assets - Land - Buildings and Equipment Investments Total Assets Liabilities Current Liabilities - Notes Payable - Accounts Payable - $ Due this YR on LT Debt Long-Term Liabilities Owners Equity

- Stock - Retained Earnings

= Total Liabilities and OE

The Profit-and-Loss Statement


Summarizes the revenue and expenses

of a business over a given period


Revenue: refers to the amount of

money the firm earned from the sale of its goods and service this period
Cost of goods sold: represents the

direct costs to the business of just the goods that are sold this period

The Profit-and-Loss Statement


Gross Margin: what remains after subtracting

cost of goods sold from revenues


Operating expenses: the general costs of operating

and administering the business, outside of the direct cost of goods sold Overhead
Profit: equal to gross margin minus operating

expenses
Net profit: profit after income taxes have been

paid, and is what is actually available for the business

Profit & Loss Statement

AgBiz Corporation
For the Year Ending December 31, 20__

Revenues from Sales Less: Cost of Goods Sold


Beginning Inventory + Purchases Goods Available Ending Inventory Cost of Goods Sold

Gross Margin Less: Operating Expenses Income Before Taxes Less: Allowance for Income Taxes Net Income (to Retained Earnings)

Discussion Questions
1.

Explain why it is important for managers to understand financial management in order to be effective. Why does this process start with the balance sheet and the profit-and-loss statement? In your own words, describe the balance sheet and what it tells managers. What does it not tell managers about their business? In your own words, describe the profit-and-loss statement and what it tells managers about their business.

2.

3.

4.

Explain why the accounting period and the fiscal year may not coincide with the calendar year.

5. 6. 7.

Explain the difference between current and fixed assets on the balance sheet. Why are they arranged this way? In your own words describe the depreciation process used by accountants and why accountants use it. Explain when a business is solvent and insolvent. Develop an example for an agribusiness when it might be solvent in one part of year and insolvent in another. Explain why an insolvent business may not need to file for bankruptcy. In your words, explain how to calculate the value for cost of goods sold on a profit-and-loss statement. Explain why this works. What would be an alternative way to calculate cost of goods sold?

8.

9.

Explain how you would decide if a cost should be allocated to cost of goods sold or operating expenses. Give an example of each. retained earnings. Why are retained earning transferred to owners equity on the balance sheet after they are calculated?

10. Define and explain the difference profits, net profits, and

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