Farm Statements: Income Statement

Is my livestock production business making profit? What are factors that can affect the profit that I make? How do I go about making profit? These are some of the questions that a farmer may ask themselves if they are running a profit oriented enterprise.

A farm income statement (sometimes called a profit and loss statement) is a summary of income and expenses that occurred during a specified accounting period, usually the calendar year for farmers. It is a measure of input and output in monetary values (in our case Pula`s). There are two kinds of income statements; Cash Income Statement and the Accrued Income Statement. For this article we will focus on Cash Income statement and the combined two statements.

The Cash Income Statement summarizes farm operating income when it is received as cash and farm operating expense when paid for by cash. Cash Income Statements are usually created for income tax filing purposes.

Accrued Income Statement combines the cash basis farm records with the inventories from the Balance Sheets (the beginning and end of the year) to give a true measure of profitability.

Components of the cash income statement

Item Description Examples
Cash Income -summarizes all farm income when it is received as cash.

-total sales of livestock and livestock products

-total sales of raised and market livestock purchased for resale

-do not subtract original cost of feeder livestock purchased in the previous year, this is done only for income tax.

-Do not include sale of land, machinery or other depreciable assets, loans received, income from non-farm sources of income

forage sales, market livestock sales, breeding stock sales,

livestock product sales (milk, eggs, etc.), other livestock income, custom work

rental or share income, government rebates, subsidies, government equity programs earned, other government payments, other insurance proceeds, interest earned,

patronage payments (Patronage dividends are given based on a proportion of profit made by the business)

Adjustments to cash income -Changes in values of inventory of feed, market livestock and breeding livestock can result in increase or decrease of in quantity of these items on hand/change in unit values.

-These changes should be counted in the year they are produced rather than the year they are sold

The beginning inventory of feeder goats consists of 420 heard valued at P75.00 each or P31 500.00. Ending Inventory is 450 heads valued at P50.00 each or P22 500.00. Inventory value decreased by P9 000.00 even though the number of goats on hand increased by 30 heads. The decline in value per head more than offset the increase in numbers and could have been due to lower market prices and/or lighter weight of the goats.
Cash expenses – Total Farm Cash Expense summarizes all farm expense when paid for by cash.

-do not include death loss of livestock as expense

-income tax should not be included in the farm cash expenses because they are personal expenses, unless you are doing a statement for farm corporation.

-interest paid on all farm loans/contracts is a cash expense but principal payments are not.

-do not include purchase of Capital Assets such as machines, equipment or land purchases.

– Family living costs and other non-farm expense items are not included.

sprays and insecticides, Government program premiums

fuel, oil and grease, machinery repairs and maintenance, equipment rental and lease payments, shop supplies and small tools, feeder livestock purchases, feed, salt, minerals and vitamins, veterinary fees and drugs, livestock supplies, breeding charges, trucking and marketing, breeding stock purchases, property taxes, wages, building and fence repairs

power, telephone, general insurance, licenses, accounting, legal and office services, land rental

Adjustments to cash expenses -cash expenses like feed and supply inventories, prepaid expenses and investments in growing calves that can be paid in 1 year but not actually used until the following year (subtract the ending value of these from the beginning value to find the net adjustments)

-expenses like accrued interest, farm taxes due and other accounts payable that are incurred in one year but not paid until the following year, do not add those that appear under cash expenses.

-depreciation: the amount by which machinery, equipment, buildings, and other capital assets decline in value due to use and obsolescence

Beginning inventory of feed was zero. Closing inventory is worth P11000.00. Feed purchased during the year were P16000.00 all paid for. The change in inventory is a positive P11000.00. Even though P16000.00 is shown for cash expense, only P5000.00 (P16000.00-P11000.00) is charged to the farm operation during the year covered. The P11000.00 of feed still unused will be the beginning inventory value for the following year

 

Capital gains/losses Sale of capital assets, the value can be either more or less than the cost value Sale of breeding livestock: record sales as income and purchases as expenses and adjust for changes in inventory.

 

Preparation of the cash Income statement

Get the information from the Actual Cash flow statement.

Do not include the income and expenses that is not due to farm operations. Such expenses are; capital sales, non-farm income, principal payments, family living costs, income tax, non-farm related income and expense items

Calculations

  1. Gross Farm Cash Income = Total cash income + net income adjustments
  2. Gross farm Cash Expenses = Total cash expenses + net expenses adjustments
  3. Net farm income from operations = Gross farm cash income – Gross Farm cash expenses
  4. Capital Gains/Losses = Sale value –Cost value
  5. Net farm Income = Net farm income from operations ± Capital gains/losses

 

Example of Cash Income Statement

Net Farm Income Statement
Name of Farm:                                                                          Year:
 
Income
Cash income   Income adjustments Beginning Ending
Sales of livestock bought for resale Market livestock
Sales of raised livestock Accounts receivable
Cooperative distributions paid Unpaid co-op distributions
Agricultural program payments Breeding livestock
Custom hire income Subtotal of adjustments
Other cash income Net adjustment (beginning-ending)
Sales of breeding livestock
Total Cash Income Gross Farm Revenue
Expenses
Cash expenses   Expense adjustments (paid in advance) Beginning Ending
Car and truck expenses Commercial feed on hand??
Custom hire?? Prepaid expenses
Employee benefits Supplies on hand
Feed purchased Subtotal of adjustments
Freight, trucking Net adjustments (beginning-end)
Fuel, oil Expense adjustments (due) Beginning Ending
Insurance Accounts payable
Interest paid (loan) Farm taxes
Labor hired Accrued interest (loan)
Pension and profit share plans Subtotal of adjustments
Rent or lease payments Net adjustments (ending-beginning)??
Repairs, maintenance
Storage, warehousing Depreciation
Supplies purchased Gross farm Expense
Taxes (farm)
Utilities (water,electricity bills) Net farm income from operations
Veterinary fees, medicine, breeding Capital sales and costs
Other cash expenses Sales of farmland
Livestock purchased Cost value of land sold
Total cash expenses Capital gains/losses
Net farm income (accrual)
Net farm income (cash) Value of farm production

(Feed purchased-livestock purchased)

 

Cash income statement calculations:

  1. Total cash income = add all cash income entries
  2. Total cash expenses = add all cash expenses entries
  3. Net cash farm income = total cash income – total cash expenses

Accrued income statement calculations:

  • Subtotal income adjustments beginning = add all income adjustments begging
  • Subtotal income adjustments ending = add all income adjustments ending
  • Net income adjustments = Subtotal income adjustments beginning – Subtotal income adjustments ending
  • Gross Farm Revenue = Total Cash Income – Net adjustments

Expense adjustments (Paid in advance):

  • Subtotal expenses adjustments beginning = add all expense adjustments begging
  • Subtotal expense adjustments ending = add all expense adjustments ending
  • Net expense adjustments (paid in advance) = Subtotal expense adjustments beginning – Subtotal expense adjustments ending

Expense adjustments (due):

  • Subtotal expense adjustments beginning = add all expense adjustments begging
  • Subtotal expense adjustments ending = add all expense adjustments ending
  • Net expense adjustments (due) = Subtotal expense adjustments ending – Subtotal expense adjustments beginning

Gross Farm Expenses = Total Cash expenses + net adjustments (paid in advance) + Net adjustments (due) + Depreciation

Net Farm income from operations = Gross Farm Revenue – Gross Farm Expenses

Capital gains/losses = sales of farm – Cost value of land sold

Net farm income (accrual) = Net farm Income from Operations ± Capital gains/losses

Value of Farm Production = Gross Farm revenue – feed purchased – livestock purchased

 

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