of University Kentucky
College of Agriculture Department of Agricultural Economics
AEC 302 SPRING 2004
HANDOUT 6 - INCOME STATEMENT Income statement - a summary of ____________ (i.e. - revenue) and ____________ (i.e. - costs) over a given time period; also called ______________ statement, operating statement, or ____________ and loss statement Major purpose - compute ____________ profit for a given time period An income statement can include or exclude nonfarm items. Key is identification of revenue and expenses. Gross receipts are recorded (for example commissions are recorded as an expense) Gains or loss from the sale of capital assets are recorded at selling price less book value at that time Gain or loss on sale of capital assets - not included until actually sold (inventory changes only apply to products/normally for sale - grain and livestock); essentially adjusts previous depreciation; sale price minus cost (e.g. - land) or sale price minus book value (e.g. machinery). Two alternative income statements formats Total revenue Less total ___________ Equals net farm income from _____________ Plus or minus gain/loss on sale of capital _____________ Equals net farm income Notes: gain/loss on culled breeding livestock in total __________ (normal operations), interest as a ____________ activity not a production activity expense
H6-1
As a second income statement format, one can calculate the ________ of farm production as an intermediate step. Total revenue Less cost of purchased ___________ and ____________ Less cost of purchased market livestock Equals value of farm ____________ Less all other expenses Equals net farm income from operations Plus or minus gain/loss on sale of capital assets Equals net farm income Value of farm production measures the dollar value of _________ and services produced, size measure, allows for ____________ farm product inputs to be reflected FFSC recommends making ____________ adjustments cash to based income statement Analysis of net farm income profit - the dollar value found by calculating net farm income profitability - profit relative to size of the business or the value of resources used Net farm income is a starting point Return to assets (or return on investment or return to capital) Return to assets is the dollar return to both debt and equity capital Net farm income from operations Plus ___________ expense Equals adjusted net farm income from _______________ Adjusted net farm income from operations Less opportunity cost of __________ ____________ Less opportunity cost of _______________ Equals return to assets Rate of return on assets (ROA) is a __________ comparable to opportunity cost of __________
Return to equity Net farm income from operations Less opportunity cost of unpaid _____________ H6-2
Less opportunity cost of _____________ Equals return on equity
If rate of return on ___________ ___________ > interest rate, borrowed capital earns an average return > average cost (interest rate) which improves rate of return to ___________ If ROA > i, then ROE _______ ROA If ROA < i, then ROE _______ ROA Operating p...