fm6e-chapter05 - Farm Management Chapter 5 The Balance...

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Farm Management Chapter 5 The Balance Sheet and Its Analysis
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farm management chapter 5 2 Chapter Outline Purpose and Use of a Balance Sheet Balance Sheet Format Asset Valuation and Related Problems Balance Sheet Example Balance Sheet Analysis Statement of Owner Equity
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farm management chapter 5 3 Chapter Objectives 1. Discuss the purpose of a balance sheet 2. Illustrate the format and structure of a balance sheet 3. Outline some problems when valuing assets, and the recommended valuation methods for different types of assets 4. Show the difference between a cost and market basis 5. Define owner equity or net worth and show its importance 6. Analyze solvency and liquidity 7. Introduce and explain statement of owner equity
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farm management chapter 5 4 Purpose and Use of a Balance Sheet Systematic organization of everything “owned” and “owed” Assets = liabilities + owner equity Owner equity = assets - liabilities Can complete at any time, but most prepared at end of accounting period Provides measures of solvency and liquidity
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farm management chapter 5 5 Solvency Solvency measures the liabilities of the business relative to the amount of owner equity invested in the business. It provides an indication of the ability to pay off all financial obligations or liabilities if all assets were sold. If assets are not greater than liabilities, the business is insolvent .
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farm management chapter 5 6 Liquidity Liquidity measures the ability of the business to meet financial obligations as they come due without disrupting the normal operations of the business. Liquidity measures the ability to generate cash needed to pay obligations. Liquidity is generally measured over the next accounting period and is a short-run concept.
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farm management chapter 5 7 Balance Sheet Format Assets shown on left or top Liabilities are shown on right or below assets Owner equity shown on balance sheet and liabilities + owner equity = assets
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farm management chapter 5 8 Table 5-1 General Format of a Balance Sheet $100 $60 400 200 $260 240 $500 $500 Total Assets Total Liabilities Owner's Equity Total Liabilities and Owner Equity Noncurrent Assets Current Assets Current Liabilities Noncurrent Liabilities Assets Liabilities
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farm management chapter 5 9 Assets An asset has value for one of two reasons: 1) It can be sold to generate cash, or 2) It can be used to produce other goods that in turn can be sold for cash in the future.
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10 Current Assets Assets that can be sold easily to generate cash are called liquid assets . Accounting principles require current assets , which are the more liquid assets, to be separated from other assets on the balance sheet. Current assets include:
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This note was uploaded on 11/15/2011 for the course AGEC 7100 taught by Professor Duffy,p during the Fall '08 term at Auburn University.

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fm6e-chapter05 - Farm Management Chapter 5 The Balance...

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