Mark DikemanAssociate DirectorKFMA

Tedious – requires attention to detail Complex – some knowledge of accounting (and

farm accounting) is needed Time consuming – when more than tax records

are needed A valuable decision making tool

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For Uncle Sam Income tax preparation

Work with a lender Balance sheet or cash flow projection

Management/decision making/planning Bookkeeping for decision making requires effort and

dedication Good intentions don’t cut it

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Schedule F Farm income and expenses Raised sales are grouped

together Records should separate

breeding livestock and equipment sales from grain or market livestock sales

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Form 4797 page 1 Sales of business related

capital assets Records should differentiate

raised and purchased breeding livestock

When possible, refer to your depreciation schedule to identify assets sold

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Form 4797 page 2

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Form 4562 Depreciation Records should identify the

full purchase price of capital assets

Entries are complicated when purchases are partially or fully financed

Transactions (and reporting) is complicated when a trade is involved

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Where they at right now, financially Their long-term goals for the farm business What is required to reach those goals What they can measure and manage Their financial strengths and weaknesses What financial performance measures say

about their farm business How they can use records in decision making

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Accrual income statement Accrual balance sheet Cash flow statement (or projection) Enterprise analysis (cost of production) Ability to compare to peers (benchmark)

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Accrual income statement Counts income when earned and expenses when incurred Provides a better measure of profitability compared to cash

basis accounting Differs considerably from taxable income Most “accounting” programs will not provide a true accrual

income statement○ www.agmanager.info/ksu-integrated-financial-statements

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Accrual income statementAccrual income = cash sales + end inventory – beg inventory

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Bushels Price Value

Corn Inventory 1/1/19 50,000 $3.00 $150,000

Corn Sales in 2019 50,000 $2.75 $137,500

Corn Inventory 12/31/19 60,000 $3.25 $195,000

Cash income = $137,500Accrual income = 137,500 + 195,000 – 150,000 = $182,500

Accrual income statementAccrual expense = cash purchases + beg prepays – end prepays

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Value

Seed prepaid in 2018 for 2019 $45,000

Cash seed purchases in 2019 $55,500

Seed prepaid in 2019 for 2020 $50,000

Cash seed expense = $55,500Accrual seed expense = 55,500 + 45,000 – 50,000 = $50,500

Accrual income statement Tax depreciation expense rarely reflects reality○ Assets are depreciated to zero remaining basis○ Depreciation can be accelerated

Some method of “management” depreciation is needed○ Percentage of market value?○ Decrease in value from beginning to end of year?○ Second or alternative depreciation schedule?

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Accrual income statement Generally, an accrual income statement accounts for only

business income and expenses Cannot ignore non-farm income or family living expenses Either segregate non-farm items on an accrual income

statement or develop a separate non-farm income statement

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118,029 accrual farm income54,814 taxable income before depreciation

Accrual balance sheet A snapshot of net worth at a point in time Assets = liabilities + equity Be aware of different methods of valuation○ Cost valuation = initial cost + improvements – depreciation Value of raised grain, calves, etc is zero using cost valuation

○ Market valuation = current market value of assets Using market value may indicate net worth that cannot be realized May result in inaccurate accrual income statement

○ Modified cost/hybrid valuation = market value on current assets, cost value on longer term assets?

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Accrual balance sheet Prepare annually at about the same time of year Use consistent valuation methods Include all inventory, payables, and receivables Make sure values are honest and reasonable

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A balance sheet trend tells a better story than a single balance sheet at one point in time A point in time balance sheet is probably more valuable to

your banker than you Change in net worth (beginning to end) should

equal net income from income statement If ignoring unearned inflation in asset values If including non-farm income and family living expense

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Cash flow statement For non-farm businesses, reflects cash in and cash out of the

business, usually annually Differs from income statement ○ Excludes accrual adjustments and depreciation○ Includes principal payments, new borrowing, family living

For farm businesses, a monthly cash flow can help determine how much current borrowing might be needed (and when)○ Use history to project the future

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Cash flow statement Helpful to compare projected to actual May help evaluate feasibility of new enterprises

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Enterprise Analysis Allocation of income and expenses to a segment of the farm

business over a period of time Calculation of cost of production Current year actual or future projections are valuable for

marketing decisions Focus on direct inputs (seed, chemical, fertilizer, cash rent,

crop insurance, etc) and direct income

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Benchmarking Comparison to others Helps identify your strengths and weaknesses www.agmanager.info/finpack/financial-benchmarking-tool

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Benchmarking

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Work with your tax preparer to get started They may have experience with different systems They will likely want input on your chart of accounts

Select a system that meets (most of) your needs No single system will do it all

Work regularly on your books Develop a habit Reward yourself Nothing happens auto-magically How good is your memory?

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Reconcile to your bank statements An absolute must for accuracy!!

Track (and reconcile) loan balances Be consistent Wal-Mart or Walmart?

Start small Don’t bite off more than you can chew Make sure you understand the basics before adding too much

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Keep accrual records Accounts payable and accounts receivable For example, use bill and invoice features in QuickBooks

Keep enough detail to provide adequate information but stay out of the weeds As your skills improve, add more detail

Identify profit centers or cost centers Enterprise analysis Most accounting packages make it easy to track but its

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Use records to manage income tax Building wealth requires paying tax Plan ahead to target taxable income In the long run, tax is minimized when paid at a

consistent level Tax savings should never be a primary reason to purchase

equipment (especially if financed) Rarely to farms go broke paying tax

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Write down your business goals and objectives Regularly evaluate progress towards goals Measure non-farm performance (family living

expenses) Envelope system

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Mark DikemanAssociate Director dikemanm@ksu.edu785-539-0373www.agmanager.info/kfma

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