Agriculture: Agricultural Business and Economics

Question 1: Explain the records that show the financial health of a farm.

Answer 1: A balance sheet and an income statement are the basic financial statements necessary to show how a farm is doing financially. Larger operations migh need other records, such as a statement of cash flow. All of the records should reflect the same business year. The balance sheet indicates what is owned and what is owed. At the end of the business year, the difference is owner equity. A balance sheet can help in acquiring loans, analyzing finances, and determining the value of ownership. The income statement is a record of what the farm has earned over the past business year. It shows crops, livestock, milk, or other farm goods that were sold in that year. It does not reflect sales of breeding livestock or changes in inventory.

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Question 2: Explain the need for keeping farm financial records.

Answer 2: Consultants and lenders sometimes worry that farmers have too few records with which to analyze the fiscal solvency of their farm. Not having this data makes it difficult for lenders to develop plans for businesses with money problems, as well as to assign proper debt loads. Many farmers still keep farm books the old fashioned way – with pencil and paper – although more and more are turning to various computer programs to help with accounting chores. Modern computer software can record income and expense, as well as summarize numerous other financial reports. The basic reason for keeping records is for tax purposes. Farmers also keep records to analyze various enterprises, to determine accrual reports, and to perform fiscal analysis. An assortment of records are also required for employees, including paycheck information, withholding, employment tax, W-2, I-9, and 1099 tax forms, as well as other records, such as workers compensation.

Question 3: Explain income and expense with respect to reporting farm income for various taxes.

Answer 3: Farmers who operate on a cash basis must calculate income when it both actually and constructively received. Benefits received by farmers or ranchers from the government are looked at as income, whether they are in cash or in kind. Some programs, such as those that help farmers meet environmental standards, have a cost-share between the farmer and the government. In some cases, these benefits in cost sharing may be excluded as reportable income. Other income considerations include gain and loss from buying and selling commodity futures and other income sources. Expenditures for farming and ranching are often deductible, dependent on the income basis of the item. Expenses may include those associated with the business that have a useful life for less than a year. These include lease payments, certain labor costs, pasture maintenance, and property taxes.

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