MANAGERIAL ACCOUNTING

Managerial Accounting

Managerial Accounting

Introduction

John and Mary usually desire and often expect agricultural borrowers to provide complete and accurate financial information. John and Mary developed by the John and Mary Farm provide recommendations on how to prepare a comprehensive set of financial statements. A key recommendation of the is an accrual-adjusted income statement to accurately report agricultural income.

Discussion

However, a challenge faced by John and Mary is how to get borrowers to provide financial statements recommended by the , particularly an accrual-adjusted income statement. Many borrowers have neither the training to prepare financial statements nor the time to receive that training. Others have received the training, but the statements are prepared so infrequently it is difficult to retain that knowledge from year to year. On the other hand, John and Mary understand how to prepare the statements, but lack the time to provide assistance to individual borrowers. John and Mary's farm is operated independently of their son's farm. However, the unique feature of these farms is that one common line of machinery is owned between the two operations. John and Mary own one major tractor, the combine, a major piece of spray application equipment, a smaller tractor, and a few pieces of minor equipment. Their son owns one major tractor, the tillage equipment, and a planter. Each party independently owns their own pieces of equipment. The estimated value of the equipment owned by each of the two entities is proportional to the amount of crop land that each entity operates. Custom fees for machinery operation do not change hands between these operations because of the proportional ownership of the equipment. John and Mary's son operates a total of 700 acres which is also rotated between corn and soybeans.

The first worksheet is used to collect and organize information from beginning and ending balance sheets of John and Mary farm and, if needed, the Federal Income Tax return. Once this data is summarized, adjustments to calculate an accrual-adjusted income statement are performed by following the instructions on the worksheet. Completion of Worksheet 1 results in an accurate estimate of accrual-adjusted net farm income.

Crop Cost Analysis

Below the Crop cost analysis of John and Mary farm calculates the ratios and measures recommended. (See appendices) All the data needed to calculate the ratios are found on Worksheet. Worksheet calculates the solvency, liquidity, profitability, and efficiency ratios. Also provided on Worksheet is a place to include benchmarks for the ratios. These benchmarks can come from John and Mary farm records programs or other sources. (See appendices) A lender and/or borrower can then compare the financial condition and performance for the operation to other operations. This comparison enables the user to identify business strengths and weaknesses.

A worksheet is provided to complete a detailed profitability analysis of John and Mary farm. The analysis is based on the relationship that exists among three key financial ratios:

Operating profit margin,

Asset turnover, and

Leverage (calculated by dividing total farm assets by owner's equity).

When the three ratios are multiplied together and an interest cost ...