FARM RECORD KEEPING : FARM RECORD KEEPING RUBI R. ORBETA
BUCAF, Guinobatan, Albay Slide 2: Importance and Uses of Farm Records
These are written statements or collection of facts and figures on a subject for a definite purpose. These records arise from the day-to-day transactions made by the farmer and should be accurate. They are used in identifying the strong as well as the weak areas of the farm business, in recognizing problems, and in determining solutions to those problems. They are used as the bases for the farmer’s key decisions concerning farm operations. Slide 3: Features of Farm Records
Easy to understand
Easy to maintain
Contains necessary facts and figures
Organized to suit the needs of a particular farm Slide 4: Classification of Farm Records
Physical – it contains information on farm productivity, like the records on crop production, livestock production, farm machinery and equipment. They provide data which will later on become part of the financial records under the account heading Inventory.
1. Crop production record – this is maintained mainly to monitor crop production activities. It gives the name of the crop being cultivated, the date of planting, the allotted area, the time to harvest and the actual volume of production at harvest time and its worth in pesos. CROP PRODUCTION RECORD : CROP PRODUCTION RECORD Slide 6: 2. Livestock and poultry production records - production record for livestock largely differs from that of crops. In swine for example, both weanlings and fattening hogs are the main products, breeding animals will have individual records. This will allow the farmer to keep track of the performance of each breeder, and of the farm as a whole in terms of production. SWINE PRODUCTION RECORDSow No.: _____ Source: _______Date of Birth: _____ Breed: _______ : SWINE PRODUCTION RECORDSow No.: _____ Source: _______Date of Birth: _____ Breed: _______ Slide 8: 3. Machinery and equipment record -this record yields data on the items of fixed investments which are available and serviceable in the farm. It also gives information on the time for possible replacement as indicated by its depreciation value or the number of years of use. MACHINERY AND EQUIPMENT RECORDYear Ending: December 31, 2006 : MACHINERY AND EQUIPMENT RECORDYear Ending: December 31, 2006 Slide 10: Valuation and Depreciation
The concept of valuation and depreciation plays a vital role in the preparation of the Balance Sheet. This gives a more or less objective value of the different fixed assets included in the statement. Slide 11: Four Methods of Valuation
1. Original Cost – the actual purchase cost. This method is used on assets with a short life span and whose values do not change drastically.
2. Normal Market Value – used to estimate average selling price of the property over a period of years Slide 12: 3. Present Market Value – assigns prices appropriate for the property if sold at the time the inventory is taken. Example is land.
4. Original Cost Minus Depreciation – uses some mathematical formulas in coming out with the amount for depreciation. The depreciation amount (in years, quarterly or monthly) may be computed using the straight line method: Slide 13: Acquisition Cost – Scrap Value
Annual Depreciation = ________________________
Ex. Hand Tractor
50,000.00 – 8,000.00
Annual Depreciation = _________________
= Php 2,800.00
After computing the annual depreciation (Php 2,800.00), the value of the tractor, after one year and until it is used for the duration of its life span (15 years) is shown in the table. DEPRECIATION OF A HAND TRACTOR WITH A LIFE SPAN OF 15 YEARS : DEPRECIATION OF A HAND TRACTOR WITH A LIFE SPAN OF 15 YEARS Slide 15: Financial Records
These are accounts of financial transactions of a farm business. These show the amount of money received from each source and amount spent for each purpose in a year.
Financial records are statements of the past performance of farm business. These cover a definite period of time, indicate a monetary position of the business for that particular period, how well that business performed at that particular period, and the sources and uses of cash during that period. Slide 16: The Balance Sheet
This shows how much a farm business is worth at a given point in time. It reveals the monetary equivalent of assets owned by the business, the claims of others against these assets and the net worth or owner’s equity. FITS FARMBalance SheetAs of December 31, 2006 : FITS FARMBalance SheetAs of December 31, 2006 Slide 18: The total assets should be equal to the sum of the total liabilities and the owner’s equity. Expressed in equation form,
TOTAL ASSETS = TOTAL LIABILITIES + OWNER’S EQUITY
Before the balance sheet could be constructed, an inventory of all farm resources and other items should first be taken. These items include cash, receivables, unsold products, material inputs, machinery and equipment, breeding stock in the case of livestock enterprise and seed stock in the case of crop production, land, buildings, tools and equipment, and such other particulars which are needed in the operation of the farm. These items form the asset side of the balance sheet. Slide 19: The Income Statement
The income statement, also called the profit and loss statement, reveals the financial performance of the farm. It determines the net income derived from the operation during the accounting period. The general format is: Slide 20: FITS FARM
For the Year Ending December 31, 2006
Cash Php 6,000.00
Total Farm Income Php 9,500.00
Less: Cost of Production 6,700.00
Gross Farm Income Php 2,800.00
Less: Other Expenses 200.00
Net Farm Income 2,600.00/6,900.00 = 37.68%
7% PA = Php 483.00 Slide 21: Cash Flow Statement
The cash flow statement gives information about the sources and uses of cash during a past period (usually the past year) or during a future period. If it is for a future period, it could be a budget for the next year. In order to be more useful to the farmer, this record should include both farm and family sources and uses of cash since in practice the cash needs of the farm family and farm business are not separated. Slide 22: The cash flow statement normally indicates the total cash available (operating receipts, capital receipts and non-farm income) and total cash required (operating expenses, livestock and feed purchases, capital expenditures, and other expenditures in the operation of the business. It also shows the disposition of cash surpluses or use of savings and borrowing cash to resolve flow problems. Slide 23: Subsidiary Records
The development of a framework showing record relationships and how they affect and contribute to the preparation of the balance sheet and income statement should be the next activity to be done after setting up the different farm records and accounts. The framework serves as an immediate source of data and information for analysis and appraisal.
A well-prepared record system is expected to:
1. Provide data for farm planning and budgeting
2. Aid in preparing tax returns and reports required by the government Slide 24: 3. Give data for group and action on local, regional or national programs
4. Provide data/information useful in property valuation.
In setting up farm records, the balance sheet and income statement are considered the ultimate objectives. Items of these two statements are supported or documented with subsidiary records using the forms found elsewhere in this unit. In addition to these forms, the farmer or record keeper can still come up with other forms. Slide 25: The Balance Sheet Subsidiary Records
Inventory in crop and livestock
Records for receivables and their collection schedule
Records for valuation of fixed investments, in itemized form, considering their depreciation, and
The cash records, whether on hand or in the bank
The Liability subsidiary records would include:
The schedule of bank loan repayments and its balances
Enterprise payables to specific creditors
Unpaid salaries and wages for labor during the time of balance sheet preparation, which were already declared as expenses for the accounting period. Slide 26: The Income Statement Subsidiary Records
Subsidiary records for income statement include records on sales/receipts and expenses. A farmer may choose to construct records of a) receipts and b) expenses for an individual farm business system. The two subsidiary records contain basically the same items though they may differ in magnitude of coverage, depending on what the record keeper may select. Subsidiary records of receipts will include:
The volume of production of what product
The unit price
The name of the buyer (may be optional) Slide 27: A simple farm receipt may be issued by the farm for later reference.
Subsidiary records of expenses will include:
Direct input expenses, like fertilizer, seeds, seedlings and other direct material input
In the same manner the quantity used and its unit price will be included in the record. SUBSIDIARY RECORDS OF RECEIPTS/SALES FOR THE YEAR 2006 : SUBSIDIARY RECORDS OF RECEIPTS/SALES FOR THE YEAR 2006 Slide 29: Non-cash receipts and expenses will be noted. For purposes of consistency, giving the money value to non-cash item may be deemed appropriate for ease of record keeping.
Identification of the balance sheet and income statement accounts is important in this regard. Failure to do this would lead to misinformation and the purpose of record keeping will be defeated. For the purpose of developing a good record system, pro-forma records preparation is recommended to be the first activity, giving considerations on their detail and information needed. Slide 30: Farm Record Analysis and Interpretation
Farm business survey or farm accounting begins with the determination at the proper measure of income and the computation of management and efficiency factors for individual farms. Analyses are then made to ascertain the relationship between management factors and income. Slide 31: Tabulations and charts of farm records are made to show the factors which affect farm success and failure, so that an individual farmer, by comparing his performance with these measures of standards, may recognize his weak points and take the necessary steps of improvement. Slide 32: The analysis of the financial status of an enterprise usually consists of determining groups of specific ratios from selected items in the balance sheet and the income statement. The complete picture of the financial status of an enterprise can thus be determined on the trend of each ratio taken from several consecutive years of record keeping.
The managerial and technical abilities of the farm manager in keeping important farm records are of paramount importance, with respect to running a successful farm enterprise. Slide 33: He assures the financial performance of the business enterprise to serve as the basis for allocating and controlling the limited resources of the business. This process involves ratio analysis and, sometimes, percentage analysis as in the case of comparing two financial statements. The results of these mathematical computations can be interpreted independently, or as a part of the ultimate measure which is the return on investment (ROI). Furthermore, comparison is also possible with other business enterprises practicing the same technique, to allow a better picture in the total operations. Slide 34: There are four main groupings of the commonly used ratios in the financial
Measure of profitability
Measure of liquidity
Measure of asset turnover, and
Measure of the use of debt Slide 35: Measure of profitability – this indicates operational performance and efficiency of the project; expresses the rate of return on the equity of the owner and relates the ability of assets in generating profit; standard level of acceptance is 1:1 or better for return on sales and the higher, the better for return on assets:
Return on Sales = _________
= Php 500.00
= Php 0.25:1 Slide 36: The result shows that for every peso sale, the business is earning Php0.25. This may be translated as 25% of sales is actually net income.
Return on Assets = _________
= __________ 25,000.00
= 0.02 Slide 37: This means that a peso asset is able to generate Php0.02 net income. The figure is too low to reflect a slow utilization of assets in generating income.
Measure of liquidity - used to measure the ability of the business to meet short term obligations and remain solvent in the event of adversities. It indicates the firm’s ability to liquidate all liabilities that are due within one year. A high current ratio may mean excessive build-up of idle cash and suggests excess liquidity. Liquidity measures by acid test ratio or quick ratio concentrates on strictly liquid assets to which current liabilities could be liquidated on short notice. It also indicates the firm’s ability to meet long-term obligations. The standard value of acceptability is from 1:1 or better.
1. Current Ratio = _____________
Current Liability Slide 38: = Php 1,000.00
The result indicates that the business has Php10.00 available to pay a peso indebtedness. This picture or ratio, however, is not desirable in as much as the business enterprise is keeping to much idle liquid asset. Too much current asset also indicates the manager’s ability to look for opportunity and the avoidance of using it due to the risk and uncertainties involved in the investment Slide 39: Quick Asset
2. Acid Test Ratio = __________
= Php 500.00
= Php 5:1
This ratio again indicates that the business enterprise can easily pay its debts in short notice. A 5:1 ratio reflects the inability to utilize these liquid assets optimally as against the 1:1 standard value of acid test ratio. Slide 40: Measure of asset turnover – this tests the effectiveness in the use of resources. It indicates the amount of sales generated per peso. The standard investment asset is that the higher is the generated income, the better.
Asset Turnover = _________
= Php 2,000.00
= 0.08:1 Slide 41: A Php 0.08:1 ratio means that a peso invested on assets was able to generate Php 0.08 sales. A higher figure would be desirable inasmuch as it indicates how the management utilizes its resources or assets.
Measure of use of debt – presents the ability of the enterprise to meet long-term obligations. The debt-to-equity ratio determines the proportion of debt in the capital structure. It is said that when the cost of debt is high, a high ratio may prove undesirable. On the other hand, the debt-to-asset ration indicates the proportion of funds contributed by creditors. A higher cost of credit would require lower production.
The measures are substituted below with their corresponding interpretation. Slide 42: Debt-to-Equity Ratio= Long TermDebt ______________
= Php1:1 Slide 43: This means that the business is equally financed by both the creditors and the owners. A higher ratio (ex. 2:1 or more) is more desirable when the cost of credit is cheaper than the cost of owner’s investment. The cost of credit is primarily defined by the rate of interest, while the cost of owner’s investment is measured by the opportunity cost if invested in other ventures.
Debt-to-Asset Ratio = _________
= Php 10,000.00
= 4:1 Slide 44: This means that for every peso asset of the business, creditors own Php 0.40 of it. In other words, 40% of the total asset is owned by creditors, while the remaining 60% is owned by the proprietor. Slide 45: