Chapter 5 In-Class Income Statement Exercise

Transcription

1 Chapter 5 In-Class Income Statement Exercise The John and Kimberley Smith continued to produce strawberries and sell eggs from a small flock of laying hens following their first year. They collected information to prepare their second year s income statement. The list of items they collected is as below. Date: July 1, 2015 to June 30, 2016 Cash Income from selling Strawberries - U pick 3, /LB : $6,300 - Pre pick 5, /LB : $14,850 Expenses from Strawberry ½ acre - Materials : $5,194 - Labor : $3,209 - Equipment : $836 Home Value Eggs and Strawberries : $400 Eggs 200/week for 48weeks ( /DZ : $3,000 Expenses from Laying Chickens - Feed : $1,358 - Other Expenses: $1,095 Depreciation : $4,180 Farm Interest Paid : $1,000 Feed on hand at the beginning 0.25 per LB) : $75 Ending Feed on hand ( ) : $25 Egg and Strawberry Cartons on hand : $25 (1) Use those items to prepare their second fiscal year s income statement. (2) After you are done with the income statement, calculate some financial efficiency ratios and (3) analyze their second year s performance by comparing the second year s ratios with the criteria farms are considered to be in a strong financial position as mentioned in (3).

2 (1) Prepare the Smith Acres Farm Income Statement Smith Acres Farm Income Statement Cash Income July 1, 2015 to June 30, 2016 Gross Income Expenses Plus Less Adjusted Farm Interest Paid Depreciation Total Expenses Net Farm Income

3 (2) Calculate the financial efficiency ratios. (Make sure that when you add four ratios up, it should equal 100 percent.) Net Farm Income Ratio (Net Income / Gross Income *100, %) : Operating Expense Ratio (Adjusted / Gross Income*100, %) : Interest Expense Ratio (Interest / Gross Income *100, %) : Depreciation Expense Ratio (Depreciation / Gross Income *100, %) : (3) What can you say about the second year s performance of the Smith Acres Farm (in terms of financial efficiency) based on their second year s income statement? (Suppose that on a typical basis, farms are considered to be in a strong financial position in the case that net farm income ratio is higher than 20%, operating expense ratio is less than 60%, depreciation expense ratio is less than 5%, and interest expense ratio is less than 10%.)

4 <Key for Balance Sheet Exercise> (1) Prepare the Smith Acres Farm Income Statement Cash Income Smith Acres Farm Income Statement July 1, 2015 to June 30, 2016 Strawberries U pick 3, /LB $6,300 Pre pick 5, /LB $14,850 Eggs 200/week for 48 weeks ( /DZ $3,000 Home value eggs and strawberries $400 Gross Income $24,550 Expenses Strawberry ½ acre Materials $5,194 Labor $3,209 Equipment $836 Laying Chickens Feed $1,358 Other Expenses $1,095 $11,692 Plus Feed on hand ( per LB) $75 Less Ending Feed on hand 0.25) $25 Egg and strawberry cartons on hand $25 Adjusted $11,717 Farm Interest Paid $1,000 Depreciation $4,180 Total Expenses $16,897 Net Farm Income $7,653

5 (2) Analyze the Income Statement. (Make sure that when you add 4 ratios up, it should equal 100 percent.) Net Farm Income Ratio (Net Income / Gross Income *100, %) : 7,653 / 24,550 *100 = % Operating Expense Ratio (Adjusted / Gross Income *100, %) : Interest Expense Ratio (Interest / Gross Income *100, %) : 11,717 / 24,550 *100 = % 4,180 / 24,550 *100 = % Depreciation Expense Ratio (Depreciation / Gross Income *100, %) : 1,000 /24,550 *100 = 4.07 % 100 % (3) What can you say about the second year s performance of the Smith Acres Farm (in terms of financial efficiency) based on their second year s income statement? (Suppose that on a typical basis, farms are considered to be in a strong financial position in the case that net farm income ratio is higher than 20%, operating expense ratio is less than 60%, depreciation expense ratio is less than 5%, and interest expense ratio is less than 10%.) Net Farm income Ratio: strong positon (31.17% >20%) Operating Expense Ratio: strong positon (47.73% < 60%) Interest Expense Ratio: weak position (17.03% > 5%) Depreciation Expense Ratio: strong position (4.07 <10%)