Colorado Agriscience Curriculum s2

Ag Education II Colorado Agriscience Curriculum

Section: Intro to Agribusiness II

Unit: Using data to manage the agricultural business or employment experience

Lesson Title: Completing and Analyzing the Balance Sheet

Colorado Ag Standard 10.1 – The student will utilize data to manage an agricultural business or Education Standards employment experience. and Competencies Competency 1-4 – Completing and analyzing the balance sheet

Colorado Model Math: 6.1 Content Standard(s):

Student Learning 1. The student will learn how to complete the financial balance sheet Objectives: 2. The student will calculate and analyze net worth statements

3. The student will calculate and interpret financial ratios from a balance sheet

Time: Two fifty minute periods.

Resource(s): Agribusiness: Decisions and Dollars by Jack Elliot, Delmar Publishing.

Farm and Ranch Business Management by John Deere Publishing

Italicized words are instructions to the teacher; normal style text is suggested script. Instructions, Tools, Equipment, and LCD projection equipment connected to computer to show PowerPoint as well as balance sheet Supplies: examples (printed and computerized). A sample balance sheet is included with this lesson. You may want to print PowerPoint handouts for the students instead of having them write all the notes. Also included is a balance sheet assignment and key.

Interest Approach: Rough Draft A – a day or two ahead of time, collect small farm toy type figures and/or actual items that can represent various assets and liabilities. To introduce the lesson, ask students to group the items into 4 different categories based on similarities and what they have in common. This will start students visualizing items that fit into the current and non- current and asset and liability groups of a balance sheet.

Objective 1: The student will learn how to complete the financial balance sheet

Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 1 1. What are the four major categories needed to complete the balance sheet?

a. Current assets – items that can be used or sold and converted to cash within one year, without disrupting the business

b. Non-current assets – items used to produce a product, not sold within a year.

c. Current liabilities – debt payable with one year

d. Non-current liabilities – debt that is due beyond one year

2. List multiple examples of current assets, non-current assets, current liabilities, and non-current liabilities:

a. Current assets – cash, checking accounts, savings accounts, stocks, life insurance, market livestock, harvested and growing crops, accounts receivable, inventory purchased for resale, consumable supplies

b. Non-current assets – breeding livestock, equipment, machinery, buildings, land, improvements to land (fences, etc.).

c. Current liabilities – accounts payable, depreciation, interest, taxes, current portion of principal from non-current debt, operating loans

d. Non-current liabilities – debt on non-current assets, mortgages, real estate debt.

3. What should be done to complete filling out the balance sheet?

a. Accurately list the value of all assets and liabilities in the appropriate categories.

b. Current assets are listed first followed by non-current assets, current liabilities and non-current liabilities.

c. There are two ways to assign valuation for the assets and liabilities:

 Cost Valuation – better evaluation of performance

 Market Valuation – truer representation of asset values

d. Add to get a total dollar value in each of the four categories as well as the value of TOTAL ASSETS and TOTAL LIABILITIES.

e. Be sure to include the date of the balance sheet.

f. The ending balance sheet for one year is the beginning balance sheet for the next year.

Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 2 Objective 2: The student will calculate and analyze net worth statements

1. After completing the balance sheet, Net Worth (also called Owner’s Equity) can be calculated.

Net Worth = Total Assets – Total Liabilities

2. If Net Worth is positive, then total assets exceed total liabilities.

3. If Net Worth is negative, then debt is greater than the assets

4. Calculate Net Worth from the following numbers:

Current Assets = $5,432 Current Liabilities = $1,234

Non-current Assets = $246,810 Non-current Liabilities = $135,790

Solution: Total Assets = $252,242 -Total Liability = $137,024 Net Worth = $115,218

5. What are two ways to increase net worth?

a. Increase assets

b. Decrease liability

Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 3 Objective 3: The student will calculate and interpret financial ratios from a balance sheet

1. Explain liquidity and how it is measured.

a. Liquidity is the ability of a business to convert assets to cash quickly

b. It can be measured two ways:

 Working Capital (current assets – current liabilities)

 businesses strive for a positive working capital figure

 business size has a large impact on working capital

 Current Ratio (current assets / current liabilities)

 a ratio of 1.5 to 1 indicates flexibility to withstand business crises

 the higher the ratio, the more liquid the business

2. What is solvency and how is it measured?

a. a business is solvent if total assets exceed total liabilities, therefore, solvency is the ability to pay debts or liabilities.

b. solvency can be measured by three ratios:

 Debt to Asset Ratio (total liabilities / total assets)

 measures proportion of total assets owed to creditors

 a ratio greater than .50:1 is risky

 Equity to Asset Ratio (net worth / total assets)

 also called the percent ownership ratio

 the higher the ratio, the more capital supplied by owner

 Debt to Equity Ratio (total liabilities / net worth)

 also called the leverage ratio

 less than 1:1 is preferred

3. Another measure of solvency is a Net Capital Ratio – also called Non-current Ratio

a. Non-current Ratio (non-current assets / non-current liabilities)

Review/Summary: Review this lesson in form of the Jeopardy Game Show. Name an asset or liability, students must respond in the form of a question like, “What is current asset.” Questions could also be asked about ratios, liquidity, and solvency.

Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 4 Application-- 1. Complete the Balance Sheet Assignment (attached). Extended Classroom Activity: 2. Using an Excel spreadsheet, have students create a balance sheet that will automatically calculates net worth and the various financial ratios. This will work much better if Standard 9.3, lesson 3-3, Using Spreadsheets, has been taught and mastered.

Application--FFA Have students complete a balance sheet for the FFA Chapter. Activity:

Application--SAE Instruct students to complete a balance sheet for their SAEP record book. Activity:

Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 5 Evaluation: 1. Give one example each of a current asset, non-current asset, current liability, and non- current asset. (4 points) 25 points

2. Current assets and liabilities: (1 point)

a. are usually associated with a time frame of 30 days

b. have to be less than non-current assets and liabilities

c. are usually associated with a time frame of less than one year

d. have very little to do with the net worth statement

3. How is net worth calculated? (2 points)

4. If Net Worth increased from this year to last year, which of the following could have happened. (circle all that apply) (2 points)

a. total assets increased

b. total liabilities increased

c. total liabilities decreased

d. total assets decreased

5. True or False – Owner’s Equity and Net Worth are the same thing. (1 point)

6. True or False – Working Capital is current assets divided by current liabilities (1 point)

7. True or False – A businesses ability to pay it’s debts is called liquidity (1 point)

8. True or False – The Net Capital Ratio is one measure of solvency (1 point)

Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 6 9. True or False – A Debt to Equity Ratio of less than 1:1 means total liabilities are less than net worth. (1 point)

10. What does a Debt to Asset Ratio of greater than 1:1 mean? (1 point)

a. the amount of liabilities and assets are equal

b. there are more assets than liabilities

c. the business has moderate to low financial risk

d. there are more liabilities than assets

11. The larger the Equity to Asset Ratio: (1 point)

a. the more money a business owes to creditors

b. the more capital supplied by the owner

c. the higher leveraged the business is

d. the higher in liquidity the business is

12. Use the following information to make the calculations below. (9 points)

Current Assets = $15,000 Current Liabilities = $5,000

Non-current Assets = $30,000 Non-current Liabilities = $10,000

Total Assets ______Total Liabilities ______

a. Net Worth –

b. Working Capital –

c. Current Ratio –

d. Debt to Asset Ratio –

e. Equity to Asset Ratio –

f. Debt to Equity Ratio –

g. Non-Current Ratio –

Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 7 Balance Sheets 2000 - 2004 Tucker farm business

12/31/00 12/31/01 12/31/02 12/31/03 12/31/04 Assets Current Assets Bank Balance $ 62,218$ 141,285$ 94,542$ 99,661$ 117,793 Savings & CD's $ 50,000$ 53,514$ 55,056$ 56,176$ 50,000 Hedging Account $ $ - $ - $ - $ - - Marketable Stocks & Bonds $ $ - $ - $ - $ - - Accounts Receivable $ 9,088$ 7,653$ 21,124$ 8,376$ 3,900 Crops & Feed Inventory $ 123,628$ 168,157$ 105,317$ 163,010$ 127,965 Market Livestock Inventory $ 61,205$ 49,430$ 48,077$ 50,839$ 64,590 Prepaid Expenses $ 15,278$ $ - - $ 19,234$ 8,257 Non-Farm Business/Other $ $ - $ - $ - $ - - Total Current Assets 321,417 420,039 324,116 397,296 372,505

Non Current Assets Machinery, Buildings and Land $ 782,630$ 768,480$ 833,602$ 626,546$ 659,201 Total Non-Current Assets 782,630 768,480 833,602 626,546 659,201

Total Farm Assets $1,104,047 $1,188,519 $1,157,718 $1,023,842 $1,031,706

Liabilities Current Liabilities Accounts Payable w/Merchants $ 1,029$ 1,206$ 1,284$ 1,829$ (50) Lease Payment $ $ - $ - $ - $ - - Feed Accounts Payable/FSA $ $ - $ - $ - $ - - CCC Loans $ $ - $ - $ - $ - - Operating/Short Term Notes $ $ - $ - $ - $ - - Est. Accrued Tax Liability (Income &$ SE) $ - $ - $ - $ - - Accrued Interest $ $ - $ - $ - $ - - Principal Due Within 12 Months Intermediate Notes $ $ - $ - $ - $ - - Long Term Notes $ $ - $ - $ - $ - - Total Current Liabilities 1,029 1,206 1,284 1,829 -50

Non-Current Liabilities $ -$ -$ -$ -$ - Total Non-Current Liabilities $0 $0 $0 $0 $0

Total Farm Liabilities $1,029 $1,206 $1,284 $1,829 -$50

Net Worth (Equity) $1,103,018 $1,187,313 $1,156,434 $1,022,013 $1,031,756

Taken from the 2005 National FFA Farm Business Management CDE

Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 8 Balance Sheet Assignment

On the form below, complete a market value balance sheet by filling in each item listed as either a current or non- current asset, or a current or non-current liability.

December 31, 2005

Crop Inventory $40,149 Machinery and Equipment $121,093 Accounts Receivable $5,100 Operating Loan $61,000 Breeding Livestock Loan $37,223 Checking Account $2,620 Breeding Livestock – Dairy $170,800 Real Estate Debt $127,176 Buildings and Improvements $86,416 Current Portion of Debt $17,921 Land – 2 quarter sections $78,000 Market Steers $27,170 Account Credit at COOP $9,300

Balance Sheet as of Dec. 31, 2005

Current Assets: Current Liabilities:

Total Current Assets:______Total Current Liabilities: ______

Non Current Assets: Non-Current Liabilities:

Total Non Current Assets: ______Total Non Current Liabilities: ______

Total Assets: ______Total Liabilities: ______

Net Worth: ______

Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 9 Calculate the following: (show your work)

1. Working Capital

2. Current Ratio

3. Debt to Asset Ratio

4. Equity to Asset Ratio

5. Debt to Equity Ratio

6. Net Capital Ratio

Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 10 KEY for Balance Sheet Assignment

Total Current Assets: $84,339 Total Current Liabilities: $78,921

Total Non Current Assets: $456,309 Total Non Current Liabilities: $164,399

Total Assets: $540,648 Total Liabilities: $243,320

Net Worth: $297,328

Calculate the following: (show your work)

1. Working Capital = $5,418

2. Current Ratio = 1.07 to 1

3. Debt to Asset Ratio = .45 to 1

4. Equity to Asset Ratio = .82 to 1

5. Debt to Equity Ratio = .55 to 1

6. Net Capital Ratio = 2.78 to 1

Unit 1, Lesson 4: Completing and Analyzing the Balance Sheet 11