Farm Financial Management

Your Farm Income Statement

How much did your farm business Preparing the Statement ν Include total receipts from sales
earn last year? There are many ways The income statement is divided into of both raised livestock and market
to answer this question. two parts: income and expenses. Each livestock purchased for resale.
of these is further divided into a Remember not to subtract the
A farm income statement (sometimes section for cash entries and a section original cost of feeder livestock
called a profit and loss statement) is for noncash (accrual) adjustments. purchased in the previous year, even
a summary of income and expenses An example income statement is though you do this for income tax
that occurred during a specified shown at the end of this publication. purposes. Also include total cash
accounting period, usually the Blank forms for developing your own receipts from sales of breeding
calendar year for farmers. It is a income statement are available in livestock before adjustments for
measure of input and output in dollar publication FM 1824, Farm Financial capital gains treatment of income are
values. It offers a capsule view of the Statements. made. These are termed “gross sales
value of what your farm produced for price” on IRS Form 4797.
the time period covered and what it Most of the information needed to
cost to produce it. prepare an income statement can be ν Do not include proceeds from
found in common farm business outstanding USDA marketing loans
Most farm families do a good job records. These include a farm account in cash income even if you report
of keeping records of income and book or program, Internal Revenue these as income for tax purposes.
expenses for the purpose of filing Service (IRS) forms 1040F (Farm Grain under loan is part of your
income tax returns. Income figures Income and Expenses) and 4797 ending crop inventory and would be
from the tax return, however, may (Supplement Schedule of Gains and counted twice in the calculation of
not accurately measure the economic Losses), and your beginning and net income if it were included in cash
performance of the farm. Conse- ending net worth statements for the receipts as well.
quently, you need to have a clear year. If you use the IRS forms, you
understanding of the purpose of an will need to organize the information ν Do not include sales of land,
income statement, the information a bit differently to make allowances machinery, or other depreciable
needed to prepare the statement, and for capital gains treatment of breeding assets; loans received; or income from
the way in which it is summarized. stock sales, and the income from nonfarm sources in income.
feeder livestock or other items
Net farm income, as calculated by purchased for resale. Adjustments to Income
the accrual or inventory method, Not all farm income is accounted for
represents the economic return to Cash Income by cash sales. Changes in inventory
your contributions to the farm Cash income is derived from sales values can either increase or decrease
business: labor, management, and net of livestock, livestock products, the net farm income for the year.
worth in land and other farm assets. crops, government payments, tax Changes in the values of inventories
Cash net farm income also can be credits and refunds, crop insurance of feed and grain, market livestock,
calculated. It shows how much cash proceeds, and other miscellaneous and breeding livestock can result
was available for purchasing capital income sources. from increases or decreases in the
assets, debt reduction, family living, quantity of these items on hand or
and income taxes. changes in their unit values (see
Example 1). Adjusting for inventory
changes ensures that the value of

Your Farm Income

FM 1816 Statement
Revised 1
March 2000
farm products is counted in the Cash Expenses
year they are produced rather than All cash expenses involved in the
Example 2
Beginning inventory of fertilizer
the year they are sold. Subtract operation of the farm business during
was zero. Closing inventory
beginning of the year values from the business year should be entered
is worth $11,000. Fertilizer
end of the year values to find the into the expense section of the
purchases during the year were
net adjustment. income statement. These can come
$16,000, all paid for. The
from Part II of IRS Schedule F.
change in inventory is a positive
Example 1 Under livestock purchases include
$11,000. Even though $16,000
The beginning inventory of the value of breeding livestock as
is shown for cash expense, only
feeder pigs consists of 420 head well as market animals.
$5,000 ($16,000 – $11,000) is
valued at $75 each, or $31,500.
charged to the farm operation
Ending inventory is 450 head ν Do not include death loss of
during the year covered. The
valued at $50 each, or $22,500. livestock as an expense. This will be
$11,000 of fertilizer still unused
Inventory value decreased by reflected automatically by a lower
will be the beginning inventory
$9,000 even though the number ending livestock inventory value.
value for the following year.
of pigs on hand increased by
30 head. The decline in value ν Income tax and Social Security tax
per head more than offset the payments are considered personal Other expenses may be incurred
increase in numbers, and could expenses and should not be included in one year but not paid until the
have been due to lower market in the farm income statement, following year or later, such as
prices and/or lighter weight of unless the statement is for a farm accrued interest, farm taxes due,
the pigs. corporation. and other accounts payable. Record
accounts payable so that products or
Changes in the market values of land, ν Interest paid on all farm loans or services that have been purchased but
buildings, machinery, and equipment contracts is a cash expense, but not paid for are counted. However,
(except for depreciation) are not principal payments are not. do not include any items that already
included in the income statement appear under cash expenses. Subtract
unless they are actually sold. Ac- ν Do not include the purchase of the beginning total of these items
counts receivable and unpaid patron- capital assets such as machinery and from the ending totals to find the net
age dividends are included, however, equipment. Their cost is accounted adjustment.
because they reflect income that has for through depreciation. Land
been earned but not yet received. purchases also are excluded. The final expense item is deprecia-
tion, or the amount by which ma-
Home-used Production ν You may wish to exclude wages chinery, equipment, buildings, and
The value of livestock, livestock paid to family members, since these other capital assets decline in value
products, or other farm products also are income to the family. due to use and obsolescence. The
consumed by the family should be depreciation deduction allowed on
added into net income even though Adjustments to Expenses your income tax return can be used,
no cash was received. Some cash expenses paid in one year but you may want to calculate your
may be for items not actually used own estimate based on more realistic
until the following year. These depreciation rates. One simple
include feed and supply inventories, procedure is to multiply the market
prepaid expenses, and investments in value of these assets at the beginning
growing crops. Subtract the ending of the year by a fixed rate, such as
value of these from the beginning 10 percent. This way you can group
value to find the net adjustment (see similar items, such as machinery,
Example 2). rather than maintain separate records
for each item.

2 Farm Financial Management

If you include breeding livestock Capital Gains and Losses Other Financial Statements
under beginning and ending invento- Some years income is received from Two other financial statements
ries, do not include any depreciation the sale of capital assets such as land, are often used to summarize the
expense for them. machinery, and equipment. The sale results of a farm business. While
price may be either more or less than they are not as common as the net
The beginning and closing net worth the cost value (or basis) of the asset. income statement and the net worth
statements are a good source of For depreciable items the cost value is statement, they do provide useful
information about inventory values the original value minus the deprecia- financial information.
and accounts payable and receivable. tion taken. For land it is the original
Publication FM 1791, Your Net Worth value plus the cost of any nondepre- Statement of Cash Flows
Statement, provides more detail on ciable improvements made. The A statement of cash flows summarizes
how to complete a net worth state- difference between the sale value and all the cash receipts and cash expen-
ment. Publication FM 1824, Farm the cost basis is a capital gain or loss. ditures that were received or paid out
Financial Statements contains sched- Information for calculating capital during the accounting year. It is
ules for listing adjustment items for gains and losses can come from the sometimes called a flow of funds
both income and expenses. Use the depreciation schedule and/or IRS statement. Unlike the net income
same values that are shown on your Form 4797. statement, it does not measure the
beginning and ending net worth profitability of the business. It merely
statements for completing adjust- Sales of breeding livestock can be shows the sources and uses of cash.
ments to your net income statement handled two ways: (1) record sales The statement of cash flows is divided
for the year. and purchases as cash income and into five sections:
expenses, and adjust for changes in
Summarizing inventory, or (2) record capital gains ν cash income and cash expenses
the Statement or losses when animals are sold and
You have now accounted for cash include depreciation as an expense. ν purchases and sales of capital assets
farm income and cash expenses. You Either method can be used, but do
also have accounted for depreciation not mix them. ν new loans received and principal
and changes in inventory values of repaid
farm products, accounts payable, Net Farm Income
and prepaid expenses. You are now Add capital gains or subtract capital ν nonfarm income and expenses
ready to summarize two measures of losses from net farm income from
farm income. operations to calculate net farm ν beginning and ending cash on hand
income. This represents the income
Net Farm Income earned by the farm operator’s own If all cash flows are accurately
from Operations capital, labor, and management recorded, the total sources of cash
Subtract gross farm expenses from ability. will be equal to the total uses of cash.
gross farm revenue. The difference is If a significant difference exists, the
the net income generated from the records should be carefully reviewed
ordinary production and marketing for errors and omissions.
activities of the farm, or net farm
income from operations. An example of a statement of cash
flows is found at the end of this
publication.

Your Farm Income Statement 3

Statement of Owner Equity If these factors are recorded accu- Further Analysis
The statement of owner equity ties rately and added to the beginning net Net farm income is an important
together net farm income and the worth of the farm, the result will measure of the profitability of your
change in net worth. Net worth equal the ending net worth. farm business. Even more can be
will increase or decrease during the learned by comparing your results
accounting year based on three An example of a statement of owner with those for other similar farms.
factors: equity is found at the end of this Publication FM 1845, Financial
publication. Performance Measures for Iowa Farms,
ν net farm income (accrual), contains information about typical
income levels generated by Iowa
ν net nonfarm withdrawals (nonfarm farms. It also illustrates other impor-
income minus nonfarm expendi- tant measures and ratios that can help
tures), and you evaluate the profitability, liquid-
ity, and solvency of your own busi-
ν adjustments to the market value of ness over time.
capital assets (affects market value net
worth, only).

4 Farm Financial Management

Net Farm Income Statement
Name Cyclone Farm Year

Income
Cash Income Income Adjustments Ending Beginning
Sale of livestock, other bought for resale Crops held for sale or feed (Sched. A) 228,166 123,420
Sales of market livestock, grain, produce 271,028 Market livestock (Sched. E) 31,920 37,120
Cooperative distributions paid 4,000 Accounts receivable (Sched. G) 7,966 5,445
Agricultural program payments 20,500 Unpaid coop. distributions (Sched. H)
Crop insurance proceeds Breeding livestock (Sched. I) 25,250 22,750
Custom hire income
Other cash income 587 Subtotal of Adjustments b. 293,302 c. 188,735
Sales of breeding livestock 14,568 d. Value of Home-used Production
a. Total Cash Income $ 310,683 e. Gross Farm Revenue (a + b – c + d) $ 415,250

Expenses
Cash Expenses Expense Adjustments Beginning Ending
Car and truck expenses Investment in growing crops (Sched. B) 13,028 22,923
Chemicals 41,560 Commercial feed on hand (Sched. C) 41,460 31,230
Conservation expenses Prepaid expenses (Sched. D) 20,387 31,500
Custom hire 6,589 Supplies on hand (Sched. F) 10,800 15,548
Employee benefits Ending Beginning
Feed purchased 79,150 Accounts payble (Sched. N) 23,523 1,126
Fertilizer and lime 29,360 Farm taxes due (Sched. O)
Freight, trucking Accrued interest (Sched. P, Q) 17,720 13,360
Gasoline, fuel, oil 14,683 Subtotal of Adjustments g. 126,918 h. 115,687
Insurance 4,306
Interest paid 22,845 i. Depreciation (Sched. J, K) 8,703
Labor hired j. Gross Farm Expenses (f + g – h + i) $ 375,807
Pension and profit-share plans
Rent or lease payments 63,560
Repairs, maintenance 18,225 k. Net Farm Income from Operations (e–j) $ 39,697
Seeds, plants 27,817
Storage, warehousing
Supplies purchased 19,850 l. Sales of Farm Capital Assets 860
Taxes (farm) 956 m. Cost Value of Items Sold (Sched. J, K, L) 0
Utilities 935 n. Capital Gains or Losses (l – m) 860
Veterinary fees, medicine, breeding 21,560
Other cash expenses 863
Livestock purchased 3,360
f. Total Cash Expenses $ 355,619 o. Net Farm Income (k + n) $40,557

Your Farm Income Statement 5

Statement of Cash Flows
Name Cyclone Farm Year

Cash Farm Income and Expenses (Operating) Cash Inflows Cash Outflows
Total Cash Income (Line a, Net Farm Income Statement) $ 310,683
Total Cash Expenses (Line f, Net Farm Income Statement) $ 355,619

Capital Assets (Investing)

Sales of Capital Assets (Line l, Net Farm Income Statement) $ 860
Cost of Purchases and Trades (Sched. J, K, L) $ 17,366

Loans (Financing)
New Loans Received $ 170,563
Principal Paid $ 110,806

Nonfarm
Nonfarm Income (wages, rents, interest, etc.) $ 27,825
Nonfarm Expenditures (family living, income tax, etc.) $ 39,901

Cash on Hand (Farm and Nonfarm Cash, Checking, Savings)

Beginning of Year (Net Worth Statement) $ 20,872
End of Year (Net Worth Statement) $ 7,111

Total $ 530,803 $530,803

If all cash transactions are included correctly, the totals for the two columns will be approximately equal.

6 Farm Financial Management

Statement of Owner Equity
Name Cyclone Farm Year

Cost Value Market Value

a. Farm Net Worth, Last Year $ 256,820 $ 477,049
(Line d, Net Worth Statement)

b. Change in Market Value of Capital Assets $ (1,645)

(Line e, Net Worth Statement, market value $27,444 minus cost value $29,089 )

c. Net Farm Income $ 40,557 $ 40,557

(Line o, Net Farm Income Statement) same for cost and market

d. Net Nonfarm Withdrawals $ (11,468) $ (11,468)

(Statement of Cash Flows, nonfarm income $27,825 minus nonfarm expenditures $39,293, same for cost and market
minus value of home-used production $0 , line d, Net Farm Income Statement)

e. Farm Net Worth, This Year $ 285,909 $ 504,493

(Line c, Net Worth Statement)

Line e should approximately equal the sum of lines a, b, c, and d.

Your Farm Income Statement 7

Prepared by William Edwards, extension And justice for all Issued in furtherance of Cooperative Extension
economist. The U.S. Department of Agriculture (USDA) work, Acts of May 8 and June 30, 1914, in
prohibits discrimination in all its programs and cooperation with the U.S. Department of
File: Economics 1-1 activities on the basis of race, color, national Agriculture. Stanley R. Johnson, director,
origin, gender, religion, age, disability, political Cooperative Extension Service, Iowa State
[A] beliefs, sexual orientation, and marital or family University of Science and Technology,
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programs.) Many materials can be made
available in alternative formats for ADA clients.
To file a complaint of discrimination, write
USDA, Office of Civil Rights, Room 326-W,
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Avenue, SW, Washington, DC 20250-9410 or
call 202-720-5964.

8 Farm Financial Management