The BASICS of FINANCIAL STATEMENTS

For Agricultural Producers

EXERCISES

Authors:
James McGrann
Francisco Abell
Doug Richardson
Christy Waggoner

Department of Agricultural Economics

Texas Cooperative Extension
Texas A&M University
May 19, 2003

The Basics of Financial Statements Exercises

Instructions
This section contains a series of questions and exercises used to gain a better
understanding of the basic concepts behind financial statements. The questions and
exercises addressed in this section focus on the four main financial statements: (1)
Balance Sheet; (2) Income Statement; (3) Statement of Cash Flows; (4) Statement of
Owners Equity. Each of these statements combine the tools that can be used to evaluate
the performance and provide other useful information to better guide decision making in
a farm or ranch business.
The first set of exercises is a list of multiple choice and fill in the blank questions
that help identify the main components of the four different financial statements. These
questions should also allow the user to understand what the differences and similarities
are between each of the statements and how this can serve as a basis for communication
about the performance of a business.
The second set of exercises allow the user to piece together an actual set of
financial statements by using the information provided from an example ranch business.
The West Texas Ranch, in this case, has a list of accounts associated with each of the four
main financial statements. It is required that the user places each account into its proper
classification within each financial statement. The last page of this exercise contains the
information necessary to calculate the performance ratios of the business. The basic goal
of this exercise is to be able to identify proper placement of each of the accounts
associated with their respective financial statements. If done properly, the numbers used
in calculating the financial ratios should match up with some of the ones generated from
the financial statements.

Multiple Choice and Fill in the Blank Questions

1) Complete the following sentences.
a) What the business has:
.
b) How much the business owes: ________.
c) What the business is worth: _________.
2) Circle each of the following equations that are correct. (A = Assets, L = Liabilities, E
= Equity)
a) E = A L
b) A = E + L
c) A = E L
d) E = A + L
e) L = A E
Table 1.
Assets

Liabilities

Current

Non-Current

Accrued Expenses
Long Term Investments.
Accrued Interest - Non Real Estate Loans and Notes
Raised Breeding Stock
Investments in growing and finishing livestock
Government Payment Receivable
Credit Card/ Oper. Loan/ Curr. Note Payable
Purchased Breeding Stock.
Prepaid Expenses
Crops/Raised Feed for Sale.
Cash & Checking
Breeding Horses
Accounts Receivable.
Principal Due - Non Real Estate Loans and Notes
Savings and Time Deposits
Income Taxes Payable
Accounts Payable
Principal Balance- Non Real Estate Loans and Notes

3) In the table above, mark which of the accounts are assets or liabilities, and if they are
current or non-current.
4) How are assets displayed in the asset section of the balance sheet?
a) Ascending order of liquidity
b) Descending order of amount
c) Ascending order of amount
d) Descending order of liquidity
e) By order of practicality

5) Which account identifies money owed to the business but has yet to be collected.
a) Cash and Checking
b) Supply, Prepaid Expenses and Leases
c) Investments, Bonds and Securities
d) Accounts Receivable
e) Saving and Time Deposits
6) Circle each of the following that are included as Current Inventory Assets?
a) Livestock for Sale
b) Crops / Raised Feed for Sale
c) Purchased Breeding Stock
d) Vehicles, Machinery & Equipment
e) Raised or Purchased Feed, intended to be used in livestock production.
7) Which describes prepaid expenses?
a) Supplies Received
b) Bills paid, but services not yet received
c) Current Assets that can be turned into cash
8) Complete the following sentences that describe the Current Asset Cycle.
a) Inventory when sold becomes _______.
b) Accounts receivable upon collection becomes _________.
c) Cash buys inputs that produce ________.
9) Which of the following is the main characteristic that describes a non-current asset?
a) Represent a great amount of money for the business.
b) Converted into cash in less than 12 months.
c) Not converted into cash during the normal course of the business.
d) Assets that are intended for sale.
10) How is a non-current asset reported on the balance sheet?
a) Non Current Asset at cost Year depreciation
b) Non Current Asset at market value Year depreciation
c) Non Current Asset at market value Accumulated depreciation
d) Non Current Asset at cost Accumulated depreciation
11) Complete the following definitions.
a) ________ depreciation (on the balance sheet) is the _________ of all the
depreciation charges taken since the asset was _______ .
b) Depreciation charges taken in a period ________ profits for the period, but do not
_________ cash.

12) How are liabilities categorized for presentation on the balance sheet? (Circle all that
apply)
a) To whom the debt is owed.
b) Ascending order of liquidity
c) Descending order of liquidity
d) By order of practicality
13) Complete the following sentences. (Use increase or decrease)
a) Current liabilities decrease, and/or current assets increase, when working capital
________ in the normal course of the business.
b) Current assets decrease, and/or current liabilities increase, when working capital
________ in the normal course of the business.
14) Which of the following are components of owners equity? (Circle all that apply)
a) Retained Earnings
b) Capital Contributions
c) Land
d) Cash
15) Which of these equations is correct for Retained Earnings (RE)?
a) RE = Sum of all profits + Capital contributions Capital Distributions
b) RE = Sum of all profits Sum of all dividends or withdrawals
c) RE = Equity + Sum of all dividend
d) RE = Sum of all profits + Sum of all dividends or withdrawals
16) Complete the following sentences. (Use increase or decrease)
a) The value of owners equity ________ when the business makes a profit, thereby
increasing retained earnings; or assets ________ more than liabilities.
b) The value of owners equity ________ when the business has a _________ ,
thereby lowering retained earnings; or assets _______ more than liabilities.
17) Which of these statements are true about the income statement?
a) It includes cash and non-cash values.
b) Is calculated after taxes.
c) Used to measure the change of Owner Equity.
d) Used to measure Net Income.
e) Government payments would not be included
f) It enables the farm operator to know the sources of income.
18) How do we organize the income statement?
a) Assets and liabilities.
b) Currents and non current assets, and current and non-current liabilities.
c) Cash for operations, cash for investments and expenses.
d) Revenues and expenses

19) Complete the following equation. (Using +, - or =)

What is sold in the period
( )
What it cost to make
( )
General & Administrative expenses for the period
( )
Income for the period
20) Which of these items belong to the Cash Receipt Account? (Circle all that apply)
a) Inventory & Accounts Receivable Change
b) Raised Livestock Products
c) Steers transferred out to another business entity
d) Cash received from the sale of products
e) Vet services
f) Gain (Loss) on Sale/Death of Breeding Livestock
g) Agricultural Program Payments
h) Crops/Raised Feed Sales.
21) Which of these accounts would be included in calculating the total Operating
Expense? (Circle all that apply)
a) Inventory change (Expenses).
b) Gains or Losses from breeding stock.
c) Repairs and Maintenance.
d) Feed.
e) Depreciation
f) Accounts Receivable
22) Which of these equations is correct?
a) Net income from operations = Gross Revenue Operating Expenses + Interest
b) Net income from operations = Gross Revenue Operating Expenses + Capital
Gain or Losses Taxes
c) Net income from operations = Gross Revenue Operating Expenses Interest
d) Net income from operations = Gross Revenue Operating Expenses + Interest +
Capital Gain or Losses Taxes
23) Which of these equations is correct on the Statement of Cash Flows?
a) Net cash from financing = New borrowings Debt Payments Interest Expense
b) Net Cash from operations = Receipts Expenses Interest Expenses Taxes
c) Net Cash from investing = Sales Purchases Expenses
d) Net Cash from investing = Sales Purchases Depreciation
24) Complete the following equation with (+ / ) signs that are missing.
Cash on hand at the start of the period ( ) Cash received in the period (
Cash spent during the period = Cash on hand at the end of the period.

25) In which financial statements do non-cash transactions have an effect? (Circle all that
apply)
a) Balance Sheet
b) Income Statement
c) Statement of Cash Flows
d) Statements of Owners Equity
26) Based on the Statement of Cash Flows, label each of the followings as a source of
Cash Inflows (CI) or Cash Outflows (CO).
a) Receiving payments from customers. _____
b) Borrowing money. _____
c) Paying interest and principal on debt. _____
d) Paying for Supplies and employees. _____
e) Making major capital investment in long-lived productive assets like breeding
stock or farm machinery. _____
f) Paying Income Taxes. ______
g) Sales of breeding stock. ______
27) Cash receipts, cash expenses, cash interest expenses and cash tax expenses on the
Statement of Cash Flow must match data with which other financial statements?
a) Balance Sheet
b) Income Statement
c) Statement of Owner Equity
28) Complete the following sentence.
The Statement of Owners Equity reconciles the _______ and _______ owners
equity through determining the changes in _______ , and net change in capital
contributions and distributions.
29) Beginning owner equity on the Statement of Owners Equity must match data with
which other financial statements?
a) Balance Sheet
b) Income Statement
c) Statement of Cash Flows
30) The ending owners equity on the Statement of Owners Equity could be compared to
the owners equity calculated from the .
a) Balance Sheet
b) Income Statement
c) Statement of Cash Flows

31) From which of the main financial statements give the data required to calculate the
following ratios?
a) Current Ratio _____.
b) Return on Equity _____.
c) Debt-to-Asset Ratio _____.
d) Equity-to-Asset Ratio _____.
e) Return on Assets _____.
32) The following definitions describe either profitability, liquidity or solvency. Label
each of the following definitions with the correct performance measure.
a) Ability of the business to generate sufficient cash to meet cash demands without
disturbing the on-going operation of the business. _______
b) Ability of the business to generate income in excess of expenses. _______
c) Ability to repay all financial obligations if all assets were sold and ability to
continue operations as a viable business after a financial adversity. _______

The West Texas Ranch

BASIC BALANCE SHEET
ASSETS

Current Assets

A
B
C
D
A+B+C+D=E

Net Non-Current Assets

F
G
H
(F - G) + H = I

Total Assets

E+I=J

Current Liabilities

K
L
M
N
K+L+M+N=O

Non-current Liabilities

P
Q
P+Q

Total Liabilities

O + P+ Q = R

J-R=S

R+S=T

LIABILITIES

EQUITY
Owner's Equity
Total Liabilities & Equity

Accounts Payable
Accounts Receivable
Accrued expenses
Inventory
Non Current Liabilities
Land Debt
Current Portion of debt
Non Current Assets at cost
Cash
Accumulated Depreciation
Prepaid expenses
Land
Income Taxes Payable

West Texas Ranch

$
$
$
$
$
$
$
$
$
$
$
$
$

10

1,700.00
1,000.00
2,900.00
10,000.00
176,371.00
9,737.00
496,380.00
77,526.00
71,870.00
2,000.00
1,500,000.00
-

BASIC INCOME STATEMENT

GROSS REVENUE

TOTAL

Gross Revenue

A
B
C
A+B+C=D

E
F
G
H
I
J
K
E+F+G+H+I+J+K=L

M
D - (L + M) = N

EXPENSES

Total Operating Expense

Net Income from Operations

O
P
NET INCOME

N+O-P=Q

West Texas Ranch

Total
Utilities
Depreciation
Non Cash Transfer out
Capital Gains (Losses)
Labor
Veterinary
Taxes

$
$
$
$
$
$
$

10,193.00
32,870.00
48,000.00
(13,364.00)
48,000.00
5,825.00
10,500.00

Inventory Change (Expenses)

Interest Expense
Repairs and Maintenance
Cash Receipts
Feed
Inventory & Accounts Receivable Change

$
$
$
$
$
$

5,470.00
18,454.00
38,629.00
175,838.00
23,400.00
2,900.00

11

BASIC STATEMENT OF CASH FLOWS

CASH FROM OPERATIONS

TOTAL

Net Cash From Operations

A
B
C
D
A-B-C-D=E

F
G
F-G=H

I
J
I-J=K

CASH FROM INVESTING

Net Cash From Investing

CASH FROM FINANCING

Net Cash From Financing

L
M
NET CASH FLOW

E+H+K-L+M=N

West Texas Ranch

Total
Purchases
Debt Payments
Interest Expenses
Cash Contributions
Taxes
Cash Withdrawals
Sales
Expenses

$
$
$
$
$
$
$
$

28,000.00
8,933.00
18,464.00
10,500.00
34,636.00
131,517.00

New Borrowings
Receipts

$
$

175,838.00

12

BASIC STATEMENT OF OWNER'S EQUITY

RETAINED EARNINGS

TOTAL

Net Change in Retained Earnings

A
B
A-B=C

E
F
G
E+F+G=H

I
J
K
I+A
J+K=L

CAPITAL CONTRIBUTIONS

Total
CAPITAL DISTRIBUTIONS

RATIOS

RETURN ON ASSETS (ROA)

Total

B
H -C
L=M
(A + B) / C = D

Net Change in Capital

Return on Assets

OWNER EQUITY RECONCILIATION

N
C +AM = O
N +EO = P

RETURN ON EQUITY
Total Equity Change
Ending Owner Equity

Return on Equity
CURRENT RATIO

A/E=F

$
$

West Texas Ranch

G
H
G/H=I

Current Ratio
Withdrawals
Beginning Owner Equity
DEBT-TO-ASSET
RATIO
Capital Distributions
Cash & Investment

Total

$$
$

J
C
J/C=K

Building, Machinery & Equipment

Debt-to-Asset Ratio
Land
Capital Contribuitons
EQUITY-TO-ASSET RATIO
Cash & Investment
Building, Machinery & Equipment
Land
Equity-to-Asset Ratio

E
C
E/C=M

Net Income

- 1,760,095.00
-

$
$
$

$
$
$$

30,000.00
- -

20,033.00

West Texas Ranch

Total Current Assets
Total Current Liabilities
Total Liabilities
Total Assets
Total Equity
Net Income from Operations
Interest Expenses

13

$
$
$
$
$
$
$

Total
83,426.00
11,437.00
197,808.00
2,007,936.00
1,810,128.00
80,897.00
18,454.00

14