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Group Title: Circular ; 657
Title: Linking the financial statements
CITATION THUMBNAILS PAGE IMAGE ZOOMABLE
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Permanent Link: http://ufdc.ufl.edu/UF00067078/00001
 Material Information
Title: Linking the financial statements
Series Title: Circular
Physical Description: 4 p. : ; 23 cm.
Language: English
Creator: Van Blokland, P. J
Publisher: Florida Cooperative Extension Service
Place of Publication: Gainesville Fla
Publication Date: 1987?
 Subjects
Subject: Financial statements   ( lcsh )
Genre: government publication (state, provincial, terriorial, dependent)   ( marcgt )
non-fiction   ( marcgt )
 Notes
Bibliography: Includes bibliographical references (p. 4).
Statement of Responsibility: P.J. van Blokland.
Funding: Circular (Florida Cooperative Extension Service) ;
 Record Information
Bibliographic ID: UF00067078
Volume ID: VID00001
Source Institution: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: oclc - 21349636

Table of Contents
    Historic note
        Unnumbered ( 1 )
    Front Cover
        Front Cover
    Table of Contents
        Table of Contents
    Main
        Page 1
        Page 2
        Page 3
        Page 4
    Back Cover
        Back Cover
Full Text





HISTORIC NOTE


The publications in this collection do
not reflect current scientific knowledge
or recommendations. These texts
represent the historic publishing
record of the Institute for Food and
Agricultural Sciences and should be
used only to trace the historic work of
the Institute and its staff. Current IFAS
research may be found on the
Electronic Data Information Source
(EDIS)

site maintained by the Florida
Cooperative Extension Service.






Copyright 2005, Board of Trustees, University
of Florida





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Contents


Page
Background .................. ................ .. ........................... 1

Linking the Four Statements ...................... .................. .................. 1

Linking the Balance Sheets with the Income Statement .................................... 2

Linking the Balance Sheet and Income Statement
with the Statement of Change in Financial Position .......................................3

Linking the Balance Sheet with the Cash Flow ............................................ 3

Linking the Income Statement with the Cash Flow ........................................ 4

Final Comments .......................... ......... ......................... 4

References ................. ..................................... ..............4





























The Author
P.J. van Blokland is Associate Professor, Food and Resource Economics Department, Institute of Food
and Agricultural Sciences, University of Florida, Gainesville, FL 32611.









Linking the Financial Statements
P.J. van Blokland


Background
This publication is one in a series outlining the
four basic financial statements used in business
today. These statements are the balance sheet, the
income statement, the statement of change in
financial position, and the cash flow. This publica-
tion shows how all these statements link together.
A sixth publication in the series uses the informa-
tion provided by the statements for a simple
business analysis.
The series assumes no prior experience with
financial statements. It is based on a popular
system developed by Frey and Klinefelter called
"Coordinated Financial Statements for Agriculture"
(1). Farmers, ranchers, nursery and grove operators,
extension agents, agricultural lenders, and students
should find the series of interest.
The reader should have a good grasp of the infor-
mation presented in the publications dealing with
the individual statements before tackling this one.
Much of the detail, particularly concerning the
schedules, were discussed in these publications.
The publications in the series are listed in the
reference section (2, 3, 4, 5, 6).


Linking the Four Statements
The four financial statements fit together as
shown in Figure 1. The key to understanding their
fit is to look at the dates.


Realize first that there are two sorts of financial
statements, namely, stock and flow statements. The
balance sheet is a stock statement in that it shows
a picture of the business on one day only. The
other three are flow statements. They cover a
period of time, in this case a year. Note that the
appropriate balance sheets for 1985 and 1986 end
on the same date as the cash flow and the income
statement.
We are looking at three different time periods in
Figure 1. Assume that we are now in the present,
i.e., early January 1986. We use the past December
31, 1984 balance sheet and the past 1985 income
statement to produce the present or December 31,
1985 balance sheet. But good management is more
concerned with what will happen in the future,
rather than what has happened in the past. So this
past and present information is used in the follow-
ing manner.
First, we produce a cash flow showing the timing
and amounts of expected monthly cash revenue
and expenses for the whole of 1986. Second, this
cash flow and the 1985 balance sheet is used to
construct a pro forma or future balance sheet. This
pro forma balance sheet predicts where we expect
to end the 1986 year in terms of assets, liabilities,
and net worth. Third, the cash flow and the 1985
and 1986 balance sheets are used to complete the
pro forma or future income statement for 1986.


Figure 1: Linking the financial statements


PAST


PRESENT


FUTURE


e Sheet Balance Sheet 1- Cash Flow
1, 1984 Dec. 31, 1985 Jan. Dec. 31, 1986


L Income Statement
Jan. Dec., 1985 Inc
I Ja

Statement of Change in
Financial Position


Jan. Dec., 1985


0o


SPro Forma
Balance Sheet
Dec. 31, 1986

Iro Forma
me Statement


n. Dec., 1986


Balanc
Dec. 31









Figure 2: Example of linking balance sheets with the income statement ($,000)

Balance Sheet Balance Sheet
December 31, 1984 December 31, 1985

LIABILITIES LIABILITIES
ASSETS AND NET WORTH ASSETS AND NET WORTH

Liabilities 700 Liabilities 800
Assets 1,000 Net Worth 300 Assets 1,200 Net Worth 400
Total 1,000 Total 1,000 Total 1,200 Total 1,200


Income Statement
January 1 to December 31, 1985
Net Income $150
Minus payments of $50, gives residual earnings of $100


Good management attempts to predict and deal
with what the future might bring. Things probably
will not turn out as expected, so we need to modify
these predictions as we go through the year, using
the monitoring work sheet in the cash flow. This
worksheet has six columns for each month. These
columns show the predicted cash inflows and out-
flows, the actual results, and the differences
between these two, both monthly and year-to-date.




Linking the Balance Sheets
with the Income Statements
Let's use three examples to illustrate the linkage
between balance sheets and income statements.


Example 1
Assume in Figure 2 that we produced the
December 31, 1985 balance sheet from the
December 31, 1984 balance sheet and the January
1 to December 31, 1985 income statement. The
linkage is simple. The 1984 modified cost net worth
plus the 1985 residual earnings must equal the
1985 modified cost net worth. For example, take
the 1984 net worth of $300, add residual earnings
for 1985, or $100, and this gives us the net worth
on December 31, 1985, of $400.
Residual earnings are what remain after net in-
come has been used. Net income is what is left to


pay principal on debts, to invest in the farm or off
farm, and to meet family living expenses. Any
remainder from these items is called residual
earnings.
What happened in this farm business during the
year? The assets increased from $1,000 to $1,200,
or $200. But residual earnings were only $100. So
how could we increase assets by $200? Where did
the other $100 come from? We borrowed it. This is
shown by the increase in liabilities from $700 to
$800.
This is how these statements link together. It
makes no difference whether assets or liabilities
increase or decrease, or whether one increases and
the other decreases. The arithmetic stated pre-
viously must hold and the net worth for 1985 must
be $400.

Example 2
Assume the December 31, 1985 balance sheet
ends up as follows and everything else remains the
same.


Assets
Assets


Liabilities
and Net Worth
600 Liabilities 200
Net Worth 400


Total 600 Total 600
Here, liabilities were reduced by $500, or
$700 $200. This was done by using the residual
earnings of $100 from the income statement and
selling off assets of $400, i.e., $1,000 $600.









Example 3
Let's say now the December 31, 1985 balance
sheet is as follows:


Assets
Assets


Total


Liabilities
and Net Worth
1000 Liabilities 600
Net Worth 400


1000


Total


1000


In this case, only the residual earnings were used
to reduce liabilities, and net worth must again be
$400.

The Statement of Owner Equity
The statement of owner equity, which accom-
panies the balance sheet, also links the balance
sheet and the income statement. We assumed in
our three previous examples that family living
expenses were known. However, most people do
not keep accurate family living records, so this
statement shows these expenses as a residual. The
layout looks like this:


Net worth as of Dec. 31, 1984 ..........
+ Net income Jan. 1 to Dec. 31, 1985 ....
+ Gifts and inheritances ...............
+ Additions to paid-in capital
(partnerships or corp.) ................
TOTAL AVAILABLE
-Gifts for estate transfer ...............
-Net worth as of Dec. 31, 1985 .........
EQUALS LIVING EXPENSES


$300
150
0

0
$450
0
400
50


This methodology is a useful (and often sobering)
way of discovering family living expenses for the
year.



Linking the Balance Sheet
and Income Statement
with the Statement of Change
The statement of change in financial position
basically converts the two balance sheets into a
flow statement. It shows where funds came from,
including some income statement items as well,
and then illustrates how these funds were used
during the year.
Funds come from four main sources. The first
source is shown in the income statement, which
lists net income, depreciation, and various account-


ing adjustments. The second source is shown on
the statement of owner equity, which lists external
capital coming to the business, such as gifts
received and additions to paid-in capital during the
year. The third and fourth sources of funds come
from the two balance sheets, which show, by sub-
traction, any asset decrease or liability increase.
The funds are used in three main areas. One is
general withdrawals, including family living ex-
penses and off-farm investments. It also includes
money put aside for estate transfer or general gifts.
Withdrawals are shown in one of the income state-
ment schedules, while any estate transfer or gifts
come from the statement of owner equity.
The second and third uses of funds are asset pur-
chases and decreases in liabilities. These are shown
in the two balance sheets.



Linking the Balance Sheet
with the Cash Flow
Let's start with the December 31, 1985 balance
sheet and the 1986 cash flow. The current assets
portion of the balance sheet shows what inventory
should be sold during 1986. The current liabilities
section shows the principal portion of the
operating, intermediate, and long-term debts that
should be paid during 1986.
As the inventory listed under current assets in
the 1985 balance sheet will be sold in the following
year, i.e., 1986, these expected sales will be entered
in the appropriate months of the cash flow. (A good
marketing program will obviously help in this pro-
cedure.) The crop, feed, and livestock inventories in
the current assets section of the 1985 balance sheet
are also shown in the cash flow schedules. The
ending inventories on December 31, 1986, will also
be shown on these schedules, as well as in the
December 31, 1986 pro forma balance sheet.
Enter the current liabilities to be paid during
1986 in the cash flow at the times when these debt
payments are due. The 1986 portions of inter-
mediate and long-term debt are additionally shown
in a cash flow schedule. Accounts payable and
property and income taxes should be copied from
current liabilities to the appropriate cash-flow rows.
The cash on hand and the savings in the current
assets portion of the December 31, 1985 balance
sheet become the beginning balances for the
January 1, 1986 cash-flow column.
These are the main items linking the balance
sheet and the cash flow. Now let's try to link the
income statement with the cash flow.









Linking the Income Statement
with the Cash Flow
The first items are the anticipated receipts from
the crops and livestock to be sold during 1986, as
shown on the January 1 to December 31, 1986
pro forma income statement. These figures include
the December 31, 1985 balance sheet inventories
that will be sold. These beginning inventories, plus
purchases and replacements and minus sales and
deaths, will, of course, provide the ending inven-
tories for both the December 31, 1986 pro forma
balance sheet and the cash-flow schedules. Other
receipts which appear on both the pro forma
income statement and the cash flow include
breeding stock and farm asset sales, government
payments, off-farm wages, and any interest and
dividends received from investments.
The cash expenses shown in the pro forma
income schedule come from the operating expenses
of the cash flow. Any anticipated livestock and feed
purchases are noted on both the pro forma income
statement and the cash flow. This completes the
main items found on both statements.

Final Comments
The statements work closely together.
Pro forma balance sheets and income statements
are simply an attempt to summarize the future
financial picture of the farm. The pro formas come
from past information and the cash flow prediction.
All this information can be analyzed to see whether
the business is moving in the right direction to
meet managerial objectives. The statements
themselves provide the arsenal of information for
management decisions commensurate with these
objectives.


References

1. Frey, Thomas L. and Danny A. Klinefelter. Coor-
dinated Financial Statements for Agriculture, 2nd edi-
tion, Agri Finance. Skokie, IL. 1980.

2. van Blokland, P.J. Introducing the Balance Sheet, Ex-
tension Circular No. 651. Florida Cooperative Exten-
sion Service, Institute of Food and Agricultural
Sciences, University of Florida, Gainesville, FL
32611.

3. van Blokland, P.J. Introducing the Income Statement,
Extension Circular No. 645. Florida Cooperative
Extension Service, Institute of Food and Agricultural
Sciences, University of Florida, Gainesville, FL
32611.

4. van Blokland, P.J. Introducing the Cash Flow,
Extension Circular No. 656. Florida Cooperative
Extension Service, Institute of Food and Agricultural
Sciences, University of Florida, Gainesville, FL
32611.

5. van Blokland, P.J. Introducing the Statement of Change
in Financial Position, Extension Circular No. 658.
Florida Cooperative Extension Service, Institute of
Food and Agricultural Sciences, University of
Florida, Gainesville, FL 32611.

6. van Blokland, P.J. Introducing Farm Business Analysis,
Extension Circular No. 655. Florida Cooperative
Extension Service, Institute of Food and Agricultural
Sciences, University of Florida, Gainesville, FL
32611.






































































This publication was produced at a cost of $297.00 or $.297 per copy, to provide information about
the financial statements used in business. 11-1M-88


COOPERATIVE EXTENSION SERVICE, UNIVERSITY OF FLORIDA, INSTITUTE OF FOOD AND AGRICULTURAL SCIENCES, K.R. Tefertiller,
director, in cooperation with the United States Department of Agriculture, publishes this information to further the purpose of the May 8 and I
June 30, 1914 Acts of Congress; and is authorized to provide research, educational information and other services only to individuals and institu-
tions that function without regard to race, color, sex or national origin. Single copies of Extension publications (excluding 4-H and Youth publica-
tions) are available free to Florida residents from County Extension Offices. Information on bulk rates or copies for out-of-state purchasers is
available from C.M. Hinton, Publications Distribution Center, IFAS Building 664, University of Florida, Gainesville, Florida 32611. Before publicizing this publication,
editors should contact this address to determine availability.




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