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Group Title: Circular / Florida Cooperative Extension Service ; no. 645
Title: Introducing the income statement
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Permanent Link: http://ufdc.ufl.edu/UF00072569/00001
 Material Information
Title: Introducing the income statement
Series Title: Circular Florida Cooperative Extension Service
Alternate Title: Income statement
Physical Description: 7 p. : ill. ; 28 cm.
Language: English
Creator: Van Blokland, P. J
Publisher: Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida
Place of Publication: Gainesville
Publication Date: 1989?
 Subjects
Subject: Financial statements   ( lcsh )
Agriculture -- Accounting   ( lcsh )
Genre: government publication (state, provincial, terriorial, dependent)   ( marcgt )
bibliography   ( marcgt )
non-fiction   ( marcgt )
 Notes
Bibliography: Includes bibliographical references (p. 4).
Statement of Responsibility: P.J. van Blokland.
General Note: Cover title.
Funding: Circular (Florida Cooperative Extension Service) ;
 Record Information
Bibliographic ID: UF00072569
Volume ID: VID00001
Source Institution: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: oclc - 21765720

Table of Contents
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        Front Cover
    Table of Contents
        Table of Contents
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        Page 2
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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





SB Circular 64f








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

W hat is an Incom e Statem ent?............................................... .. ....... 1

What Does an Income Statement Look Like? ................................. ........... 1

How is an Income Statement Constructed? ................................. ............. 2

Final Com m ents ................................. ................................. 4

R eferen ces ................................................... ......... .......... 4

A ppen dix ................................................... .......... ........... 5






Central Science
Library

MAR 29 1990

University of Florida


















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.









Introducing the Income Statement
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 cash flow, and the statement
of change in financial position. A fifth publication
shows how these statements link together and a
sixth shows how to use the information provided
by the statements for a simple business analysis.
This series tries to keep things simple and assumes
no prior experience with financial statements.
The income statement and its essential features
are outlined in this publication. This should provide
the reader with sufficient information to complete
a proper income statement. Farmers, ranchers,
nursery and grove operators, extension agents,
agricultural lenders, and students should find this
publication of interest.
The series is based on a widely used methodol-
ogy developed by Frey and Klinefelter called
"Coordinated Financial Statements for Agriculture"
(1). The example statements in the appendix come
from Frey et al (2). The publications in the series
are listed in the reference section (3, 4, 5, 6, 7).

What is an Income Statement?
An income statement shows what has happened
in a business over a specific period of time, usually
a year. It is similar to a movie which illustrates
changes in the cost and returns of a business over
time, compared with the balance sheet, which just
presents a snapshot of the firm on one specific day.
As we will see later, the income statement is the
flow statement that links two balance sheets.

What Does an Income
Statement Look Like?

A complete income statement with its accompa-
nying schedules is shown in the appendix, but it
should be helpful to first examine simpler versions
of this statement.
A simple income statement is shown in Table 1.
The income statement simply lists the revenue and
expenses that occurred over the year and, by sub-
traction, the residual income.
This income is available for family living ex-
penses, paying income taxes, paying principal on


loans, and investing in the business. However, the
form as presented in Table 1 tells us little about the
contributions of the various enterprises or how ex-
penses were allocated. It also uses the three basic
income statement terms, namely, revenue, ex-
penses, and income, rather loosely.

Table 1: A simple income statement


Revenue
Sales
Total Sales

Expenses
Costs
Total Costs


Income
(1) (2) = Income


(1)




(2)


A more detailed income statement is shown in
Table 2. This is a more useful income statement,
assuming that the items such as crop sales or
variable costs are broken down into their com-
ponents, e.g., corn, wheat, and cotton sales, or fer-
tilizer, chemical, and fuel costs. We can see here
the contributions of the various enterprises and the
gross margin of the farm.
Gross margin shows what is left to pay fixed
costs after deducting all variable costs. The farmer,
therefore, can operate in the short run if he covers
his variable expenses. Gross margin is also used in
enterprise selection and analysis. For example, if
two enterprises have similar fixed costs, such as
corn and soybeans, then the farmer generally will
grow the crop with the higher gross margin.
Finally, this statement calculates net farm income
or what is available for family living, financing,
investing, and paying income and Social Security
taxes.
However, the form still does not provide all the
information that managers need to make useful
decisions about the business. Table 2 uses what is








Table 2: A more detailed income statement

Revenue $
Crop sales
Livestock sales


Other
TOTAL REVENUE

Expenses
Variable costs
(1) (2) = Gross margin
Fixed costs
(2) + (4) = TOTAL COSTS

Income
(1) (5)
or (3) (4) =NET FARM INCOME


(1)


(2)
(3)
(4)
(5)


termed cash accounting methods, rather than ac-
crual. The accrual method will provide better infor-
mation because it shows the inventory changes that
occur during the year. In addition, the form ex-
cludes a major proportion of the cash coming into
the farm during the year. This is off-farm income,
and for the majority of U.S. farms it is difficult to
separate this income from the net farm income.
The choice is made by the individual farm
manager. At this stage, it may be more convenient
to include it. The form also does not show what
the farm itself produced during the year. All these
points will be discussed more fully, but at this
stage it might be more interesting to see what a
summary of a useful income statement would look
like (Table 3).

How is an Income
Statement Constructed?
The three sections of a complete income state-
ment revenues, expenses, and income will be
examined in detail.
Revenue
Accrual System. Farm revenue mainly comes from
enterprise sales. But revenue is also composed of
inventory change, and this point requires some
explanation. A manager needs to use an accrual
system to really know what is going on in a
business. A cash form of revenue accounting looks
only at actual sales during the year, while an
accrual system also includes inventory change.


If we want to make meaningful management
decisions, it is important to use the accrual system
of accounting on most farms, simply because
changes in inventory affect the business. The
accrual system does require more work, but despite
a generally held opinion, it will rarely lead to more
taxes than the cash system. In fact, it will probably
reduce taxes. So what is it? An illustration may
help.
A farmer sells $100,000 of grain during the year
and feels he has done well. But what happened if
his inventory of grain on January 1 was $40,000
and on December 31 it was $15,000? Some $25,000
of sales came from inventory and only $75,000
from production during the year. Not only would
he be misled by his performance, but he has also
reduced his current assets by $25,000. Now all this
is fine if he knows what happened. But in the ma-
jority of cases, farmers are not certain what their
beginning and ending inventories are, and therefore
they are not certain what role this year's produc-
tion played in net farm income and what came
from previous years. So the accrual system is the
way to go.
Value of Farm Production. The other point in the
revenue section concerns the value of farm produc-
tion. This item is used in analyzing the farm
business. It is important because it shows only
what is produced by the farm.
Suppose the farmer buys feeder cattle at 700
pounds and fattens them up to 1,000 pounds. His
farm has added only 300 pounds before the sale,









Table 3: Summary of a complete income statement*

Revenue $
Crop sales
(+) or (-) inventory change
Livestock sales


(+) or (-) inventory change
Government payments
Other
Total revenue
Minus value of livestock and feed bought
VALUE OF FARM PRODUCTION

Expenses
Variable costs (including interest)
(2) (3) = Gross margin
Fixed costs
(3) + (5) = TOTAL COSTS

Income
(2)- (6)
or (4) (5) = Net farm income
Plus off-farm income
Minus income and Social Security taxes
NET INCOME


(1)

(2)



(3)
(4)
(5)
(6)


*A complete income statement is shown in the appendix.


yet his revenue will reflect the full 1,000-pound
value. So the total revenue overstates what the
farm itself produced. We are after the value added
by the farm. If he both raised and fattened his own
cattle, then the total revenue and the value of farm
production from these cattle would be the same.
The same argument applies to feed purchased. If
a farmer buys all his feed, say, to fatten pigs, he is
again using inputs produced on other farms. If he
produced this feed himself, the costs involved
would be reflected in his expenses. Remember, we
are after the value of farm production. Livestock
and feed purchases are still expenses and have the
same tax treatment. All we are doing is putting
them in a better place in the income statement for
managerial analysis.
Expenses
This section is fairly straightforward. We simply
list the expenses that occurred during the year,
though there may also be some inventory adjust-
ments. For example, the farm supplies of fuel,


fertilizers, or chemicals may have changed, and the
change should be shown under the appropriate
item.
Realize that principal payments are not included
in an income statement. These are balance sheet
and cash flow items and only interest payments are
shown here.
Income
This section deals with net farm income and off-
farm income in order to produce the true bottom
line of any business, namely, net income. Net in-
come is what is available to meet family living ex-
penses, to invest on and off the farm, and to pay
principal on capital debts (i.e., loans outstanding on
intermediate and long-term assets such as
machinery and real estate).
Off-farm income is a net figure and excludes any
expenses incurred in earning this income. These ex-
penses are standard deductions that are listed in
Schedule C of Form 1040, such as car expenses,
depreciation, insurance, office supplies, repairs, and








utilities involved in an off-farm job. Expenses that
are part of the family living budget, such as clothes
and lunches, are unfortunately not deductible. It
may also be easier to record the wage received
before taxes and let the income tax and Social
Security line on the income statement take care of
both farm and off-farm taxes.
Thus, this section of the statement shows the
amount of income earned by the farm and what is
earned off farm in producing net income. As two-
thirds of the U.S. farm family income is currently
earned off farm, it is important for the manager to
follow the relative proportion of all contributions to
net income.

Final Comments
So this is what the income statement looks like.
It provides a moving picture of the business and
farm family performance for the year and links the
balance sheets together. For example, the December
31, 1984 balance sheet would provide the inventory
starting point for the January 1 to December 31,
1985 income statement, and the December 31, 1985
balance sheet becomes the end point. What hap-
pened during the year is shown by the income
statement's net income, and this figure is largely
responsible for any change in the net worth of the
business. And that's all there is to it.
Appendix Comments
A complete income statement is shown in the
appendix. Note that the gross margin section is not
included. However, it is worth at least considering
including it. Realize also that this complete income
statement is built from the accompanying
schedules. These schedules take data from the
beginning and ending balance sheets and from the
year's records. These figures are entered in each
schedule and the final schedule figures go on the
income statement.


References

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

2. Frey, Thomas L. et al. Unpublished working paper,
1983.

3. van Blokland, P.J. Introducing the Balance Sheet,
Extension Circular No. 651. Florida Cooperative
Extension Service, Instutute of Food and Agricultural
Sciences, University of Florida, Gainesville, FL
32611.

4. van Blokland, P.J. Introducing the Cash Flow, Exten-
sion 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. Linking the Financial Statements,
Extension Circular No. 657. Florida Cooperative
Extension Service, Institute of Food and Agricultural
Sciences, University of Florida, Gainesville, FL
32611.

7. van Blokland, P.J. Introducing Farm Business Analysis,
Extension Circular No. 655. Florida Cooperative
Extension Service, University of Florida, Gainesville,
FL 32611.





This form is copyrighted. It Is a
violation of the U. Copyrght Law
to reproduce It in any manner.


APPENDIX


INCOME STATEMENT


For 12 Month Period
Ending tl I3 ,198


Address
REVENUE
Crops and feed:
cash sales .......... ............. $ i ( coo (la)
inventory change (Sch. 1). ... ... .. ..... () t)40 (lb)$ 83,500 (1)


Livestock & poultry sold:
cash sales. ......... .
inventory change (Sch. 1) ..............
Breeding stock:
cas h sa le s . . . . .. . .
inventory change (Sch. 1) ..
Products: livestock and poultry cash sales ...
Custom work: cash .......... .. .
Government payments and patronage dividends ..
Income from hedging transactions (Sch. 2) .....
Other ............. ... ....
Adjustment in notes and accounts receivable (Sch
Gross revenue (Add lines 1 thru 9) ..
Less livestock & poultry purchases (feeder &
Less feed purchased ............
VALUE OF FARM PRODUCTION......

EXPENSES
Cash operating expenses (Sch. 3) .........
Expense adjustment (unused assets) (Sch. 4) ...
Expense adjustment (unpaid items) (Sch. 5) ..
Depreciation:
Machinery and equipment .
Fixed farm improvements ... ... ....
Total operating expenses (Add lines 13 thru 16)
Income from farm operations ... .. .. ..
Less interest expense (Sch. 6) ..... .........
Gain or loss on disposal of farm assets (Sch. 7) .
NET FARM INCOME ........ ..


........$ loe. 3ILC (2a)
.() 4 I (2b) a,, 9 (2)


. $ > l( (3a)


.... ( ) -


8~0 (3b) (,q 0o (3)
(4)
. . (5 )
1. (6)
.. () -t o4 (7)
. . (8 )
... .. ( ) (9)
$ o ,52 (10)
.............(-) _15 0 (11)
..... (-) 7o,180 (12)


. ....... $ 1 (D t" (a)


................ . $ 5 8 5 (13)
. . . ( ) (1 4 )
............ ) 9 0 (15)

..... $ 3 ,t34 (16a)
..... $ cPo,~c c (16b) ,c-.. ii31- (16)
.... ................. ................. .C: :, 44 b (b)
............ ... ............ (a- b) $ 1_ ,(t. ( (c)
..... ........ ...... .. .... (- ) -- ?a 5~ tp
........................................... ) oo
$ to I 035 (d)


NON-FARM INCOME
Operator's wage off farm (net of expenses incurred) ... ............ ....... $ "^0O (17)
Spouse's wage off farm (net of expenses incurred) ......................... (18)
Interest and dividends (including int. on retirement accts.) .................. ... I Lo05 (19)
Gain or loss on sale of non-farm assets (Sch. 8) ........................... () (20)
Net income other farms .............................................. (21)
Net income non-farm real estate ....................................... (22)
Other.............................. ... ....................... -- (23)
NET NON-FARM INCOME (Add lines 17 thru 23) ......................... $ .l c> (e)
Income before income taxes and extraordinary items ............... .................... .... (d +e) $ o 5, o S (f)
Provision for income and Soc. Sec. taxes (all income) (Sch. 9) ..................................... ', q94 (g)
Income before extraordinary items ..................................................... (f ) $ 3 1 1 p( (h)
Extraordinary items (explain) ................ ............................................. (i)
NET INCOME ........................................... ................... $ 3$ ); 1t
I M by Thu L. Fray anm Dnny A. KDInller. Dept of Agricultural Economics, Coopyative Ext Servio. UnivMsity of INois @1960 AGRI FINANCE Aviable from Ag Financ. 5520-G Touhy Awv Skokki. IL 60077


r Actual
O Projected
Name


EILL ROl/\w J


- -










SCHEDULE 1 REVENUE ADJUSTMENT
S Transfer Totals from Balance Sheets
Beginning Inventory(-)| Ending Inventory (+)


Change
(+ or -)


Notes and accounts receivable .................. -$ 11, -80 +$ o- $ -tl >
Livestock & poultry to be sold ......... ........ $ 5 +$ 58, $ 4t t.
Cropsandfeed ............. ...... ... ( +$ To ,$,0o $ -~-- t'
Breeding stock .......... ........... ...... .-$ 35 9A 5 +$ 3 ', o(p+ $ $

SCHEDULE 2 HEDGING TRANSACTIONS ADJUSTMENT
Hedging account equity, from beginning balance sheet ......... ..... ......................... -
Deposits during period .... ......... ........................... 7 c- o
W withdrawals during period ........ .............. .. .... ... . + .- ( .4 f.
Hedging account equity, from ending balance sheet ..... .... ... ..................... + --
TOTAL GAIN OR LOSS ON HEDGING TRANSACTIONS ... ..... .. .. $ tp- 4 o

SCHEDULE 3 CASH OPERATING EXPENSES (excluding interest, feed, livestock)
Item Cash Expense


Labor hired (including all taxes and employee benefits)
Repairs machinery and equipment ......
Repairs building and improvements .. .
Rents and leases.. ..... .......
Seed .
Fertilizer and lime ........
C hem icals ..................
Custom machine hire ...... .
Supplies . .. .
Livestock expenses ...
Gas, fuel, oil
Storage and custom drying .
Taxes (real estate and personal property) .
Insurance (property, liability, crop) ....
Utilities (farm share) .. .....
Marketing and transportation expense
Auto (farm share) ... ..
Miscellaneous ....


. ..... .... ................ $ 1 aooC
... . .......... 54 0
...... .. .. ..... .. ..... I oo
. . . . . . .

........ ................ .. .. .. 4

...... .. .... .... B0 0

.... g?1oo





.... .b





. ... ... :.5 15


TOTAL CASH OPERATING EXPENSES


SCHEDULE 4 EXPENSE ADJUSTMENT (unused assets)
Transfer Totals from Balance Sheet
Beginning Balance (+)| Ending Balance (-)


Cash'investment in growing crops
Supplies ...... ...
Prepaid expenses ....
TOTAL .......


+$ iCp -o
+$ 189
+$ \300
+$S 41&g


$ )An5

-s 453'9


SCHEDULE 5 EXPENSE ADJUSTMENT (unpaid items)
Transfer Totals from Balance Sheets
Beginning Balance (-)| Ending Balance (+)


Farm accounts payable .. ... .. ..
Accrued property taxes .. ............... ...
Accrued real estate taxes ................
Accrued employer payroll withholding ...... .
Accrued rent and lease payments .. . ..
TOTA L ............. ...


-$ 07:oo
-S --~.
-$
-$ ,c800
-$
-$ s t7 Co
-$ T7oo:>


>$ 17c0
f-$ --

9s$ ---
4.$ laDOc
f-$ cp.Q(.,


Change
(+ or -)
$ --4

-loo
$ + I-


Change
(+ or -)
$ I Cc



$ ---
$ --40


Developed by Thomas L Frey and Danny A Klneteller Dept of Agricultural Economics Cooperalve Exl Service Unversity ol Illtnois 1980 AGRI FINANCE Available from Agro Finance 5520-6 Touhy Ave Skokie IL 60077


This form is copyrighted. It is a
violation of the U.S. Copyright Law
to reproduce it in any manner.






This form is copyrighted. It is a
violation of the U.S. Copyright Law
to reproduce it in any manner.


SCHEDULE 6 INTEREST EXPENSE
Am ount paid in cash or by renewal ............................ .. .... .. .... $
Accrued interest:
Beginning of period..................... (-) $ -I(o.4o,
Endof period ............... ...... ... (+ ) $ F, 3 I
Adjustment for change in accrued interest ... .... .. ......- "
TOTAL INTEREST EXPENSE .. ......... ........ ......... .$ ~a ,


SCHEDULE 7 GAIN OR LOSS ON DISPOSAL OF FARM ASSETS
Net Sale Original Cost Less
Price Accum. Dep. (book value)
(+) (-)


Machinery and equipment ....... .
Fixed assets .................
TOTAL .

SCHEDULE 8 -GAIN OR


Securities .. ....
Fixed assets .. .
Other ... ... .
TOTAL.


+$ 7000 -$ --
+$ -'..-$ _
+$ -$


Change
+ or -)

*70.C?


LOSS ON SALE OF NON-PARMASSETS
Net Sale Original Cost Less
Price Accum. Dep. (book value) Chang
(+) (-)
+$_ -$ $
+$ -$- -

+$ -$_ $ ~


SCHEDULE 9 PROVISION FOR INCOME TAX
Amount paid in cash
Accrued income and Soc. Sec. taxes.
Beginning of period () $s-
End of period .. ... (+) $ I L
Adjustment for change in accrued income and Soc Sec taxes
Income tax refund due:
Beginning of period (+) $
End of period ...-) $ -
Adjustment for change in income tax refund due
TOTAL


..+


I


$-t











































































This publication was produced at a cost of $147.89, or 74.0 cents per copy, to provide information about the
financial statements used in business. 11-200-89


COOPERATIVE EXTENSION SERVICE, UNIVERSITY OF FLORIDA, INSTITUTE OF FOOD AND AGRICULTURAL SCIENCES, G L.
Zachariah, director, in cooperation with the United States Department of Agriculture, publishes this information to further the purpose of the
May 8 and June 30, 1914 Acts of Congress; and is authorized to provide research, educational information and other services only to
individuals and institutions that function without regard to race, color, sex, age, handicap or national origin. Single copies of extension
publications (excluding 4-H and youth publications) 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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