Financial Analysis & Budgeting in Farm Management Flashcards
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A farm shows a debt-to-asset ratio of 0.65. How would this farm be classified financially?
Answer: Highly leveraged with vulnerable financial position
A debt-to-asset ratio of 0.65 means 65% of assets are financed by debt, which is considered a highly leveraged and financially vulnerable position.
Which measure best captures a farm's ability to generate cash from operations to service debt?
Answer: Term debt coverage ratio
The term debt coverage ratio measures whether farm income is sufficient to cover scheduled principal and interest payments on term debt.
On an accrual-adjusted income statement, an increase in grain inventory from the beginning to the end of the year would:
Answer: Increase net farm income
An inventory increase is added to cash sales on an accrual basis, increasing the value of farm production and therefore net farm income.
A farmer is considering leasing versus purchasing equipment. Which financial factor most favors leasing?
Answer: Need to preserve working capital and credit capacity
Leasing preserves working capital and avoids large down payments, maintaining credit capacity for other farm needs.
In break-even analysis for a crop enterprise, the break-even yield is calculated as:
Answer: Total costs (fixed + variable) divided by market price per unit
Break-even yield equals total costs (fixed plus variable) divided by the expected market price, representing the minimum yield needed to cover all costs.
A farmer uses an accrual accounting system. When is revenue from a grain sale recognized?
Answer: When the grain is delivered and title transfers to the buyer
Under accrual accounting, revenue is recognized when the earnings process is complete and title transfers, not when cash is received.
Which of the following is a measure of farm efficiency rather than profitability?
Answer: Operating expense ratio
The operating expense ratio (operating expenses divided by gross revenue) measures how efficiently expenses are managed relative to revenue, not absolute profit.