A farm’s ability to operate on the production frontier depends on its ability to produce crop and livestock enterprises efficiently, while a farm’s ability to produce on the cost frontier pertains to its ability to produce on the production frontier, manage costs, and market crop and livestock commodities.  The asset turnover ratio, on the other hand, measures how efficiently farm assets are being used to generate value of farm production (a gross income measure).

The rates of return on assets and equity are extremely useful when comparing farm investments with other investments.  However, these two measures are sensitive to how farm assets are valued on the balance sheet.  For this reason, the operating profit margin is more conducive for benchmarking profitability among farms.

It is widely accepted that accrual accounting provides a more accurate estimate of annual farm profitability than cash accounting or Schedule F net farm profit. This article compares cash and accrual net farm income for a case farm in west central Indiana given alternative scenarios pertaining to prepaid expenses and crop inventories.

There are numerous factors impacting a farm’s debt holding capacity.  It is important to remember that financial leverage or debt directly impacts a farm’s growth rate through its effect on expected returns and risk.

Since its peak in 2013 at $123.7 billion, average U.S. net farm income has averaged $82.7 billion or approximately 33% less than the peak value. This article discusses changes in the U.S. farm sector balance sheet as well as liquidity and solvency ratios.

Income tax liabilities arise from differences between balance sheet values of certain assets and liabilities, and the tax basis of those same assets and liabilities.  Deferred taxes reconcile the tax basis of balance sheet assets and liabilities with the basis currently being used to value assets and liabilities on a balance sheet, which is usually market value.

This article is one of a series of financial management articles that examine financial statements and financial analysis.  In this article, the components of a statement of owner’s equity are illustrated and described.