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Your Farm Income Statement
Adjustments to Income
Not all farm income is accounted for by cash sales.
Changes in inventory values can either increase
or decrease the net farm income for the year.
Changes in the values of inventories of feed and
grain, market livestock, and breeding livestock can
result from increases or decreases in the quantity
of these items on hand or changes in their unit
values (see Example 1). Adjusting for inventory
changes ensures that the value of farm products is
counted in the year they are produced rather than
the year they are sold. Subtract beginning of the
year values from end of the year values to find the
net adjustment.
Example 1
The beginning inventory of feeder pigs consists
of 420 head valued at $75 each, or $31,500.
Ending inventory is 450 head valued at $50
each, or $22,500. Inventory value decreased by
$9,000 even though the number of pigs on hand
increased by 30 head. The decline in value per
head more than offset the increase in numbers,
and could have been due to lower market prices
and/or lighter weight of the pigs.
Changes in the market values of land,
buildings, machinery, and equipment (except
for depreciation) are not included in the income
statement unless they are actually sold. Accounts
receivable and unpaid patronage dividends are
included, however, because they reflect income
that has been earned but not yet received.
Cash Expenses
All cash expenses involved in the operation of the
farm business during the business year should be
entered into the expense section of the income
statement. These can come from Part II of IRS
Schedule F. Under livestock purchases include
the value of breeding livestock as well as market
animals.
• Do not include death loss of livestock as an
expense. This will be reflected automatically by
a lower ending livestock inventory value.
• Income tax and Social Security tax payments are
considered personal expenses and should not be
included in the farm income statement, unless
the statement is for a farm corporation.
• Interest paid on all farm loans or contracts is a
cash expense, but principal payments are not.
• Do not include the purchase of capital assets
such as machinery and equipment. Their cost
is accounted for through depreciation. Land
purchases also are excluded.
• You may wish to exclude wages paid to family
members because these also are income to
the family.
• Include cash deposits made to hedging
accounts.
Adjustment to Expenses
Some cash expenses paid in one year may be
for items not actually used until the following
year. These include feed and supply inventories,
prepaid expenses, and investments in growing
crops. Subtract the ending value of these from the
beginning value to find the net adjustment (see
Example 2).
Example 2
Beginning inventory of fertilizer was zero.
Closing inventory is worth $11,000. Fertilizer
purchases during the year were $16,000, all paid
for. The change in inventory is a positive $11,000.
Even though $16,000 is shown for cash expense,
only $5,000 ($16,000 − $11,000) is charged to
the farm operation during the year covered.
The $11,000 of fertilizer still unused will be the
beginning inventory value for the following year,
and will be included in that year’s expenses.
Other expenses may be incurred in one year but
not paid until the following year or later, such
as farm taxes due, and other accounts payable.
Record accounts payable so that products or
services that have been purchased but not paid for
are counted. However, do not include any items
that already appear under cash expenses. Subtract
the beginning total of these items from the ending
totals to find the net adjustment. Note that interest
expense due is not included until later, after net
farm income from operations is calculated.