Financial ratio hw

 Calculate the following financial ratios. Once the ratios have been calculated, classify the ratios according to the stoplight benchmarking approach. 

  

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Calculate the current ratio.

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Question 21 pts

Classify the current ratio you just calculated according to the following benchmarking procedure.

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Calculate working capital.

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Calculate working capital to gross revenues

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Classify the working capital to gross revenues ratio you just calculated according to the following benchmarking procedure.

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Calculate the debt-to-asset ratio as a percentage to the nearest hundredth (two places after the decimal).

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Classify the debt-to-asset ratio you just calculated according to the following benchmarking procedure.

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Calculate the equity-to-asset ratio as a percentage to the nearest hundredth (two places after the decimal).

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Classify the equity-to-asset ratio you just calculated according to the following benchmarking procedure.

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Calculate the debt-to-equity ratio as a percentage to the nearest hundredth (two places after the decimal).

Flag this QuestionQuestion 111 pts

Classify the debt-to-equity ratio you just calculated according to the following benchmarking procedure.

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Calculate net farm income. Remember to include dollar signs, comma separators after thousands of dollars, and round to the nearest whole cent.

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Calculate return on assets as a percentage to the nearest hundredth (two places to the right of the decimal).

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Classify the return on assets ratio you just calculated according to the following benchmarking procedure.

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Calculate return on equity as a percentage to the nearest hundredth (two places to the right of the decimal).

Flag this QuestionQuestion 161 pts

Classify the return on equity ratio you just calculated according to the following benchmarking procedure.

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Calculate operating profit margin as a percentage to the nearest hundredth (two places to the right of the decimal).

Flag this QuestionQuestion 181 pts

Classify the return on equity ratio you just calculated according to the following benchmarking procedure.

Group of answer choicesGreenYellowRed Flag this QuestionQuestion 193 pts

Calculate asset turnover ratio as a percentage to the nearest hundredth (two places to the right of the decimal).

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Classify the return on equity ratio you just calculated according to the following benchmarking procedure.

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Calculate operating expense ratio as a percentage to the nearest hundredth (two places to the right of the decimal).

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Classify the operating expense ratio you just calculated according to the following benchmarking procedure.

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Calculate depreciation expense ratio as a percentage to the nearest hundredth (two places to the right of the decimal).

Flag this QuestionQuestion 241 pts

Classify the depreciation expense ratio you just calculated according to the following benchmarking procedure.

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Calculate interest expense ratio as a percentage to the nearest hundredth (two places to the right of the decimal).

Flag this QuestionQuestion 261 pts

Classify the depreciation expense ratio you just calculated according to the following benchmarking procedure.

Group of answer choicesGreenYellowRed Flag this QuestionQuestion 273 pts

Calculate net farm income ratio as a percentage to the nearest hundredth (two places to the right of the decimal).

Flag this QuestionQuestion 281 pts

Classify the net farm income ratio you just calculated according to the following benchmarking procedure.

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Bal Sheet Answers

12/31/18 12/31/19 Change

$10,000

$6,000

$1,500 $0

$25,000

and Supplies

$25,000

$40,000

$10,000

$65,000 $35,000

$75,000

$40,000

$15,000 $12,000

$45,000 $35,000

$35,000 $20,000

$75,000

$10,000

$2,000 $0

$25,000

-$10,000

$315,000 $15,000

$10,000

$21,250 $0

$25,000

$1,144,500 $1,248,000 $103,500

12/31/18 12/31/19 12/31/18 12/31/19

$48,500 $86,500 Fertilizer and Supplies CA $500 $25,000

Accounts Payable

$80,000 $120,000 Accounts Receivable CA $1,500 $1,500

Breeding Livestock

$45,000 $35,000 Investments in Cooperatives NCA $2,000 $2,000

$125,000 $100,000 Cash CA $25,000 $35,000

Land NCA $500,000 $525,000

NCL $150,000 $145,000

Taxes Payable CL $6,000 $6,000 Crops held for Sale and Feed CA $12,000 $8,000
Market Livestock CA $75,000 $115,000 Accrued Interest CA $15,000 $12,000
Current Portion, Deferred Taxes CL $18,500 $40,000 Notes due within one year CL $65,000 $75,000
Current Portion of Term Debt CL $30,000 $65,000 Marketable Securities CA $10,000 $15,000
Buildings NCA $75,000 $85,000 Machinery and Equipment NCA $350,000 $315,000

NCL $35,000 $20,000

CL $25,000 $45,000

Retained Earnings

$300,000 $315,000 Valuation Equity RE $273,750 $283,750

RE $21,250 $21,250

The Family Farm
Assets 12/31/18 12/31/19 Change Liabilities and Owners’ Equity
Cash $25,000 $35,000 $10,000 Accounts Payable $80,000 $120,000 $40,000
Marketable Securities $15,000 $5,000 Taxes Payable $6,000 $0
Accounts Receivable $1,500 Accrued Expense $45,000 $20,000
Fertilizer $500 $24,500 Current Portion, Deferred Taxes $18,500 $21,500
Investments in Growing Crops $48,500 $86,500 $38,000 Notes due within one year $65,000 $75,000
Crops held for Sale and Feed $12,000 $8,000 -$4,000 Current Portion of Term Debt $30,000
Market Livestock $115,000 Accrued

Interest -$3,000
Total Current Assets $172,500 $286,000 $113,500 Total Current Liabilities $239,500 $363,000 $123,500
Breeding Livestock -$10,000 Noncurrent Portion, Notes Payable $125,000 $100,000 -$25,000
Machinery and Equipment $350,000 $315,000 -$35,000 Noncurrent Portion, Deferred Taxes -$15,000
Buildings $85,000 Noncurrent Portion, Real Estate Debt $150,000 $145,000 -$5,000
Investments in Cooperatives $2,000 Total Non-Current Liabilities $310,000 $265,000 -$45,000
Land $500,000 $525,000
Total Non-Current Assets $972,000 $962,000 Total Liabilities $549,500 $628,000 $78,500
Retained Earnings $300,000
Valuation Equity $273,750 $283,750
Combined Capital $21,250
Owner Equity $595,000 $620,000
Total Assets $1,144,500 $1,248,000 $103,500 Total Liabilities and Owners’ Equity
Using the items below, complete the balance sheet above. All items below are either a current asset, non-current asset, current liability or non-current liability
Investments in growing crops CA
CL
NCA
Noncurrent portion, Notes Payable NCL
Noncurrent portion, Real Estate Debt
Noncurrent portion, Deferred Taxes Accrued Expenses
RE
Combined Capital

Inc Stmt Answers

$595,000

$8,000

$12,000

from Crops

$115,000

$75,000

$315,000

$25,000

$7,500

$0

$0

$24,500

$38,000

-$10,000

$5,000

$0

Gross Revenue

$0

$0

$1,003,500

$35,000

$85,000

$75,000

Fertilizer

$15,000

$35,000

$24,500

$2,500

$40,000

$20,000

$85,000

Interest $30,000

-$3,000

from Operations

$0

Net Farm Income $463,000
Income Statement (Farm Business Only) – 2019
Farm Business Receipts
Cash Crop Sales
Ending Crop Sales/Feed Inventory
Beginning Crop Sales/Feed Inventory
Accrual

Gross Revenue $591,000
Livestock and Milk Cash Sales $275,000
Ending Market Livestock Inventory
Beginning Market Livestock Inventory
Accrual Gross Revenue from Livestock and Milk
Gain/Loss on Sale of Breeding Livestock Sales $7,500
Agricultural Program Payments
Crop Insurance Proceeds
Other Farm Income
Change in Accounts Receivable
Change in Supplies
Change in Growing Crops
Change in Breeding Livestock
Change in Marketable Securities
Change in Investments
$1,003,500
Less:
Livestock Purchases
Cost of Purchased Feed/Grain
Value of Farm Production
Farm Business Expenses
Labor Hired
Repairs
Seed
$50,000
Machine Hire $2,500
Veterinarian Expense $8,500
Marketing
Fuel and Utilities
Property Tax $19,500
General Farm Insurance $12,500
Cash Rent $3,500
Herbicide and Insecticide
Miscellaneous
Change in Accounts Payable
Change in Accrued Expenses
Total Cash Operating Expenses $428,500
Depreciation
Total Operating Expenses $513,500
Accrued Interest Change
Total Interest Expense $27,000
Total Expenses $540,500
Net Farm Income $463,000
Gain/Loss on Sale of Capital Assets
Unpaid Labor $39,500

Vulnerable Strong

Farm Finance Scorecard

__ . __

$ ______

____%

____%

____%

__ . __

$ ______

____%
____%
____%
$ ______

$ ______

$ ______
$ ______
__ . __
__ . __

____%

____%

____%
____%
____%

Year _____

1. Current ratio

2

. Working capital

3

. Working capital to gross revenues

4. Farm debt-to-asset ratio

5. Farm equity-to-asset ratio

6. Farm debt-to-equity ratio

7. Net farm income

8. Rate of return on farm assets

9. Rate of return on farm equity

10. Operating profi t margin

11. EBITDA

12. Capital debt repayment capacity

13. Capital debt repayment margin

14. Replacement margin

15. Term-debt coverage ratio

16. Replacement margin coverage ratio

17. Asset-turnover rate

18. Operating-expense ratio

19. Depreciation-expense ratio

20. Interest-expense ratio

21. Net farm income ratio

Liquidity

Solvency

Profi tability

Repayment capacity

Financial effi ciency

1.3 2.0

10% 30%

60% 30%

40% 70%

1.5 0.43

4% 8%

3% 10%

15% 25%

1.25 1.75

30% 45%

80% 60%

10% 5%

10% 5%

10% 20%

1.10 1.50

Liquidity
– is the ability of your farm business to
meet financial obligations as they come
due – to generate enough cash to pay
your family living expenses and taxes, and
make debt payments on time.

1. Current ratio
– measures the extent to which current
farm assets, if sold tomorrow, would pay
off current farm liabilities.

2. Working capital
– tells us the operating capital available
in the short term from within the business.

3. Working capital to gross revenues
– measures operating capital available
against the size of the business.

Solvency
– is the ability of your business to pay all its
debts if it were sold tomorrow. Solvency
is important in evaluating the financial risk
and borrowing capacity of the business.

9. Rate of return on farm equity
– represents the interest rate being
earned by your investment in the farm.
This return can be compared to
returns available if your equity were
invested somewhere else, such as a
certificate of deposit.

10. Operating profit margin
– shows the operating efficiency of the
business. If expenses are low relative
to the value of farm production, the
business will have a healthy operating
profit margin. A low profit margin
can be caused by low product prices,
high operating expenses, or inefficient
production.

11. EBITDA
– Earnings Before Interest Taxes
Depreciation and Amortization.
Measures earnings available for debt
repayment.

Profitability
– is the difference between the value
of goods produced and the cost of the
resources used in their production.

7. Net farm income
– represents return to 3 things,
• Your labor,
• Your management and
• Your equity,
that you have invested in the business.
It is the reward for investing your
unpaid family labor, management
and money in the business instead of
elsewhere. Anything left in the
business, i.e., not taken out for family
living and taxes, will increase your farm
net worth.

8. Rate of return on farm assets
– can be thought of as the average
interest rate being earned on all (yours
and creditors’) investments in the farm.
Unpaid labor and management are
assigned a return before return on farm
assets is calculated.

4. Farm debt-to-asset ratio
– is the bank’s share of the business.
It compares total farm debt to total
farm assets. A higher ratio is an
indicator of greater financial risk and
lower borrowing capacity.

5. Farm equity-to-asset ratio
– is your share of the business. It
compares farm equity to total farm
assets. If you add the debt-to-asset
ratio and the equity-to-asset ratio you
must get 100%.

6. Farm debt-to-equity ratio
– compares the bank’s ownership to
your ownership. It also indicates how
much the owners have leveraged (i.e.,
multiplied) their equity in the business.

Farm Financial Ratios and Guidelines

From the balance sheet

From the income statement

2

Repayment capacity
– shows the borrower’s (i.e., your) ability to
repay term debts on time. It includes non-
farm income and so is not a measure of
business performance alone.

12. Capital debt repayment capacity
– measures the amount generated from
farm and non-farm sources, to cover debt
repayment and capital replacement.

13. Capital debt repayment margin
– is the amount of money remaining after
all operating expenses, taxes, family living
costs, and scheduled debt payments have
been made. It’s really the money left,
after paying all bills, that is available for
purchasing or financing new machinery,
equipment, land or livestock.

The last four ratios show how Gross Farm
Income is used. The sum of the four equals
100% (of Gross Farm Income).

18. Operating-expense ratio
– shows the proportion of farm income
that is used to pay operating expenses,
not including principal or interest.

19. Depreciation-expense ratio
– indicates how fast the business wears
out capital. It tells what proportion of
farm income is needed to maintain the
capital used by the business.

20. Interest-expense ratio
– shows how much of gross farm income
is used to pay for interest on borrowed
capital.

21. Net farm income ratio
– compares profit to gross farm income.
It shows how much is left after all farm
expenses, except for unpaid labor and
management, are paid.

Financial efficiency
– shows how effectively your business uses
assets to generate income. Past
performance of the business could well
indicate potential future accomplishments.

It also answers the questions:
• Are you using every available asset to
its fullest potential?

• What are the effects of production,
purchasing, pricing, financing and
marketing decisions on gross income?

17. Asset-turnover rate
– measures efficiency in using capital.
You could think of it as capital productivity.
Generating a high level of production with
a low level of capital investment will give
a high asset-turnover rate. If, on the other
hand, the turnover is low you will want to
explore methods to use the capital
invested much more efficiently or sell
some low-return investments. (It could
mean getting rid of that swamp and ledge
on the back 40 and getting something
that produces income.)

14. Replacement margin
– the amount of income remaining after
paying principal and interest on term
loans and unfunded (cash) capital
purchases.

15. Term-debt coverage ratio
– tells whether your business produced
enough income to cover all intermediate
and long-term debt payments. A ratio
of less than 1.0 indicates that the
business had to liquidate inventories,
run up open accounts, borrow money, or
sell assets to make scheduled payments.

16. Replacement margin coverage ratio
– A ratio under 1.0 indicates that you did
not generate enough income to cover
term debt payments and unfunded
capital purchases.

From the cash-flow statement

From all the financial statements

3

2014

Liquidity
1. Current ratio
= Total current farm assets
/ Total current farm liabilities
2. Working capital
= Total current farm assets
– Total current farm liabilities
3. Working capital to gross revenues
= Working capital / Gross farm income

Solvency (market)
4. Farm debt-to-asset ratio
= Total farm liabilities / Total farm assets
5. Farm equity-to-asset ratio
= Farm net worth / Total farm assets
6. Farm debt-to-equity ratio
= Total farm liabilities / Farm net worth

Profitability
7. Net farm income
= Gross cash farm income
– Total cash farm expense
+ / – Inventory changes
– Depreciation
8. Rate of return on farm assets
= Return on farm assets / Average farm assets
Return on farm assets
= Net farm income
+ Farm interest
– Value of operator labor & management
9. Rate of return on farm equity
= Return on farm equity / Average farm net worth
Return on farm equity
= Net farm income
– Value of operator labor & management
10. Operating profit margin
= Return on farm assets
/ Value of farm production
Value of farm production
= Gross cash farm income
+ / – Inv change of crops, mkt lvst,
brdg lvst & other income items
– Feeder livestock purchased
– Purchased feed
11. EBITDA
= Net farm income
+ Interest expense
+ Depreciation and amortization expense

Repayment capacity
12. Capital debt repayment capacity
= Net farm income
+ Depreciation
+ Net non-farm income
– Family living & income taxes
+ Interest expense on term loans
13. Capital debt repayment margin
= Capital debt repayment capacity
– Scheduled principal & interest on term loans*
14. Replacement margin
= Capital debt repayment margin
– Unfunded (cash) capital replacement allowance
15. Term debt coverage ratio
= Capital debt repayment capacity
/ Scheduled principal & interest on term loans*
16. Replacement margin coverage ratio
= Capital debt repayment capacity
/ (Scheduled principal & interest on term loans*
+ Unfunded capital replacement allowance)

Financial efficiency
17. Asset-turnover ratio
= Value of farm production
/ Average farm assets
18. Operating-expense ratio
= (Total farm operating expense excluding interest
– Depreciation)
/ Gross farm income
19. Depreciation-expense ratio
= Depreciation
/ Gross farm income
20. Interest-expense ratio
= Farm interest
/ Gross farm income
21. Net farm income ratio
= Net farm income
/ Gross farm income

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