The Closing Net Worth Statement

 
 
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 The Closing Net Worth Statement
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A complete set of financial statements includes both an opening and a closing net worth statement. These are called the “Book End” statements as they enclose between them the income and expense statement, and the cash flow statement for the fiscal period being reported.

The closing net worth statement contains all of the same information as the opening net worth statement. The only difference is that it is reporting the asset, liability, and equity balances as of a different point in time - the closing date for the fiscal period being reported.

Figure A1-4 contains the closing net worth statement for the example we have been following.

Inter connectivity of Financial Statements – Closing Net Worth Statement

As was mentioned above, all of the financial statements in a “set of financial statements” are interconnected. The closing net worth statement is the final financial statement of the set. In a past fiscal year reporting period we would have the information on hand to complete all of the sections of the closing net worth statement and we would use the accrual adjustment information on the accrued income and expense statement to calculate accrued net income. This income and expense statement would also provide us with the depreciation amounts we require to complete the after depreciation closing net worth statement.

We would use the difference between the term debt in the opening statement and the closing statement as the financing activities undertaken during the year to complete that portion of the cash flow statement. The difference between the closing capital asset values and the opening capital asset values would be the investment activities that were undertaken during the year, and that section of the cash flow statement would be completed. We would have documented amounts for the cash contributions and withdrawals for the period to complete the personal activities section of the cash flow statement. Cash farm tax paid would be known, as would the accounts payable and receivable adjustment amounts for the cash flow statement.

The opening cash balance for the farm would be known, and once the adjustments mentioned in the paragraph above were made on the cash flow statement the cash balance at the bottom should equal the amount in the operating account as of the closing net worth statement date. For historical periods the facts needed to complete the financial statements should be known, but it is different for a projected set of financial statements.

In a projected set of financial statements only the net worth statement information at the start of the projection period is known. The rest of the statements will be an estimation of amounts expected based on what has happened in the past, and is expected to happen in the upcoming year.


Closing Balance Sheet or Net Worth Statement
December 31, 2012
Assets
Liabilities
Current Assets Current Liabilities
Cash
0
Operating Loan
155,000
Accounts Receivable
35,000
Accounts Payable
15,000
Inventory For Sale 300,000 Accrued Interest
17,500
(Grain, Livestock, Hay) Current Portion of the
Inventory For Production
60,000
Term Debt – CPTD
60,000
(Seed, Feed, Supplies)
Total Current Assets
395,000
Total Current Debt
247,500
Intermediate Assets Intermediate Liabilities
Breeding Livestock
160,000
Loans > 1 yr < 10 yrs
New Combine Loan
90,000
Machinery
915,000
4 Year Term Loan
60,000
Quota
800,000
80,000
Loan – CPTD
Total Intermediate Assets
1,875,000
Total Intermediate Debt
150,000
Long Term Assets
Long Term Liabilities
Buildings
475,000
Loans > 10 years
Land 1,500,000 19 Year Term Loan
180,000
190,000
Loan – CPTD
Total Long Term Assets
1,975,000
Total Long Term Debt
180,000
Total Assets
4,245,000
Total Debt
577,500
Equity (Net Worth)
Contributions ( + ) 40,000
Withdrawals ( - ) - 30,000
Open Retained Earnings 365,000
Current Earnings -7,500
Close Retained Earnings 357,500
Equity (Net Worth)
3,667,500
Figure A1-4 The Closing Net Worth Statement


In the example we have been following we entered expected income and expense information into a projected production plan, which was summarized in a projected income statement for the upcoming year. We also completed a cash flow statement with the expected cash changes from operating, investing, financing, and personal activities for the farm for the upcoming year. Once this information has been entered the closing net worth statement can be produced by a template, program like ABA or through manual calculations.

The closing cash balance for the period is reported at the bottom of the cash flow statement. Closing inventory values are taken from the production planners for the upcoming year. Closing accounts payable and receivable were estimated and entered into the accrued income and expense statement. Closing amounts for the accrued interest were estimated, and or calculated by a projection template (like ABA). The current portion of the term debt was estimated, and or calculated by a projection template.

Changes to capital assets were reported in the investing activities section of the cash flow statement. New loans, and loan repayments made were reported in the financing activities section of the cash flow statement. With this information the closing capital account, and loan account, balances can be calculated and reported on the closing net worth statement. You will note that the farm in the example lost equity by going from $ 3,690,000 to $ 3,667,500 over the course of the year.

With assets at market value in a net worth statement equity can increase without a profit being generated by the farm. Capital assets like land can increase in market value by more than an operating loss, and the equity of the net worth statement will increase because assets minus liabilities equals equity. It is still very important to track your farms’ profitability, as you will not want to borrow money if your farm is not that profitable but has good equity. For this reason a section in the ABA financial analysis template has been made under equity, for current and retained earnings, to track historical profitability even though the net worth statements are based on market values.

With a solid understanding of the information that financial statements report, and how financial statement information is interconnected, one can advance to the next step in assessing financial risk, which is analyzing the financial statements.

Authored by Ron Lyons P. Ag.
 
 
 
 
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For more information about the content of this document, contact Rick Dehod.
This document is maintained by Nicole Halvorson.
This information published to the web on February 6, 2014.