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Junior and Senior level Ag Bus. | |Colorado Agriscience Curriculum

|Section: |Advanced Agribusiness |

|Unit: |Agricultural Business Records |

|Lesson Title: |Balance Sheets |

|Colorado Ag Education Standards|AGB11/12.03 - The student will be able to formulate and analyze financial records and use the information for |

|and Competencies |evaluation and planning. |

| | |

| |Complete and analyze cash flow projections, income statements, and balance sheets. |

| | |

|Colorado Model Content | |

|Standard(s): |Math Standard 3: Students use data collections and analysis, statistics, and probability in problem-solving |

| |situations and communicate the reasoning used in solving these problems. |

| | |

| |Math Standard 6: Students link concepts and procedures as they develop and use computational techniques, including |

| |estimation, mental arithmetic, paper-and-pencil, calculators, and computers, in problem-solving situations and |

| |communicate the reasoning used in solving these problems. |

| | |

| |English Standard 4: Students apply thinking skills to their reading, writing, speaking, listening, and viewing |

| | |

| |English Standard 5: Students read to locate, select, and make use of relevant information from a variety of media, |

| |reference, and technological sources. |

| | |

|Student Learning Objectives: |Upon completion of this lesson the student will be able to: |

| |Define what a balance sheet is. |

| |State the three kinds of analysis to use on a balance sheet. |

| |State the three areas a balance sheet financially analyzes. |

| |Compile a balance sheet from a real farm business. |

|Time: |50 minutes |

|Resource(s): |2005 National Farm Business Management Test |

| |Farm and Ranch Management, John Deere |

|Instructions, Tools, Equipment,|Italicized words are instructions to the teacher, normal style text is suggested script. |

|and Supplies: |*1 copy/student of the scenario found in the unit 4-6 scenario. It might even be helpful to make single sided copies |

| |so that a student can analyze several bits of information at one time. |

| |*Blank piece of paper for interest approach. |

| |*Projector and whiteboard with markers. |

| |*Blank balance sheet forms attached at the end of this lesson. |

| | |

|Interest Approach: |Have students pick a certain farm or ranch scenario familiar to your community. Once students have decided on a |

| |scenario hand out a blank piece of paper to each student. Once each student has a blank piece of paper in front of |

| |them, have them write/draw an asset or liability that would be familiar to the type of business they have picked. |

| |Each item must be stated and have a value. For example 10 head of cows - $9,000. Operating note at bank – $20,000. |

| |The interest approach will proceed from here. |

| |Hello students!! Today we are going to explore the wonderful world of balance sheets. I know you may remember these |

| |from previous years, but we are going to go into more detail to make sure you really know this skill for your own |

| |business needs one day. First, when I say go, I need you, as a class, to come up with a farm business or ranch |

| |scenario that is familiar to this community. For example, if you all want to work with a wheat farm scenario all you |

| |have to is say wheat farm. If there are several ideas we will put them on the board and vote. I am going to give you|

| |1 minute. Go. |

| |Stop. Now that we have an idea, I am going to pass out a blank piece of paper to each of you. Once you have your |

| |piece of paper and I say go, you will have 1 minute to come up with an asset or liability that would be familiar to |

| |the farm business you have picked. For example your piece of paper may say 10 head of cows - $9,000 or operating note|

| |at bank - $20,000. If you have time you may draw a picture of your asset or liability. Are you ready? You have one |

| |minute, go. |

| |Stop. Now, when I say go, I need you all to stand up and I need you all to divide yourselves into asset and liability|

| |groups. The assets need to gather on one side of the room and the liabilities on the other. When I say go, you have |

| |15 seconds. Go. |

| |Review and discuss why each is an asset or liability. (See if students break into the right groups and use this |

| |teachable moment to reinforce the information) |

| |Great now that you are all divided, when I say, “divide further,” I want you to, as a group, to divide into current |

| |and non-current entities. Do not mix assets and liabilities still stay separate. When you are complete we should |

| |have 4 groups. You have 2 minutes, “Divide further.” |

| |Stop student and review and discuss why each is asset or liability is current or non-current. Make corrections as you|

| |go. |

| |Great! Now when I say, “Do your math,” you have 2 minutes to add your group’s total. Remember there should be four |

| |totals when we are done. “Do your math.” |

| |Stop. Now that you have done your math, when I say go I need a representative to write their groups total on the |

| |board. Make sure you label which group you are from. Go. |

| |Great! Now I need you all to sit down at your desk and each figure the net worth of this business for me. Remember |

| |the equation for net worth is assets – liabilities. You have 2 minutes, go. |

| |Stop. Let’s discuss your answers. Let’s also discuss why we have to divide assets and liabilities into current and |

| |non-current portions. |

| |What answers did you all get? Great, now I bet your wondering why we have to divide the balance sheet into current |

| |and non-current portions. You will see later today that several financial analysis procedures need to have current |

| |and non-current portions divided in order to tell what a business is doing right and what a business could do better. |

| |Let’s get out our notebooks so we can review further. |

|Objective 1: |Define what a balance sheet is. |

| |Utilize PowerPoint through lesson as it directly aligns with all note taking sections so you don’t have to write as |

| |much information on the board. |

| |What is a balance sheet? |

| |A balance sheet or commonly called “net worth statement” is a snapshot of a financial situation that lists assets, |

| |liabilities, and net worth. The accounting equation states that net worth = assets – liabilities. |

| |A balance sheet is further divided into current assets, current liabilities, non-current assets, and non-current |

| |liabilities in order to analyze a farm or ranch financially. |

| |Remember that current assets are those that have a useful life of one year. Example: Hay for cows. Current |

| |liabilities are those that are due within the current year. Example: Portion of term loan due this year. |

| |Remember that non-current assets are those that have a useful life of more than one year. Example: Tractor. |

| |Non-current liabilities are those that are due beyond the current year. Example: Portion of term loan due beyond |

| |this year. |

|Objective 2: |State the three kinds of analysis to use on a balance sheet. |

| |What are the three kinds of analysis to use on a balance sheet? |

| |Comparative analysis – Comparison of figures from the same dates each year to determine if the business equity is |

| |growing or shrinking. |

| |Projected analysis – This consists of making balance sheets for the future for expected farm situations and analyzing |

| |them to see probable trends. |

| |Ratio analysis – A tool to measure the financial condition of one farm business against another--using financial |

| |ratios. |

|Objective 3: |State the three areas a balance sheet financially analyzes. |

| |What are the three areas a balance sheet financially analyzes? |

| |Liquidity – The ability of a business to generate enough cash to pay bills without disrupting business. Liquidity |

| |measures determine the ability to meet short term debt and other obligations from available cash. Ratios that help |

| |determine liquidity are as follows: |

| |Current ratio = Current assets/Current liabilities. Therefore a ratio of $3.85:$1.00 means that there would by $3.85 |

| |worth of current assets for every $1.00 of current debt. This means that a business with this type of ratio would be |

| |liquid. |

| |Working capital = Current assets – current liabilities. Therefore a business that has $62,550 worth of current assets|

| |and $16,254 worth of current liabilities would have a working capital of $46,296. This is also a reflection of a |

| |business that is liquid. |

| |Debt Structure = Current Liabilities/Total Liabilities. The higher this percentage the more current assets will have |

| |to be used to service debt. |

| |Solvency – Measures the ability of all assets, if sold at market value, to cover all debts. A business is solvent if |

| |there are more assets than liabilities. Ratios that help determine solvency are as follows: |

| |Debt-to-Asset ratio = Total liabilities/Total Assets. Lenders usually prefer to provide loans that are equal to or |

| |less than 50% of assets. Therefore a ratio of .50:1 or less is preferred. |

| |Debt to Equity ratio = Total liabilities/Net Worth (Owner’s Equity). Lenders prefer a debt to equity ratio of less |

| |than one. This shows the owners contribution is more than the borrowed funds. |

| |Equity to Asset ratio = Net worth/Total assets. A ratio of .50:1 would mean that for every $1.00 of assets there is |

| |.50 in equity. |

| |C. Equity – The owner’s share of the business. |

|Objective 4: |Compile a balance sheet from a real farm business. |

| |Students will need to complete the beginning of the year balance sheet and end of the year balance sheet in order to |

| |complete the following income statement lesson. |

| |Now that we are through discovering the ins and outs of a balance sheet let’s get some hands on experience compiling |

| |and analyzing balance sheets for Tucker Farms. |

| |Use the attached forms to pass out and utilize in compiling balance sheets. |

|Review/Summary: |Close class with analyzing the ratios that were discovered in compiling the balance sheets. Ask if the business is |

| |liquid and solvent. Ask what the business could do to improve. |

|Application--Extended Classroom|Objective 4 works well as students are asked to compile a balance sheet from information retrieved from the farm |

|Activity: |scenario previously presented. |

|Application--FFA Activity: |This information was pulled from the national farm business management exam. This whole curriculum would be perfect |

| |to get a farm business management team started. |

|Application--SAE Activity: |Have students look at and analyze their own financial sheets in their own record books. |

|Evaluation: |Use the beginning balance sheet for practice. Use the ending balance sheet for an evaluation. |

|Evaluation Answer Key: |Attached. |

Balance Sheets

2004

Tucker Farm Business

Assets

Current Assets 1/1/04 12/31/04

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

Total Current Assets _________________ __________________

Non-Current Assets

______________________________________________________________________________

Total Non-Current Assets __________________ __________________

Total Farm Assets ______________ ______________

Liabilities

Current Liabilities

_______________________________________________________________________________

Total Current Liabilities _________________ __________________

Non-Current Liabilities

Total Non-Current Liabilities _________________ __________________

Total Farm Liabilities _____________ ______________

Net Worth (Equity) _____________ ______________

Balance Sheets

2004

Tucker Farm Business

Assets

Current Assets 1/1/04 12/31/04

Bank Balance________________________$99,661.00__________________________$117,793.00__

Savings and CD’s____________________ $56,176.00__________________________$50,000.00___

Accounts Receivable__________________$8,376.00___________________________$3,900.00____

Crops and Feed Inventory______________$163,010.00_________________________$127,965____

Market Livestock Inventory_____________$50,839.00__________________________$64,590.00___

Prepaid Expenses___________________ $19,234.00__________________________$8,257.00____

Total Current Assets ______$397,276___ _______ $372,505.00__

Non-Current Assets

Machinery, Buildings, and Land________$626,546.00_________________________ $659,201.00__

Total Non-Current Assets ______$626,546.00_________________________$659,201.00__

Total Farm Assets _____$1,023,842.00_______________$1,031,706.00

Liabilities

Current Liabilities

Accounts Payable w/Merchants________$1,829.00__________________________$(50.00)________

Total Current Liabilities ______$1,829.00___ ______$(50.00)________

Non-Current Liabilities

Total Non-Current Liabilities ______$0.00_______ ______$0.00__________

Total Farm Liabilities ____$1,829.00__ ____-$50.00______

Net Worth (Equity) ____$1,022,013.00__ _____$1,031,756.00

Balance Sheet Ratios

1/1/04 12/31/04

Liquidity

Current Ratio_______________________________________________________________________

Working Capital_____________________________________________________________________

Debt Structure______________________________________________________________________

Solvency

Debt/Asset Ratio____________________________________________________________________

Equity/Asset Ratio___________________________________________________________________

Debt/Equity Ratio____________________________________________________________________

Is this business liquid?________________________________________________________________

Is this business solvent?______________________________________________________________

Balance Sheet Ratios

1/1/04 12/31/04

Liquidity

Current Ratio_____________________________217.22:1_____________________7450.10:1______

Working Capital__________________________395,467______________________372,555________

Debt Structure_________________________________1:1__________________________1:1______

Solvency

Debt/Asset Ratio__________________________.002:1________________________.000:1________

Equity/Asset Ratio_________________________.998:1_______________________1.000:1________

Debt/Equity Ratio__________________________.002:1________________________.000:1________

Is this business liquid?____________________Yes____________________________________________

Is this business solvent?___________________Yes___________________________________________

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