NC Farm School In-Class Exercise
Chapter 5 In-Class Balance Sheet Exercise
The Thomas family started “New Farms” a year ago. They have heard that you went
through NC Farm School and they asked you for help in developing what their
balance sheet should look like for their “New Farms”. You asked them to make a list
of all the items that will need to be included on the balance sheet. The list of items
you will need is as below.
Date: January 15th, 2017
 Buildings and Improvements in Production (Pack House, Transplant Starter
House, Deer Fence, etc.) : $14,054
 3 Acre Property value with farm in Production : $168,900
 House with 1 acre of land, Not in Production : $150,560
 Tractor with Implements : $10,540
 Cash Rollover from last year : $15,589
 Checking Account : $5,000
 Accounts Receivable : $4,000
 Real Estate (in Production) Debt that will come due beyond one year : $99,554
 Inventory (feed, fertilizer, chemicals, packaging, etc.) : $1,815
 Used Farm Truck : $5,000
 Tools and Equipment : $4,570
 Personal Vehicles, Not in Production : $36,000
 Operational Loan for the year with Interest : $5,225
 Tax (The business showed a loss in the first year. So, there will be no taxes
owed) : $0
(1) Use those items to develop their first balance sheet. You should make sure that
only items related to production in “New Farms” are included in the balance sheet.
That is, personal assets of the Thomas family do not need to go into the Farm Balance
sheet because they are not being used in the production. (2) After you are done with
developing the balance sheet, calculate some useful formulas and (3) analyze how
their “New Farms” is doing financially.
NC Farm School In-Class Exercise
(1) Balance Sheet as of January 15th, 2017
Current Assets :
Total Current Assets :
Current Liabilities :
_____________
Fixed Assets :
Total Current Liabilities :
____________
Long-Term Liabilities :
Total Fixed Assets :
_____________
Total Long-Term Liabilities : ____________
TOTAL FARM ASSETS :
_____________
TOTAL LIABILITIES :
____________
FARM NET WORTH : ___________________
(2) Analyze the Balance Sheet
 Working Capital (Current Assets – Current Liabilities) : __________________
 Current Ratio (Current Assets / Current Liabilities) :
__________________
 Debt to Asset Ratio (Total Liabilities/Total Assets) :
__________________
 Debt to Equity Ratio (Total Liabilities / Net Worth) :
__________________
(3) What can you say about the financial health of this “New Farms” (in terms of
solvency and liquidity) based on the balance sheet?
________________________________________________________________
________________________________________________________________
________________________________________________________________
NC Farm School In-Class Exercise
Explanation of Analysis
Working Capital
Working capital shows the excess amount of capital that a business would have at any point
during the year. This number needs to be positive to show that the business has the ability to
meet all obligations. This also allows you to measure how a business can absorb any problems,
handle unforeseen expenses, or plan for growth that they may have during the year.
Current Ratio
This ratio says that for every X dollars of current assets you have one dollar of current
liabilities. The ratio measures the ability to pay back the liabilities that would include payments
that needed to be made in the next 12 months, short term. At the minimum this ratio needs to
be 1:1 to ensure that the current liabilities can be paid. This is an overall measure of your ability
to pay current liabilities when solely dependent on using cash assets or the cash flow of the
business. If this ratio gets lower that 1:1 it would mean the business would be in danger of
going out of business in the next year due to lack of cash if the situation does not change.
Debt to Asset Ratio
This ratio states that for every X dollars of total liabilities you have one dollar of total assets.
This is similar to the current ratio only it is a long term measure of a business to pay its debts.
The main difference is that this ratio includes total liabilities, which includes both debts that
come due within a year and long term debts owed by a business, as well as total assets, which
includes the cash assets of the business and capital equipment that could be converted to cash
in an emergency if the business had to pay all its obligations. If this ratio higher than 40%, it
means the business is “highly leveraged” and could fail to meet its payments on long term
capital debt. The ideal ratio will depend on the interest rates of the loans, when they might
come due.
Debt to Equity Ratio
This ratio states that for every X dollars of total liabilities you have one dollar of net worth. This
shows the percentage of net worth that is being financed in comparison to all your holdings
including items that may be used as collateral that a business may not directly own. A Lender
could include your personal assets if they were being used to help finance your business.
Another way to look at this ratio is that it is the measure of how much of your wealth is owned
by the bank or investors.