Farm Management 9th Edition by Ronald Kay – Test Bank

 

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Sample Test

CHAPTER 3

 

SAMPLE TEST QUESTIONS – MULTIPLE CHOICE

 

1.   A fiscal accounting period is one which

2.   covers January 1 through December 31

3.   is only 3 months in length

4.   ends on any date other than December 31

5.   can only be used by governmental agencies

 

2.   Selling grain from storage would be which type(s) of farm business activity?

3.   operating

4.   investment

5.   financing

6.   operating and investment

 

3.   When using cash accounting which of the following accounts would never be used?

4.   grain sales

5.   depreciation

6.   fertilizer purchases

7.   accounts payable

 

4.   A prepaid expense is one where payment is made

5.   by check

6.   in an accounting period prior to the one in which the item will be used to produce income

7.   in a series of payments over time

8.   before the bill is even received

 

5.   Which of the following would not be recorded when using a single-entry, cash accounting system?

6.   charging $2,000 worth of chemicals at the farm supply store

7.   billing a neighbor $850 for baling hay

8.   recognizing that $3,476.34 of interest has accrued since the last interest payment

9.   all of the above

 

6.   One advantage of a double-entry accrual accounting system over a single-entry cash system is

7.   it is easier to enter transactions

8.   a current balance sheet is always available

9.   noncash transactions do not need to be entered

10.                it can be done on a computer

 

 

7.   An organization that develops and publishes guidelines for farm financial analysis and reporting is called the:

8.   Farm Accounting Association

9.   Farm Credit System

10.                Agricultural Analysis Association

11.                Farm Financial Standards Council

 

8.   At the end of the year a farmer has an unpaid bill at the local machinery repair shop. It would be shown in an accrual accounting system as a(n)

9.   prepaid expense

10.                account receivable

11.                account payable

12.                accrued expense

 

9.   A major advantage of accrual accounting over cash accounting is

10.                a more accurate estimate of annual profit

 

1.   simplicity

2.   always shows a higher profit

3.   can use single entry instead of double entry

 

10.                The Farm Financial Standards Council (FFSC)

11.                reviews loan applications

12.                recommends uniform procedures and standards for preparing farm financial statements

13.                recommends changes in farm tax regulations to the Internal Revenue Service

14.                sets financial goals for different types of farms and ranches

 

11.                Using double entry accounting, transactions can be posted to which accounts

12.                only income and expense

13.                only assets and liabilities

14.                income, expense, asset, and/or liabilities

15.                only cash and noncash

 

12.                When something is purchased and paid for in a year before it will be used to produce income it is called a(n)

13.                accrued expense

14.                account payable

15.                prepaid expense

16.                account receivable

 

13.                An organized list of all accounts used by an accounting system is called

14.                a chart of accounts

15.                a balance sheet

16.                an income statement

17.                a debit

 

14.                According to the cash accounting method, expenses are recorded

1.   when they are paid

2.   when they are accrued

3.   at the end of each month

4.   all of the above

 

15.                The Chart of Accounts in a farm accounting system consists of:

16.                A list of unpaid bills to dealers and suppliers

17.                A diagram of the various fields on the farm

18.                A diagram of the lines of authority on the farm

19.                A list of income, expense, asset and liability categories

 

16.                Which type of accounting system would be most useful to a farmer who wanted to know which of the six crops he/she produced was most profitable?

17.                cash accounting

18.                accrual accounting

19.                enterprise accounting

20.                double-entry accounting

 

SAMPLE TEST QUESTIONS – TRUE/FALSE

 

T	F	1.  An accounting period must be from January 1 to December 31.
T	F	2.   Good farm records can be useful when applying for a farm loan.
T		3.   An accounting system only needs to be able to record those transactions which are part of the farm’s production activities.
	F	4. Depreciation is a noncash expense which is included as an expense when using cash accounting.
T	F	5.   Revenue and expenses can be properly matched in the correct time period when using cash accounting.
T	F	6.   A single-entry accounting system does not maintain current values for assets and liabilities.
T	F	7.   A depreciation schedule is a necessary part of a complete accounting system.
T	F	8.   Records are of no use when trying to obtain a new loan.
T	F	9.   The basic accounting equation is Assets + Liabilities = Owner Equity.
T	F	10. Changes in inventory values are not included in a cash accounting system.
T	F	11. Cash accounting will always show a lower profit than accrual accounting.
T	F	12. Profit or net farm income is equal to total revenue for the accounting period minus total expenses for the same period.
T	F	13. Farmers and ranchers must use a calendar year accounting period.
T	F	14. Most farmers and ranchers use the cash method of accounting.
T	F	15. The accrual method of accounting is easier to use than the cash method.

 

 

SAMPLE TEST QUESTIONS – PROBLEMS

 

Given the following chart of accounts, what 2-digit codes and $ amount would you assign to each of the cash transactions listed below?  Some may have two entries.

 

Transaction code (1st digit): 1 – ordinary income                  6 – operating expense

2 – capital asset sales                7- capital asset purchases

3 – new loans received              8 – loan principal repaid

 

Enterprise code (2nd digit):    1 – tomatoes

2 – sweet corn

3 –  pumpkins

Code               $ amount

1.   $450 received from sale of tomatoes at the farmers market ________ _________

2.   $500 paid for weeding tomatoes (20 hours) and pumpkins (30 hours)________ _________

________        _________

1.   $1,000 for construction of a roadside stand to sell sweet corn ________ _________

2.   $800 borrowed for purchase of materials for the roadside stand ________ _________

 

Code               $ amount

1.   11 $450

2.   61 $200

                                                                                                            63                    $300

1.   72 $1,000

2.   d. 32 $800

 

 

15.                List 4 pieces of information that should be recorded when a cash expenditure transaction is entered into a farm accounting system:

 

1._________________________________________

 

2._________________________________________

 

3._________________________________________

 

4._________________________________________

 

1.Value ($ amount)     2. Date    3. Purpose      4. Person or entity paid

 

 

CHAPTER 5

 

SAMPLE TEST QUESTIONS – MULTIPLE CHOICE

 

1.   The depreciation method with the greatest depreciation in the first year is

2.   double declining balance

3.   150% declining balance

4.   straight line

5.   all of the above have the same depreciation in the first year

 

2.   Which of the following cannot be valued using the cost less accumulated depreciation method?

3.   tractor

4.   barn

5.   purchased dairy cow

6.   land

 

3.   The proper term for the value found by subtracting accumulated depreciation from the asset’s original cost is

4.   salvage value

5.   market value

6.   book value

7.   use value

 

4.   The total depreciation over an asset’s useful life is equal to

5.   cost minus salvage value

6.   cost plus salvage value

7.   book value

8.   salvage value

 

5.   To be depreciable, an asset must have a useful life of

6.   more than ten years

7.   five years or more

8.   more than one year

 

1.   six months or longer

 

6.   The depreciation method with the smallest annual depreciation in the first year of life is

7.   straight line

8.   double declining balance

9.   150% declining balance

10.                all depreciation methods have the same first-year depreciation.

 

 

7.   A depreciable asset’s book value will equal its salvage value

8.   only on the purchase date

9.   only at the midpoint of its useful life

10.                only at the end of its useful life

1.   every year of its useful life

 

8.   Depreciation is a cost associated with which of the following assets:

9.   Farm land

10.                Nitrogen fertilizer

11.                A machinery storage shed

12.                Corn silage stored in a silo

 

9.   Which of the following items on a balance sheet would not be considered when making accrual adjustments to net income?

1.   accrued interest

2.   change in market value of land

3.   inventories of market livestock

4.   pre-paid expenses

 

10.                Which of the following is not included as an expense on the net farm income statement?

1.   depreciation

2.   interest payments made on loans

3.   principal payments made on loans

4.   the cost of supplies used but not yet paid for

 

11.                Which financial measure shows how many dollars are left over after opportunity costs for equity capital and unpaid labor have been deducted from net farm income from operations?

1.   Return on assets

2.   Net farm income

3.   Return to labor and management

4.   Return to management

 

12.                The Statement of Cash Flows summarizes:

1.   Everything the business owns and owes as of a certain date

2.   All the sources and uses of cash in the business over a period of time

3.   All the income and expenses in the business over a period of time

4.   The change in owner equity in the business over a period of time

13.                Which of the following is not a general category of cash inflows and cash outflows in a farm or ranch business?

1.   Noncurrent

2.   Financing

3.   Operating

4.   Investing

 

Which type of financial statement would be most useful for answering each of the following questions?  Indicate with the appropriate letters.

 

NW = Net worth statement

NI   = Net income statement

OE  = Statement of owner equity

CF = Statement of cash flows

 

1.   a) _NI___ How much did your capital assets depreciate last year?

2.   b) _NI____ How much net farm income did the operation make last year?

3.   c) __NW___ Is the operation’s solvency above average?

4.   d) __OE___ How much did the market value of farm assets change last year?

5.   e) __CF___ How much did the business borrow in new loans last year?

 

SAMPLE TEST QUESTIONS – TRUE/FALSE

 

T	F	1. Book value is equal to cost minus salvage value.
T		2.   Market value is the most conservative valuation method to use during periods of inflation.
T	F	3.   All depreciation methods will result in the same total depreciation over the full life of the asset.
	F	4.  It is possible for an asset to have a $0 salvage value.
T	F	5.   Book value and market value will always be the same dollar amount.
T	F	6.   Book value will equal salvage value at the end of the asset’s useful life.
T	F	7. Total operating expenses include interest paid on outstanding loans.
T	F	8. A tractor can be valued using the farm production cost method.
T	F	9. The market value of an asset cannot be lower than its cost.
T	F	10. Cost less depreciation cannot be used to value purchased feeder livestock.
T	F	11. An increase or decrease in the value of crop inventories during the accounting year creates an adjustment to Expenses on the Income Statement.
T	F	12.  Double declining balance is a “fast” depreciation method.
T	F	13. Salvage value is the term used for what an asset is worth at the end of its useful life.
T	F	14. The market value of an asset cannot be less than its book value.
T	F	15. Straight line is a slower depreciation method than double declining balance.
T	F	16. Market value will generally result in a lower value than other valuation methods, particularly during periods of high inflation.
T	F	17. At the end of an asset’s useful life, accumulated depreciation is an amount equal to the asset’s cost minus its salvage value.
T	F	18. 150% declining balance is a faster depreciation method than straight line.
T	F	19. At the end of a depreciable asset’s useful life, its book value will equal its salvage value.
T	F	20. Grain in storage can be valued using the cost less accumulated depreciation method.
T	F	21. Depreciation reflects the decline in values of an asset over time due to wear and tear, age and obsolescence.

 

SAMPLE TEST QUESTIONS – DISCUSSION

 

1.   What are the differences between net farm income computed on a cash basis versus an accrual basis?

 

A cash basis income statement would include only cash revenue received and cash expenses paid during the accounting period even though the revenue may have been earned or the expense incurred in another accounting period.  An accrual basis income statement would also include changes in inventory, accounts receivable, accounts payable, prepaid expenses, and accrued expenses.

 

2.   Which is the preferred measure of net farm income? Explain why.

 

While the total net farm income over the entire life of the business would be the same with either system, the accrual income statement is a much better measure for any given year.

As an extreme example, assume, all crops produced in a year are stored for sale in the following year.  There would be no cash income from crop sales but there would be expenses incurred from producing this crop.  Net farm income would be negative (very negative!) and not a good indicator of how profitable the farm actually was that year.

 

3.   Briefly explain why the following cash inflows — New loans received, Capital asset sales, and Nonfarm income — are not included on the net income statement?

In all three cases, these are revenue, but not income originating from the production and sale of a good or service, so they should not appear on a net income statement.

 

 

SAMPLE TEST QUESTIONS – PROBLEMS

1.   When accrual adjustments are made to cash income and expenses at the end of the year, are the following beginning and ending values added or subtracted? Show by + or – signs.

Beginning Value    Ending Value

Adjustment to cash income:   Inventory of stored grain     __________   ___________

Accounts receivable    __________                    ___________

Adjustment to cash expenses: Accrued interest              __________   ___________                                                          Supplies on hand                           ___________   ___________

 

 

 

2.   Given the following chart of accounts, what 2-digit codes and $ amount would you assign to each of the cash transactions listed below? Some may have two entries.

Transaction code (1st digit):  1 – operating income

2 – capital asset sales (investment)                                                         3 – new loans received (financing)

4 – operating expense

5- capital asset purchases (investment)

6 – loan principal repaid (financing)

 

Enterprise code (2nd digit):    1 – tomatoes

2 – sweet corn

3 –  pumpkins

Code      $ amount

1.   $450 received from sale of tomatoes at the farmers market ________ _________

2.   $500 paid for weeding tomatoes (20 hours) and pumpkins (30 hours)________ _________

________  _________

1.   $1,000 for construction of a roadside stand to sell sweet corn ________ _________

2.   $800 borrowed for purchase of materials for the roadside stand ________ _________

 

Code      $ amount

1.   11 $450

2.   41 $200

                                           43        $300

1.   52 $1,000

2.   d. 32 $800

 

3.   Consider the amount and timing of the following transactions made by I.M. Farmer:

 

December, 2021:  Purchased, paid for and applied fertilizer for the 2022 grain crop. $5,000.

 

April, 2022:  Purchased and paid for seed, chemicals, fuel, etc.  $60,000.

 

November, 2022:  Part of grain sold for $100,000.  The rest placed in storage to sell in 2023,           valued currently at $90,000.

 

December 31, 2022:  Accrued interest, $500.

 

January 15, 2023:  Paid accrued interest, $500.

 

May, 2023:  Remaining 2022 grain sold. $105,000.

 

1.   A) What is the 2022 profit under cash accounting? (Show work)

 

 

$100,000 – $60,000 = $40,000  (consider only cash received and cash spent during 2022)

 

 

1.   B) What is the 2022 profit under accrual accounting? (Show work.)  4 points

 

($100,000 + $90,000) – ($60,000 + $5,000 + $500) = $124,500

 

Consider all items that increase or decrease net worth over the accounting period.  The May, 2023 sale of grain in excess of its inventory value does not affect 2022 income.  It counts as a change in inventory value that affects 2023 income.

 

 

 

	Original Cost	Salvage Value	Useful Life
Tractor	$75,000	0	5 years
Tillage implement	$84,000	$21,000	7 years

 

 

 

4.   Use the information above to fill in the annual depreciation for these machines in the table below, using both straight line (columns 1 and 2) and double declining balance (columns 3 and 4). Round depreciation values to the nearest dollar. For the tractor on DDB, be sure to switch to straight line (on the remaining value for the remaining life) as soon as you get more depreciation by making the switch.  For the tillage implement on DDB, be careful not to depreciate below the salvage value.

 

Year	Straight Line		Double Declining Balance
	Tractor	Tillage Implement	Tractor	Tillage Implement
1	15,000	9,000	30,000	24,000
2	15,000	9,000	18,000	17,143
3	15,000	9,000	10,800	12,245
4	15,000	9,000	8,100	8,746
5	15,000	9,000	8,100	866
6		9,000
7		9,000

 

 

5.   Use the information below to answer the questions about Farmer Brown.

 

(*Note:  The “interest paid” has already been included in the expenses in the left-hand column but is listed separately so that you can use it in some calculations, as needed.)

 

_______________________________Show All Work!__________________________

 

1)  Compute Net Farm Income from Operations :   $46,000

 

NFIO = total revenue (250,000 +95,000) – total expenses (175,000 + 90,000 +35,000) +/- inventory change + 1.000

 

2)  Calculate Net Farm Income: $47,500

NFI = NFIO +/- Gain/loss capital assets

 

3)  Calculate Adjusted Net Farm Income from Operations:  $74,000

ANFIO = 46.000 + 28,000

 

4)  Calculate Rate of Return on Assets:  ($74,000 – 32,000)/600,000 = 7.0%

 

 

5) Calculate Rate of Return on Equity: ($46,000 – 32,000)/250,000 = 5.6%

Note: This farm is covering the opportunity cost of equity capital (5.6% > 4%)

 

6) Calculate Return to Labor and Management:

46,000 – (250,00X.05) = 46,000 – 12,500 = 33,500

 

Note:  This farm is covering the OCLM

7) Is borrowed capital earning an average loss or an average profit?   Average loss (RoE < RoA)

 

8)  If Farmer Brown paid $5,000 in income taxes and spent $25,000 on living expenses, how much did net worth change over this accounting period?

 

$47,500- $30,000 = $17,500     This is NFI – (living expenses + taxes)