Your Farm Ag Decision Maker

Income Statement File C3-25

H
ow much did your farm business earn last business records. These include a farm account
year? Was it profitable? There are many book or program, Internal Revenue Service
ways to answer these questions. (IRS) forms 1040F (Profit or Loss From Farming)
A farm income statement (sometimes called a and 4797 (Sales of Business Property), and your
profit and loss statement) is a summary of income beginning and ending net worth statements for
and expenses that occurred during a specified the year. If you use the IRS forms, you will need to
accounting period, usually the calendar year for organize the information a bit differently to make
farmers. It is a measure of input and output in allowances for capital gains treatment of breeding
dollar values. It offers a capsule view of the value stock sales and the income from feeder livestock or
of what your farm produced for the time period other items purchased for resale.
covered and what it cost to produce it. Cash Income
Most farm families do a good job of keeping Cash income is derived from sales of livestock,
records of income and expenses for the purpose livestock products, crops, government payments,
of filing income tax returns. Values from the tax tax credits and refunds, crop insurance proceeds,
return, however, may not accurately measure the and other miscellaneous income sources.
economic performance of the farm. Consequently, • Include total receipts from sales of both raised
you need to have a clear understanding of the livestock and market livestock purchased for
purpose of an income statement, the information resale. Remember not to subtract the original
needed to prepare the statement, and the way in cost of feeder livestock purchased in the previous
which it is summarized. year, even though you do this for income tax
Net farm income, as calculated by the accrual or purposes. Also include total cash receipts from
inventory method, represents the economic return sales of breeding livestock before adjustments
to your contributions to the farm business: labor, for capital gains treatment of income are made.
management, and net worth in land and other These are termed “gross sales price” on IRS Form
farm assets. Cash net farm income also can be 4797.
calculated. It shows how much cash was available • Do not include proceeds from outstanding USDA
for purchasing capital assets, debt reduction, marketing loans in cash income even if you
family living, and income taxes. report these as income for tax purposes. Grain
Preparing the Statement under loan is part of your ending crop inventory
The income statement is divided into two parts: and would be counted twice in the calculation of
income and expenses. Each of these is further net income if it were included in cash receipts as
divided into a section for cash entries and a section well.
for noncash (accrual) adjustments. • Do not include sales of land, machinery, or other
An example income statement is shown at the end depreciable assets; loans received; or income
of this publication. Blank forms for developing from nonfarm sources in income.
your own income statement are available in ISU Adjustments to Income
Extension and Outreach publication FM 1824/ Not all farm income is accounted for by cash sales.
AgDM C3-56, Farm Financial Statements. Changes in inventory values can either increase
Most of the information needed to prepare an or decrease the net farm income for the year.
income statement can be found in common farm Changes in the values of inventories of feed and

FM 1816 Revised April 2017

Page 2 Your Farm Income Statement

grain, market livestock, and breeding livestock can

Example 1
result from increases or decreases in the quantity of The beginning inventory of feeder pigs consists
these items on hand or changes in their unit values of 420 head valued at $75 each, or $31,500.
(see Example 1). Adjusting for inventory changes Ending inventory is 450 head valued at $50
ensures that the value of farm products is counted each, or $22,500. Inventory value decreased by
in the year they are produced rather than the $9,000 even though the number of pigs on hand
year they are sold. Subtract beginning of the year increased by 30 head. The decline in value per
values from end of the year values to find the net head more than offset the increase in numbers,
adjustment. and could have been due to lower market prices
and/or lighter weight of the pigs.
Changes in the market values of land, buildings,
machinery, and equipment (except for
Example 2
depreciation) are not included in the income Beginning inventory of fertilizer was zero.
statement unless they are actually sold. Accounts Closing inventory is worth $11,000. Fertilizer
receivable and unpaid patronage dividends are purchases during the year were $16,000, all
included, however, because they reflect income paid for. The change in inventory is a positive
that has been earned but not yet received. $11,000. Even though $16,000 is shown for
cash expense, only $5,000 ($16,000 – $11,000)
Cash Expenses is charged to the farm operation during the
All cash expenses involved in the operation of the year covered. The $11,000 of fertilizer still
farm business during the business year should be unused will be the beginning inventory value
entered into the expense section of the income for the following year, and will be included in
statement. These can come from Part II of IRS that year’s expenses.
Schedule F. Under livestock purchases include
the value of breeding livestock as well as market Adjustments to Expenses
animals. Some cash expenses paid in one year may be
• Do not include death loss of livestock as an for items not actually used until the following
expense. This will be reflected automatically by a year. These include feed and supply inventories,
lower ending livestock inventory value. prepaid expenses, and investments in growing
crops. Subtract the ending value of these from the
• Income tax and Social Security tax payments are beginning value to find the net adjustment (see
considered personal expenses and should not be Example 2).
included in the farm income statement, unless
the statement is for a farm corporation. Other expenses may be incurred in one year but
not paid until the following year or later, such
• Interest paid on all farm loans or contracts is a as accrued interest, farm taxes due, and other
cash expense, but principal payments are not. accounts payable. Record accounts payable so that
• Do not include the purchase of capital assets products or services that have been purchased but
such as machinery and equipment. Their cost not paid for are counted. However, do not include
is accounted for through depreciation. Land any items that already appear under cash expenses.
purchases also are excluded. Subtract the beginning total of these items from
• You may wish to exclude wages paid to family the ending totals to find the net adjustment.
members because these also are income to the The final expense item is depreciation, or
family. the amount by which machinery, equipment,
buildings, and other capital assets decline in value
due to use and obsolescence. The depreciation
deduction allowed on your income tax return can
Your Farm Income Statement Page 3

be used, but you may want to calculate your own For depreciable items the cost value is the
estimate based on more realistic depreciation rates. original value minus the depreciation taken.
One simple procedure is to multiply the value of For land it is the original value plus the cost of
these assets at the end of the year by a fixed rate, any nondepreciable improvements made. The
such as 10 percent. This way you can group similar difference between the sale value and the cost
items, such as machinery, rather than maintain value is a capital gain or loss. For purposes of the
separate records for each item. farm income statement, capital gain would also
If you include breeding livestock under beginning include the value of “recaptured depreciation”
and ending inventories, do not include any from the farm tax return. Information for
depreciation expense for them. calculating capital gains and losses can come from
the depreciation schedule and/or IRS Form 4797.
The beginning and ending net worth statements
for the farm are a good source of information Sales of breeding livestock can be handled two
about inventory values and accounts payable ways: (1) record sales and purchases as cash
and receivable. ISU Extension and Outreach income and expenses, and adjust for changes in
publication FM 1791/AgDM C3-20, Your Net inventory, or (2) record capital gains or losses
Worth Statement, provides more detail on how when animals are sold and include depreciation as
to complete a net worth statement. ISU Extension an expense. Either method can be used, but do not
and Outreach publication FM 1824/AgDM C3-56, mix them.
Farm Financial Statements, contains schedules Net Farm Income
for listing adjustment items for both income and Add capital gains or subtract capital losses from
expenses. Use the same values that are shown on net farm income from operations to calculate net
your beginning and ending net worth statements farm income. This represents the income earned
for completing adjustments to your net income by the farm operator’s own capital, labor, and
statement for the year. management ability. It also represents the value
of everything the farm produced during the year,
Summarizing the Statement
minus the cost of producing it.
You have now accounted for cash farm income
and cash expenses. You also have accounted for Further Analysis
depreciation and changes in inventory values of Net farm income is an important measure of the
farm products, accounts payable, and prepaid profitability of your farm business. Even more
expenses. You are now ready to summarize two can be learned by comparing your results with
measures of farm income. those for other similar farms. ISU Extension and
Net Farm Income from Operations Outreach publication FM 1845/AgDM C3-55,
Subtract total farm expenses from total farm Financial Performance Measures for Iowa Farms,
income. The difference is the net income generated contains information about typical income levels
from the ordinary production and marketing generated by Iowa farms. It also illustrates other
activities of the farm, or net farm income from important measures and ratios that can help you
operations. evaluate the profitability, liquidity, and solvency of
your own business over time.
Capital Gains and Losses
Some years income is received from the sale Other Financial Statements
of capital assets such as land, machinery, and Two other financial statements are often used
equipment. The sale price may be either more or to summarize the results of a farm business.
less than the cost value (or basis) of the asset. While they are not as common as the net income
statement and the net worth statement, they do
provide useful financial information.
 Page 4 Your Farm Income Statement

Statement of Cash Flows Statement of Owner Equity

A statement of cash flows summarizes all the cash The statement of owner equity ties together
receipts and cash expenditures that were received net farm income and the change in net worth.
or paid out during the accounting year. It is Net worth will increase or decrease during the
sometimes called a flow of funds statement. Unlike accounting year based on three factors:
the net income statement, it does not measure the • net farm income (accrual)
profitability of the business. It merely shows the
sources and uses of cash. The statement of cash • net nonfarm withdrawals (nonfarm income
flows is divided into five sections: minus nonfarm expenditures)
• cash income and cash expenses • adjustments to the market value of capital assets
(affects market value net worth only)
• purchases and sales of capital assets
If these factors are recorded accurately and added
• new loans received and principal repaid to the beginning net worth of the farm, the result
• nonfarm income and expenses (sole proprietor) will equal the ending net worth.
• beginning and ending cash on hand An example of a statement of owner equity is
found at the end of this publication.
If all cash flows are accurately recorded, the total
sources of cash will be equal to the total uses of
cash. If a significant difference exists, the records
should be carefully reviewed for errors and
omissions.
An example of a statement of cash flows is found
at the end of this publication.

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By William Edwards,
Iowa State University Extension and Outreach does not discriminate on
the basis of age, disability, ethnicity, gender identity, genetic information,
retired extension economist,
marital status, national origin, pregnancy, race, religion, sex, sexual wedwards@iastate.edu
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all prohibited bases apply to all programs.) Inquiries regarding non-
discrimination policies may be directed to Ross Wilburn, Diversity Officer,
2150 Beardshear Hall, 515 Morrill Road, Ames, Iowa 50011, 515-294-1482, www.extension.iastate.edu/agdm
wilburn@iastate.edu.
store.extension.iastate.edu
Your Farm Income Statement Page 5

Net Farm Income Statement Example

Name Cyclone Farm Year 2017
Income
Cash Income (numbers in ( ) refer to IRS Sch. F) Income Adjustments Beginning Ending
Sales of livestock bought for resale (1a) $423,735 Hedging accounts balance $41,500 $47,909
Sales of raised livestock, grain, etc. (2) 451,028 Crops held for sale or feed 538,150 489,105
Cooperative distributions paid (3b) 4,280 Market livestock 296,160 329,403
Agricultural program payments (4b) Accounts receivable 15,445
Crop insurance proceeds (6b) Unpaid cooperative distributions 24,581 28,861
Custom hire income (7) 8,740 Breeding livestock 201,000 222,600
Other cash income (8) 2,563 Other current assets
Sales of breeding livestock 5,680 Subtotal of income adjustments $1,116,836 $1,117,878
Hedging accounts withdrawals 3,000 b. Net income adjustment (ending - beginning) $1,042
a. Total Cash Income $899,026 c. Total Farm Income (a + b) $900,068

Expenses
Cash Expenses (numbers in ( ) refer to IRS Sch. F) Expense Adjustments (paid in advance) Beginning Ending
Car and truck expenses (10) Investment in growing crops $13,040 $8,680
Chemicals (11) $18,456 Commercial feed on hand 10,000 10,940
Conservation expenses (12) Prepaid expenses 20,387 0
Custom hire (13) 9,589 Supplies on hand 14,500 2,000
Employee benefits (15) Subtotal of adjustments $57,927 $21,620
Feed purchased (16) 179,150 e. Net adjustment (beginning - ending) $36,307
Fertilizer and lime (17) 75,890 Expense Adjustments (due) Beginning Ending
Freight, trucking (18) 15,690 Accounts payable $4,589 $1,859
Gasoline, fuel, oil (19) 11,899 Farm taxes due 4,400 4,750
Insurance (20) 18,913 Accrued interest 23,725 22,484
Interest paid (21a + 21b) 25,442 Subtotal of adjustments $32,714 $29,093
Labor hired (22) 13,654 f. Net adjustment (ending - beginning) ($3,621)
Pension and profit-share plans (23)
Rent or lease payments (24a + 24b) 125,600 g. Depreciation $53,150
Repairs, maintenance (25) 13,136 h. Total Farm Expenses (d + e + f + g) $832,353
Seeds, plants (26) 56,800
Storage, warehousing (27) i. Net Farm Income from Operations (c - h) $67,715
Supplies purchased (28) 4,890
Taxes (farm) (29) 8,800 j. Sales of farmland $100,000
Utilities (30) 4,629 k. Cost value of land sold $80,000
Vet. fees, medicine, breeding (31) 6,891 l. Capital gains or losses (j - k) $20,000
Other cash expenses (32) 4,588
Livestock purchased 132,500 m. Net Farm Income (accrual) (i + l) $87,715
Hedging accounts deposits 20,000
d. Total Cash Expenses $746,517

Value of Farm Production

Net Farm Income (cash) (a - d) $152,509 $588,418
(c - purchases of feed & livestock)
Page 6 Your Farm Income Statement

Net Farm Income Statement

Name Year

Income
Cash Income (numbers in ( ) refer to IRS Sch. F) Income Adjustments Beginning Ending
Sales of livestock bought for resale (1a) Hedging accounts balance
Sales of raised livestock, grain, etc. (2) Crops held for sale or feed
Cooperative distributions paid (3b) Market livestock
Agricultural program payments (4b) Accounts receivable
Crop insurance proceeds (6b) Unpaid cooperative distributions
Custom hire income (7) Breeding livestock
Other cash income (8) Other current assets
Sales of breeding livestock Subtotal of income adjustments
Hedging accounts withdrawals b. Net income adjustment (ending - beginning)
a. Total Cash Income c. Total Farm Income (a + b)

Expenses
Cash Expenses (numbers in ( ) refer to IRS Sch. F) Expense Adjustments (paid in advance) Beginning Ending
Car and truck expenses (10) Investment in growing crops
Chemicals (11) Commercial feed on hand
Conservation expenses (12) Prepaid expenses
Custom hire (13) Supplies on hand
Employee benefits (15) Subtotal of adjustments
Feed purchased (16) e. Net adjustment (beginning - ending)
Fertilizer and lime (17) Expense Adjustments (due) Beginning Ending
Freight, trucking (18) Accounts payable
Gasoline, fuel, oil (19) Farm taxes due
Insurance (20) Accrued interest
Interest paid (21a + 21b) Subtotal of adjustments
Labor hired (22) f. Net adjustment (ending - beginning)
Pension and profit-share plans (23)
Rent or lease payments (24a + 24b) g. Depreciation
Repairs, maintenance (25) h. Total Farm Expenses (d + e + f + g)
Seeds, plants (26)
Storage, warehousing (27) i. Net Farm Income from Operations (c - h)
Supplies purchased (28)
Taxes (farm) (29) j. Sales of farmland
Utilities (30) k. Cost value of land sold
Vet. fees, medicine, breeding (31) l. Capital gains or losses (j - k)
Other cash expenses (32)
Livestock purchased m. Net Farm Income (accrual) (i + l)
Hedging accounts deposits
d. Total Cash Expenses

Value of Farm Production

Net Farm Income (cash) (a - d)
(c - purchases of feed & livestock)
Your Farm Income Statement Page 7

Statement of Cash Flows

Name Cyclone Farm Year 2017
Cash In Cash Out
Cash farm income and expenses (operating)
Total cash income (line a, net farm income statement) $899,026 xxx
Total cash expenses (line d, net farm income statement) xxx $746,517
Capital assets (investing)
Sales of capital assets $106,500 xxx
Cost of purchases and trades xxx $102,000
Loans (financing)
New loans received $446,580 xxx
Principal paid on loans xxx $524,070
Nonfarm (withdrawals)
Nonfarm income invested in the farm business xxx
Cash withdrawn from the farm for family living, taxes, savings, etc. xxx $69,000
Cash on hand (balance in farm checking and savings accounts)
Beginning of year $6,146 xxx
End of year xxx $16,665

Total of cash in and cash out* $1,458,252 $1,458,252

*If all cash transactions are included correctly, the totals for the two columns will be approximately equal.

Statement of Owner Equity

Name Cyclone Farm Year 2017
Cost Value Market Value
a. Farm net worth, beginning of year $1,665,962 $1,820,062
(Line g, beginning net worth statement)
b. Change in market value of capital assets (net of depreciation) xxx $148,150
(Line i, ending net worth statement, market value __$166,865___ minus cost value __$18,715___)
c. Net farm income (accrual) $87,715 $87,715
(Line m, net farm income statement) same value for cost and market
d. Net nonfarm withdrawals: (nonfarm income invested - cash withdrawn) ($69,000) ($69,000)
(see statement of cash flows) same value for cost and market
e. Calculated change in net worth (b + c + d) $18,715 $166,865
f. Farm net worth, end of year (Line g, ending net worth statement) $1,684,677 $1,986,927
g. Actual change in net worth (f - a) $18,715 $166,865
(line e should approximately equal line g)
h. Percent of net farm income retained in the business this year ((c + d) / c) 21% xxx
i. Percent of change in market value net worth from retained earnings
11% xxx
this year (g, cost value / g, market value)
Page 8 Your Farm Income Statement

Statement of Cash Flows

Name Year
Cash In Cash Out
Cash farm income and expenses (operating)
Total cash income (line a, net farm income statement) xxx
Total cash expenses (line d, net farm income statement) xxx
Capital assets (investing)
Sales of capital assets xxx
Cost of purchases and trades xxx
Loans (financing)
New loans received xxx
Principal paid on loans xxx
Nonfarm (withdrawals)
Nonfarm income invested in the farm business xxx
Cash withdrawn from the farm for family living, taxes, savings, etc. xxx
Cash on hand (balance in farm checking and savings accounts)
Beginning of year xxx
End of year xxx

Total of cash in and cash out*

*If all cash transactions are included correctly, the totals for the two columns will be approximately equal.

Statement of Owner Equity

Name Year
Cost Value Market Value
a. Farm net worth, beginning of year
(Line g, beginning net worth statement)
b. Change in market value of capital assets (net of depreciation) xxx
(Line i, ending net worth statement, market value _____________ minus cost value _____________)
c. Net farm income (accrual)
(Line m, net farm income statement) same value for cost and market
d. Net nonfarm withdrawals: (nonfarm income invested - cash withdrawn)
(see statement of cash flows) same value for cost and market
e. Calculated change in net worth (b + c + d)
f. Farm net worth, end of year (Line g, ending net worth statement)
g. Actual change in net worth (f - a)
(line e should approximately equal line g)
h. Percent of net farm income retained in the business this year ((c + d) / c) % xxx
i. Percent of change in market value net worth from retained earnings
% xxx
this year (g, cost value / g, market value)