Division of Agricultural Sciences and Natural Resources • Oklahoma State University
AGEC-753
Oklahoma Cooperative Extension Fact Sheets
are also available on our website at:
extension.okstate.edu
Oklahoma Cooperative Extension Service
February 2021
Developing an Income
Statement
1 “Financial Guidelines for Agricultural Producers: Recommendations of the
Farm Financial Standards Council (Revised),” January 2014.
2 OSU Extension Fact Sheets AGEC-751, Developing A Cash Flow Statement
and AGEC-752, Developing a Balance Sheet, discuss information require-
ments and include sample statements.
3 The FFSC recommends that income from nonfarm sources should not be
shown on the farm income statement. Because the OSU forms are used for
a variety of purposes, we have chosen to include them.
Rodney Jones
Extension Specialist for Ag Finance and Management
Courtney Bir
Extension Specialist for Farm Management
Brent Ladd
Extension Assistant
The income statement indicates whether a business has
earned money or suffered a loss. Actual nancial statements
help evaluate past performance so that improvements can
be made as needed. Projected nancial statements allow for
evaluating options from production to marketing strategies to
risk management. It is important to keep good farm records
throughout the year to help ease the burden of nancial state-
ment preparation and planning.
To be useful, analysis needs to be done at regular inter-
vals using consistent reporting techniques. Annual reviews
should be standard, but for some businesses monthly, quar-
terly, and/or semi-annual evaluations are necessary. Most
people prepare tax information on a calendar year. Therefore,
nancial planning is often done on the same calendar year
basis. The balance sheet, cash ow, and income statement
planning periods need to align to be effective. The instructions
that follow are generally consistent with the Farm Financial
Standards Council recommendations.
1
The Income Statement
The income statement shows whether the farm opera-
tion returns a prot or a loss to unpaid labor, management,
and equity. Protability is dened as the extent to which an
entity generates revenue over and above expenses with the
available assets. Assets are items of value owned by the busi-
ness plus items owed to the business. Information from the
income statement is also used to evaluate repayment capac-
ity, capital investment potential, and nancial efficiency (see
OSU Extension Fact Sheet AGEC-790, Evaluating Financial
Performance and Position).
This OSU Fact Sheet explains how to prepare the income
statement. Information, like that found in balance sheets and
a cash ow statement, is required to develop the income
statement.
2
The cash ow statement should cover the same
accounting period as the income statement. Balance sheets
are required for the beginning and ending of the accounting
period.
Two basic accounting methods exist for determining net
income. Both the cash and accrual methods are acceptable
in tax reporting for farmers, and each has its advantages and
disadvantages. Most farmers use cash accounting to compute
income taxes. Cash accounting requires only single entry re-
cord keeping, which is achieved through maintaining receipts
for income and expenses. Under the cash method, receipts
and expenses are reported for the period during which cash
or money actually changes hands. If feed is purchased and
used during one accounting period, but not paid for until the
next accounting period, the feed expense is not recorded
until it is paid in the next accounting period. In this example,
prots are overstated during the rst period and understated
during the next accounting period. Reliance on cash income
gures can delay recognition of nancial problems.
The accrual method more accurately reports net income
and is better for nancial analysis. However, accrual accounting
requires double-entry bookkeeping, which is more complicated.
Accrual accounting “matches” associated expenses to revenue
as they are earned. The Farm Financial Standards Council
recommends that farm nancial statements be developed
using “accrual adjusted” accounting, a compromise between
cash and accrual methods. Accrual adjusted nancial state-
ments are based on cash records with accrual adjustments
to revenue (e.g., changes in inventories, accounts receivable,
and prepaid expenses) and expenses (e.g., accounts payable,
accrued taxes, and interest). The Farm Financial Standards
Council recommends that 1) the general income statement
should include a calculation of gross revenues and net farm
income both on an accrual adjusted basis 2) a charge for
unpaid family labor and management should not be included
in the income statement 3) incidental revenue and expenses
should be separately reported on the income statement after
net farm income.
Example
A case study involving James and Dolly Madison is used in
the examples of this fact sheet.
3
The accrual adjusted income
AGEC-753-2
Table 1. Gain or loss on sale of raised breeding stock.
Animals Number Base Total Base Total Cash Net
Sold of Animals Value Value Recieved Gain/Loss
Cows 10 $1,000 $10,000 $9,000 ($1,000)
4 See OSU Extension Fact Sheet AGEC-791, Schedules of Assets, for more
information on valuing assets and calculating gains and losses when assets
are sold.
5 Changes in the value of purchased livestock (calves, chicks, etc.) that are
purchased young to be raised for breeding should also be included.
statement is being prepared for the scal year March 2019
through February 2020. The primary sections of the income
statement are Gross Farm Revenue, Total Operating Expenses,
Interest Expense, Net Farm Income From Operations, Gain/
Loss on Sale of Farm Capital Assets, Gain/Loss Due to Change
in General Base Values of Breeding Livestock, Net Farm
Income, Nonfarm Revenue, Nonfarm Expenses, Gain/Loss
on Sale of Capital Assets and Marketable Securities, Income
Before Taxes and Extraordinary Items, Income Tax Expense,
Extraordinary Items, and Net Income. Some key components
for evaluation are Gross Revenue, Total Expenses, Net Farm
Income From Operations, Net Farm Income, and Net Income.
Note: The most efficient way to develop an accrual adjusted
income statement is to have a completed cash ow statement
and balance sheets for the beginning and end of the account-
ing period at hand. References to line numbers in the OSU
Cash Flow and Balance Sheet forms (OSU Extension fact
sheets AGEC-751 and AGEC-752) are given both in the text
that follows and on the income statement forms. For instance,
CF 1 means information can be transferred from line one of
the cash ow; BS 6 C means numbers can be taken from the
balance sheet, line 6, column C.
Warning: If you customize the cash ow statement lines,
be careful when transferring information to the appropriate
lines in the income statement.
Revenue
Revenue is income generated by the farm operations. Not
all cash inows are income. Cash proceeds from an operat-
ing loan are an example of a cash receipt that is not income.
Revenue includes proceeds from the sales of market livestock,
livestock products and crops, plus government payments.
Changes in inventories of market livestock, raised crops, and
feed, gains or losses from the sale of culled breeding stock,
changes in accounts receivable, and prepaid expenses are
also recorded in the revenue section.
Gross Revenue from Market Livestock Sales. Sale of
raised market livestock, livestock purchased for resale, and
livestock products are recorded in the Gross Revenue section.
Raised market livestock may include stockers, feeder pigs,
and broilers. Livestock purchased for resale may include pur-
chased stocker steers and heifers or feeder pigs. Examples of
livestock products are milk, eggs, wool, and mohair. Note that
sales of breeding livestock are not included in this section.
In the Madison example, sales of livestock purchased
for resale are $126,489 (CF 1), Livestock Product Sales are
zero (CF 2), and Market Livestock Sales (raised livestock) are
$34,592 (CF 3). The accrual adjustment to livestock sales is
the difference in the value of market livestock inventories at
the beginning and ending of the accounting period. In other
words, this is the change in Market Livestock Inventories
(BS 5 C). Since the value of market livestock at the end of the
year is the same, the change in market livestock inventories
for the Madison example is zero. Decreases in inventory are
subtracted from the cash sales gure when calculating gross
revenue. This adjustment to revenue may result from either a
decrease in the market value of livestock, a reduced number
of animals, or both. Increases in market livestock inventories
are added to the cash sales gures, increasing gross revenue.
A positive change in inventory would suggest that more rev-
enue was generated either due to an increase in market value
and/or an increase in the number of livestock on hand. Gross
Revenue from Market Livestock/Products is found by adding
lines 1 through 4 on the Income Statement. The Madisons
have gross revenue from market livestock products of $161,081
(calculated from 126,489 + 34,592).
Gross Revenue from Crops. Total crop sales should
be broadly interpreted to include income from the sales of
raised crops: wheat, corn, soybeans, fruits and vegetables, as
well as hay, straw, and silage. Revenue from sales of crops
or feed purchased for resale would also be included in this
section. The Madisons have Crop Sales of wheat and alfalfa
hay, $166,075; and prairie hay, $5,700 (CF 4 and CF 5). The
Change in Stored Crop and Feed inventories is an accrual
adjustment to the crop revenue (BS 6 C), summarizing the
differences between beginning and ending values of raised
crop and feed inventories. The Madisons recorded an increase
in the value of inventories of $200. An increase in inventory
increases revenue for the accounting period. Gross Revenue
from Crops sums the lines 6,7 and 8 of this income statement
section. The Madison total is $171,975 which is 166,075 +
5,700 + 200.
Other Revenue and Accrual Adjustments to Revenue.
Ag Program payments, cash rent for farm property, crop insur-
ance claim proceeds, interest earned from farm savings and
loans, patronage dividends from farm related entities (coopera-
tives, rural electric cooperatives, etc.), and custom work are
other sources of farm revenue. Ag Program Payments, on line
10, include SURE, ACRE, CRP, disaster, and diversion pay-
ments (CF 6). The total for Other Farm Income is entered on
line 11 (CF 7). Patronage dividends from farm-related entities
are entered on line 12 (CF 8). Custom work is farm-related
use of machinery, equipment, or labor for pay (e.g., baling
hay, harvesting wheat, hauling grain). The Madisons have ag
program payments totaling $7,567. The Madisons have other
farm income of $28,672 from custom work. The patronage
dividends for the Madisons totaled $280.
Gain/Loss from the Sale of Culled Breeding Stock sums
gains and losses from sales of raised and purchased breed-
ing animals culled (line 13). For raised breeding livestock, the
gain/loss is calculated by subtracting the base value from the
sale proceeds; for purchased breeding stock, subtract the
cost basis from the sale proceeds to determine the gain or
loss.
4
A positive number indicates a gain on the sale; a nega-
tive number indicates a loss on the sale. Only the gain from
the sale, not the gross revenue, is recorded; otherwise, the
revenue will be overstated. The raised cows are expected to
have a cash receipt of $9,000, a loss of $1,000 when com-
pared to their base value (Table 1). If a material downsizing
or complete liquidation of the herd occurs, the gain/loss on
sale should be recorded on the income statement after Net
AGEC-753-3
6 See OSU Extension Fact Sheet AGEC- 323, Valuation of Raised Breeding
Livestock, for more detail.
Table 2. Schedule of Raised Breeding Livestock, 3/1/2019.
1 2 3 4 5 6 7 8 9 10 11 12
Raised Number Base Value Total Transferred Transferred Sold Died Number Base Value Total New Base New Base
Description of Animals per head Base Value In Out of Animals per Head Base Value Value Value of
3/1/19 3/1/19 3/1/20 3/1/20 per Head Beginning
Inventory Inventory
(Col. 1xCol.11)
Repl. Heifers 10 $750 $7,500 10 10 0 0 10 $750 $7,500 950 $9,500
Bred Heifers 10 $945 $9,450 10 10 0 0 10 $945 $9,450 1,145 $11,450
Cows 80 $1,000 $80,000 10 0 10 0 80 $1,000 $80,000 1,000 $88,000
$96,950 $96,950 $108,950
Farm Income from Operations and before accrual adjusted
Net Farm Income (line 61).
Change in Value Due to Change in Quantity of Raised
Breeding Stock is the sum of the changes in value of raised
livestock that are being retained for possible future use in
the breeding herd, but for which the related cash costs have
been expensed in the income statement.
5
Raised livestock for
breeding are not depreciated if using a base-value method.
Instead, revenue is recognized each period when the animals
are at a transfer point such as changing from market livestock
to replacement heifer, replacement heifer to bred heifer or bred
heifer to cow. The value recorded on line 14 of the income
statement is the gain in value (no cash exchanged) of market
livestock as they change livestock classes within the breeding
herd.
Table 2 (columns 1 through 10) summarizes the Madisons
raised breeding stock activities for the year and lists the base
values (group approach) used for livestock.
6
Replacement heif-
ers are assigned a base value of $750; bred heifers, $945 and
cows, $1,000. This year the Madisons will transfer 10 calves
into the raised replacement heifers class, 10 replacement heif-
ers into bred heifers, and 10 bred heifers into cows. Because
there was no change in the number of head in any category,
and no change in the base value, no entry is needed on line
14 for the Income Statement.
The Change in Accounts Receivable (BS 2 C) is an
accrual adjustment to the cash revenue, where accounts re-
ceivable represent the value of cash not yet received for sales
made or custom work done during the accounting period that
are likely to be collected. During the year, accounts receivable
might increase as a result of the increase in money due from
the sale of hay. Income due from the sale of livestock prod-
ucts, crops, supplies, or perhaps machine work could also be
recorded. The net change in accounts receivable (BS 2 C) is
reected on line 15 of the income statement.
Inventory changes associated with Other Current Assets
can result from changes in quantities or prices. Inventory
changes (ending values minus beginning values) are recorded
on line 16 of the income statement. All inventory adjustment
gures are computed from the current asset section of the bal-
ance sheet. Previous versions of this fact sheet showed accrual
adjustments to inventories under revenue. These adjustments
were moved to the expense side to align with industry account-
ing standards.
Inventory changes associated with Cash Investment in
Growing Crops, Supplies, or Other Current Assets can result
from changes in quantities or prices. Inventory changes (ending
values minus beginning values) are recorded on lines 42 to 44
of the income statement. All inventory adjustment gures are
computed from the current asset section of the balance sheet.
Contracts and Notes Receivable might include farm rent
on a long-term lease or income from a land sale that is ex-
pected to be earned in future years. The change in Investment
in Cooperatives is the change in the value of stock owned in
cooperatives (BS 20 C).
Gross Revenue is the total farm revenue including ac-
crual adjustments. Gross Revenue from Market Livestock
and Products (line 5) and Gross Revenue from Crops (line 9)
is summed with Other Farm Revenue (line 19) to determine
AGEC-753-4
Business Actual
Consolidated Projected
Personal
REVENUE Line
Sales of Livestock Bought for Resale CF 1 1 126,489
Sale of Livestock Products CF 2 2
Livestock Sales (raised) CF 3 3 34,592
Change in Market Livestock inventories BS 5C 4 0
Gross Revenue from Market Livestock and Products (1+2+3+4) 5 161,081
Crop Sales
a. Wheat and Alfalfa CF 4 6 166,075
b. Hay CF 5 7 5,700
Change in Stored Crops/Feed Inventories BS 6 C 8 200
Gross Revenue from Crops (6+7+8) 9 171,975
Ag Program Payments CF 6 10 7,567
Other Farm Income CF 7 11 28,672
Patronage Dividends CF 8 12 280
Gain or Loss from Sale of Culled Breeding Stock 13 (1,000)
Change in Value Due to Change in Quantity
of Raised Breeding Livestock 14 0
+/- Change in Accounts Receivable BS 2 C 15 (900)
+/- Change in Other Current Assets BS 9 C 16 0
+/- Change in Contracts & Notes Receivable BS 19 C 17 0
+/- Change in Investment in Cooperatives BS 20 C 18 350
Other Farm Revenue (sum 10 thru 18) 19 34,969
GROSS FARM REVENUE (5+9+19) 20 368,025
MADISON INCOME STATEMENT
For the period: March 2019 through February 2020
AGEC-753-5
Name: James and Dolly Madison
Date Prepared: Mar 1, 2019
EXPENSES Line
Purchased Market Livestock CF 40 21 85,000
Car, truck CF 17 22 0
Chemicals CF 18 23 5,768
Custom Hire CF 20 24 1,066
Purchased Feed/Grain CF 22 25 9,796
Fertilizers, Lime CF 23 26 32,250
Freight, Trucking CF 24 27 935
Gas, Fuel, Oil CF 25 28 26,938
Insurance CF 26 29 7,001
Labor Hired CF 27 30 13,975
Rents, Leases CF 29 31 10,918
Repairs, Maintenance CF 30 32 28,408
Seeds, Plants CF 31 33 15,912
Storage, Warehousing CF 32 34 1,547
Supplies CF 33 35 163
Taxes (Ad Valorem) CF 34 36 3,332
Utilities CF 35 37 1,320
Vet, Breeding Feeds, Medicine CF 36 38 1,251
Other Expenses CF 37 39 607
Marketing Expenses CF 38 40 2,465
Sale Commission CF 39 41 0
+/- Change in Prepaid Expenses -(BS 3 C) 42 0
+/- Change in Cash Investment Growing Crops -(BS 4 C) 43 0
+/- Change in Supplies -(BS 8 C) 44 0
+/- Change in Purchased Feed Inventories -(BS 7 C) 45 0
+/- Change in Accounts Payable BS 30 F 46 0
+/- Change in Ad Valorem Taxes BS 34 F 47 0
+/- Change in Employee Payroll Witholding Taxes BS 35 F 48 0
+/- Change in Other Accrued Expenses BS 38 F 49 0
+/- Change in Other Current Liabilities BS 39 F 50 0
+/- Change in Other Non-Current Liabilities BS 47 F 51 0
Depreciation Expense 52 69,224
Total Operating Expenses (Sum lines 21 through 52) 53 317,876
Cash Interest Paid (CF 49+CF 51+CF 53,+CF 66) 54 12,978
+/- Change in Accrued Interest BS 33 F 55 5,625
Total Interest Expense (54+55) 56 18,603
TOTAL FARM EXPENSES (53+56) 57 336,479
NET FARM INCOME FROM OPERATIONS (20-57) 58 31,546
Gain/Loss on Sale of Farm Capital Assets 59 0
Gain/Loss Due to Change in Base Values of Breeding Livestock 60 0
NET FARM INCOME, Accrual Adjusted (58+59+60) 61 31,546
NONFARM REVENUE
Wages, Salaries CF 13 62 21,600
Other Non-Farm Income (CF 14 + CF 15) 63 960
+/- Change in Nonfarm Assets (BS11+BS12+BS13+BS25+BS26+BS27) 64 4,893
Total Nonfarm Revenue (62+63+64) 65 27,453
NONFARM EXPENSES
Cash Interest Paid CF 55 66 6,957
+/- Change in Accrued Interest BS 41 F 67 (112)
Depreciation Expense 68 3,052
Other Cash Payments CF 48 69 3,000
Total Nonfarm Expenses (66+67+68+69) 70 12,897
Gain/Loss on Sale of Nonfarm Capital Assets & Marketable Securities 71 0
Total Nonfarm Income (65-70+71) 72 14,556
INCOME BEFORE TAXES & EXTRAORDINARY ITEMS (61+72) 73 46,102
Cash Income Taxes Paid CF 46 74 10,350
Change in Accrued Income Taxes BS 36 F 75 0
Change in Current Portion of Deferred Taxes BS 37 F 76 121
Total Income Tax Expense (74+75+76) 77 10,471
Income Before Extraordinary Items (73-77) 78 35,631
Extraordinary Items (Net of Tax) 79 0
NET INCOME (78+79) 80 35,631
AGEC-753-6
Business Actual
Consolidated Projected
Personal
REVENUE
Sales of Livestock Bought for Resale CF 1 1
Sale of Livestock Products CF 2 2
Livestock Sales (raised) CF 3 3
Change in Market Livestock inventories BS 6 C 4
Gross Revenue from Market Livestock and Products (1+2+3+4) 5
Crop Sales
a. CF 4 6
b. CF 5 7
Change in Stored Crops/Feed Inventories BS 6 C 8
Gross Revenue from Crops (6+7+8) 9
Ag Program Payments CF 6 10
Other Farm Income CF 7 11
Patronage Dividends CF 8 12
Gain or Loss from Sale of Culled Breeding Stock 13
Change in Value Due to Change in Quantity
of Raised Breeding Livestock 14
+/- Change in Accounts Receivable BS 2 C 15
+/- Change in Other Current Assets BS 9 C 16
+/- Change in Contracts & Notes Receivable BS 19 C 17
+/- Change in Investment in Cooperatives BS 20 C 18
Other Farm Revenue (sum 10 thru 18) 19
GROSS FARM REVENUE (5+9+19) 20
INCOME STATEMENT
For the period: ________________________________
AGEC-753-7
Name: _____________________
Date Prepared: ______________
EXPENSES
Purchased Market Livestock CF 40 21
Car, truck CF 17 22
Chemicals CF 18 23
Custom Hire CF 20 24
Purchased Feed/Grain CF 22 25
Fertilizers, Lime CF 23 26
Freight, Trucking CF 24 27
Gas, Fuel, Oil CF 25 28
Insurance CF 26 29
Labor Hired CF 27 30
Rents, Leases CF 29 31
Repairs, Maintenance CF 30 32
Seeds, Plants CF 31 33
Storage, Warehousing CF 32 34
Supplies CF 33 35
Taxes (Ad Valorem) CF 34 36
Utilities CF 35 37
Vet, Breeding Feeds, Medicine CF 36 38
Other Expenses CF 37 39
Marketing Expenses CF 38 40
Sale Commission CF 39 41
+/- Change in Prepaid Expenses -(BS 3 C) 42
+/- Change in Cash Investment Growing Crops -(BS 4 C) 43
+/- Change in Supplies -(BS 8 C) 44
+/- Change in Purchased Feed Inventories -(BS 7 C) 45
+/- Change in Accounts Payable BS 30 F 46
+/- Change in Ad Valorem Taxes BS 34 F 47
+/- Change in Employee Payroll Witholding Taxes BS 35 F 48
+/- Change in Other Accrued Expenses BS 38 F 49
+/- Change in Other Current Liabilities BS 39 F 50
+/- Change in Other Non-Current Liabilities BS 47 F 51
Depreciation Expense 52
Total Operating Expenses (Sum lines 21 through 52) 53
Cash Interest Paid (CF 49+CF 51+CF 53,+CF 66) 54
+/- Change in Accrued Interest BS 33 F 55
Total Interest Expense (54+55) 56
TOTAL FARM EXPENSES (53+56) 57
NET FARM INCOME FROM OPERATIONS (20-57) 58
Gain/Loss on Sale of Farm Capital Assets 59
Gain/Loss Due to Change in Base Values of Breeding Livestock 60
NET FARM INCOME, Accrual Adjusted (58+59+60) 61
NONFARM REVENUE
Wages, Salaries CF 15 62
Other Non-Farm Income (CF 14 + CF 15) 63
+/- Change in Nonfarm Assets (BS11+BS12+BS13+BS25+BS26+BS27) 64
Total Nonfarm Revenue (62+63+64) 65
NONFARM EXPENSES
Cash Interest Paid CF 55 66
+/- Change in Accrued Interest BS 41 F 67
Depreciation Expense 68
Other Cash Payments CF 48 69
Total Nonfarm Expenses (66+67+68+69) 70
Gain/Loss on Sale of Nonfarm Capital Assets & Marketable Securities 71
Total Nonfarm Income (65-70+71) 72
INCOME BEFORE TAXES & EXTRAORDINARY ITEMS (61+72) 73
Cash Income Taxes Paid CF 46 74
Change in Accrued Income Taxes BS 36 F 75
Change in Current Portion of Deferred Taxes BS 37 F 76
Total Income Tax Expense (74+75+76) 77
Income Before Extraordinary Items (73-77) 78
Extraordinary Items (Net of Tax) 79
NET INCOME (78+79) 80
AGEC-753-8
7 See OSU Extension Fact Sheet AGEC-935, Capital Leases.
Gross Farm Revenue. The Madison farm has gross revenue
of $368,025.
Expenses
Operating Expenses are those expenses incurred to
generate revenue. An expense is the amount of goods or ser-
vices (cash or non-cash) used to produce a revenue generating
item or service. Cash expenditures do not always constitute
an expense. For example, principal payments on farm loans
are cash expenditures and are recorded on the Cash Flow
Statement; however, they are not operating expenses. Only the
interest portion of a loan payment is recorded as an expense
for the income statement.
The cost of Purchased Market Livestock such as stocker
steers and feeder pigs purchased for resale are recorded on
line 21 of the income statement. The Madisons purchased
stocker steers for $85,000 (CF 40).
Other cash operating expenses (lines 22 through 44)
include costs associated with operating the farm business
such as car/truck; chemicals; gas/fuel/oil; insurance; and utili-
ties. Purchased Feed/Grain is the value of supplements, hay,
corn, silage, etc. purchased during the reporting period (CF
22). Labor hired includes all employer costs: wages, social
security, unemployment taxes, medical premiums, and pension
costs. Repairs and maintenance should not include items that
are a capital improvement. Capital improvements should be
capitalized and be expensed through a depreciation schedule.
Rents and leases record payments made under an operating
agreement. If a capital lease is made, the depreciation ex-
pense and the interest portion of the capital lease payments
are recorded.
7
The line item for taxes is for personal property
and real estate taxes only. (Taxes related to labor hired are
recorded on line 30, as stated above.)
Accrual adjustments (lines 42 through 51) record differ-
ences in beginning and ending balances of several asset and
liabilities (accounts payable, ad valorem taxes, and so on).
Inventory changes associated with Prepaid Expenses, Cash
Investment in Growing Crops, or Supplies can result from
changes in quantities or prices. Inventory changes (ending
values minus beginning values) are recorded on lines 42 to
45 of the income statement. The change in values (ending
values minus beginning values) for prepaid expenses, cash
investment in growing crops, supplies, other current assets,
contracts and notes receivable, and invest ments in coopera-
tives can come from corresponding lines of the balance sheet.
Prepaid Expenses include production input items or services
paid for during the accounting period, but not yet received.
The change in Prepaid Expenses (BS 3 C) is recorded on line
42 of the income statement. The Change in Purchased Feed
Inventories (BS 7 C) adjusts the cash expense (an increase
in inventory is a negative expense, hence the negative sign)
to better match feed purchases to the time period in which
they are used to generate revenue.
Accounts Payable include the value of accounts payable
to others for operating inputs purchased on credit, accrued
property tax, accrued interest, and other expenses such as
unpaid cash rent.
Ad valorem taxes include property and real estate taxes
due (BS 34 F). The amount of Other accrued expenses pay-
able did not change from the previous years levels, hence no
adjustment is necessary. Note again that changes in operating
loan principal balances, personal and self-employment tax
due is not recorded on the income statement. These items
are not farm production expenses.
Depreciation is considered an operating expense and it
is reported on a separate line (line 52) in the income state-
ment. Economic depreciation is used for the income statement
because it tends to better estimate the useful life of assets.
8
It differs from depreciation used for tax purposes. Economic
depreciation is a systematic and rational method of allocating
the non-recoverable cost of breeding stock, machinery, and
buildings over the estimated number of years that the item
will generate revenue. Economic depreciation is based on a
known quantity and cost, an estimate of the useful life of an
asset, and the salvage value at the end of the useful life. As
an example, the Madisons have a hoedrill bought in April 2015
at a cost of $80,000. The estimated useful life is 12 years, and
the estimated salvage value is $15,118. The annual deprecia-
tion expense, calculated using the straight line method, is:
Depreciation $80,000 - 15,118 = 5,406 per year
12
Only the appropriate amount of depreciation for the
reporting period is recorded. For instance, if a new piece of
equipment is purchased mid-year, only one-half the annual
farm depreciation is recorded. The Madisons have several
pieces of equipment and machinery. For the Madisons, the total
depreciation expense for this time period is $69,224 (includes
depreciation on assets owned March 1 and held through the
year, plus a partial year for the combine purchased). Only the
depreciation expense for farm assets is recorded on this line.
Land is not depreciated, since it is assumed that land will not
be depleted and will continue to generate revenue.
Interest Expenses include cash interest expenses plus
the change in accrued interest. Cash Interest Paid on line 54
is the sum of cash interest payments for farm loans, includ-
ing operating notes, line of credit, machinery and equipment
notes, and real estate loans (CF 49, 51, 53 and 66). Accrued
interest is the amount of interest outstanding at the reporting
date from all farm notes and loans. The Change in Accrued
Interest is the accrued interest at the end of the accounting
period minus the accrued interest at the beginning of the ac-
counting period (BS 33 F). Principal payments are not a farm
operating expense; rather they are repayment of cash that was
received from loan proceeds and so are not included on the
income statement. (Principal payments are a cash expenditure
on the cash ow statement.) The Madisons project cash inter-
est payments of $12,978 plus an increase in interest accrued
of $5,625; thus, total interest expense is $18,603.
Total Farm Expenses are the sum of operating expenses
(line 53) and interest expenses (line 56). In the Madison case,
total expenses equal $336,479.
Net Farm Income From Operations (NFIFO) is the
amount of prot (loss) strictly from the farm operations not
including gains or losses on the sale of farm capital items or
personal and income tax. Thus, net farm income from opera-
tions equals Gross Farm Revenue (line 20) minus Total Farm
8 More information on valuing assets and estimating depreciation is in OSU
Extension Fact Sheet AGEC-791, Schedules of Assets.
AGEC-753-9
9 While BS 46F is not on the income statement, this is where producers may
nd the non-current portion of deferred taxes on their balance sheet if using
a balance sheet from OSU Extension fact sheet AGEC-752.
10 Note that a reduction in accrued taxes could result in a negative tax expense.
Subtracting a negative tax expense is equivalent to adding the amount to
income before taxes and extraordinary items.
Expenses (line 57). NFIFO is useful for comparisons over
time periods as it focuses on the net returns to normal farm
operations (capital sales are expected to be occasional).
Gain/Loss on Sales of Farm Capital Assets (line 59)
sums gains and losses from the sale of farm vehicles, machin-
ery, equipment, buildings, etc. While not a routine operating
item, sales of capital assets and marketable securities are
used to determine the overall farm prot or loss for the ac-
counting period. The difference between the value for which
the item is sold and the adjusted cost or basis is the amount
of depreciation that was over or under expensed in previous
time periods.
Gain/Loss Due to Change in Base Values of Breeding
Livestock sums changes in the base values of the raised
breeding livestock (line 60) from the beginning to the end of
the accounting period if the base value method has been used.
Base values are expected to remain constant for several years,
but when costs of raising livestock change signicantly, an
adjustment in base values is appropriate. The adjustment to
income for the change in general level of base values of one
or more of the age categories will be based on the change in
value of the raised breeding livestock on hand at the beginning
of the accounting period. One alternative example to what
is shown on the income statement is to increase the base
values of raised livestock shown in column 11 of Table 2, the
herd would have a beginning value of $108,950 (column 12)
rather than $96,950 (column 3). In this alternative example,
the difference between these two values ($12,000) would
be entered as the gain/loss due to change in general base
values of breeding livestock in the income statement (line 60).
Because the Madisons did not change their values, zero is
entered in line 60 of their income statement.
Net Farm Income is a standard measure of protability
for a farm business, calculated by matching revenue with
expenses incurred to generate the revenue, plus the gain or
loss from the sale of farm capital assets, before taxes. It is
a residual return to the unpaid labor and management and
owner equity. Net Farm Income equals Net Farm Income from
Operations (line 58) plus/minus Gains or Losses on Sales of
Farm Capital Assets (line 59) and Gains or Losses Due to
Changes in Base Value of Breeding Livestock (line 60). Net
farm income must be positive for the farm to be protable. A
prot shows that operating expenses and debt interest are
paid and that owner and family labor and management have
earned a positive return. Generating prots over time allows
the farm business to expand, replace capital, and reduce debt.
The Madison net farm income is $31,546.
Nonfarm Revenue includes all sources of cash and
non-cash income attributable to something other than farm
production: income from wages or salaries, interest, dividends,
rents and cash prots realized from nonfarm businesses,
changes in the cash value of the life insurance policy, gifts and
inheritances, nonfarm capital gains and losses, and accrual
adjustments.
Change in Nonfarm Assets (line 64) includes changes in
the value of marketable stocks, bonds, securities, and other
personal assets.
Although farm creditors may focus on net farm income
as they prefer to lend to farms able to generate a prot, they
may also be interested in the net income to further validate
the borrowers ability to repay. Nonfarm income is often looked
at as a source of funds for family living which can supplement
the farm if necessary. The Madisons have off-farm wages of
$21,600. Other nonfarm income is $960 from royalty payments
received. The nonfarm accrual adjustments are an increase
in savings, cash value of life insurance, and investments in
other entities of $4,893.
Nonfarm Expenses are the expenses incurred to generate
the nonfarm revenue. For the Madisons, items that must be
deducted from nonfarm income are cash interest paid on the
health care business loan of $1,392, cash interest paid on the
house loan of $5,565, the summation of the aforementioned
are found on line 66, a decrease in non-farm interest of $112,
and withdrawals for savings of $3,000. Depreciation expense
of 3,052 is a non-cash expense. This number may be found
on the non-current asset schedule.
Gain/Loss on Sale of Nonfarm Capital Assets and
Marketable Securities (Line 71) sums gains and losses
from the sale of nonfarm assets (home, rental houses, stocks,
bonds, etc.). As with farm capital assets, the difference between
the value for which the item is sold and the adjusted cost or
basis determines the gain or loss and reects the amount of
depreciation that was over- or under-expensed in previous
periods.
Income Before Taxes and Extraordinary Items (line 73)
is the sum of net farm income (line 61) and nonfarm income
(line 72). The Madisons’ income before taxes and extraordinary
items is $46,102.
Total Income Tax Expense is then subtracted from the
income before taxes and extraordinary items. Income taxes are
based on the prot (loss) of the reporting entity. The Madisons
have a cash income tax expense of $10,350. As with inter-
est, accrual adjustments must be recorded to note changes
in accrued income taxes (BS 36 F) and the current portion
of deferred taxes (BS 37 F) and the non-current portion of
deferred taxes (BS 46 F).
9
The Madisons have an increase in
the current portion of deferred taxes of $121. Thus, the total
income tax expense is $10,471 (line 77).
Income Before Extraordinary Items is the income before
taxes and extraordinary items less income tax expense.
10
In
the Madison example, income before extraordinary items is
$46,102 - $10,471 = $35,631.
Extraordinary Items are revenue or expenses that are
unusual in nature and infrequent in occurrence. Both criteria
must be met to qualify as extraordinary. The amount is net
of tax because the tax liability should have been accounted
for earlier. An example of extraordinary items would be the
gains or losses from an extinguishment of debt or proceeds
from winning the lottery. Extraordinary items should be noted.
Losses are entered as a negative number and will be added
to the previous section to arrive at Net Income. The Madisons
do not have any extraordinary items.
Net Income (line 80) is calculated by subtracting ex-
traordinary items (net of tax) (line 79) from Income Before
Extraordinary Items (line 78). Net income is the amount of
income available for paying personal income and social security
taxes, family living expenses, and reinvesting in the business.
AGEC-753-10
The amount of income reinvested in the business is equal to
retained earnings on the balance sheet. A reduction in owner
equity occurs when Net Income (line 80) is not adequate to pay
the combined taxes and family living expenses. The Madisons
have a net income of $35,631.
The income statement is one of the most commonly used
nancial tools. The income statement indicates the progress
of the business for a particular period of time, usually a year,
and is used to analyze the nancial success of the business. It
summarizes the effects of activities, transactions, and events
on the business. The income statement (also known as prot
and loss statement or operating statement) measures prot-
ability.
Related Publications
AGEC-752, Developing a Balance Sheet
AGEC-751, Developing a Cash Flow Statement
AGEC-302, Farm Record Systems Available to Oklahoma
Farmers
AGEC-323, Valuation of Raised Breeding Stock
AGEC-753-11
AGEC-753-12
Oklahoma State University, as an equal opportunity employer, complies with all applicable federal and state laws regarding non-discrimination and affirmative action. Oklahoma State University
is committed to a policy of equal opportunity for all individuals and does not discriminate based on race, religion, age, sex, color, national origin, marital status, sexual orientation, gender identity/
expression, disability, or veteran status with regard to employment, educational programs and activities, and/or admissions. For more information, visit https:///eeo.okstate.edu.
Issued in furtherance of Cooperative Extension work, acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture, Director of Oklahoma Cooperative Extension
Service, Oklahoma State University, Stillwater, Oklahoma. This publication is printed and issued by Oklahoma State University as authorized by the Vice President for Agricultural Programs and
has been prepared and distributed at a cost of 80 cents per copy. Revised 02/2021 GH.
The Oklahoma Cooperative Extension Service
WE ARE OKLAHOMA
for people of all ages. It is designated to take
the knowledge of the university to those persons
who do not or cannot participate in the formal
classroom instruction of the university.
• It utilizes research from university, government,
and other sources to help people make their own
decisions.
• More than a million volunteers help multiply the
impact of the Extension professional staff.
• It dispenses no funds to the public.
• It is not a regulatory agency, but it does inform
people of regulations and of their options in meet-
ing them.
• Local programs are developed and carried out in
full recognition of national problems and goals.
• The Extension staff educates people through
personal contacts, meetings, demonstrations,
and the mass media.
• Extension has the built-in exibility to adjust its
programs and subject matter to meet new needs.
Activities shift from year to year as citizen groups
and Extension workers close to the problems
advise changes.
The Cooperative Extension Service is the largest,
most successful informal educational organization in
the world. It is a nationwide system funded and guided
by a partnership of federal, state, and local govern-
ments that delivers information to help people help
themselves through the land-grant university system.
Extension carries out programs in the broad categories
of agriculture, natural resources and environment;
family and consumer sciences; 4-H and other youth;
and community resource development. Extension
staff members live and work among the people they
serve to help stimulate and educate Americans to
plan ahead and cope with their problems.
Some characteristics of the Cooperative Extension
system are:
• The federal, state, and local governments co-
operatively share in its nancial support and
program direction.
• It is administered by the land-grant university as
designated by the state legislature through an
Extension director.
• Extension programs are nonpolitical, objective,
and research-based information.
• It provides practical, problem-oriented education
