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MF294
Income Statement — A Financial
Management Tool
Department of Agricultural Economics — www.agmanager.info
Kansas State University Agricultural Experiment Station and Cooperative Extension Service
Robin Reid
Agricultural Economist
Kevin Herbel
Agricultural Economist
An income statement is a financial statement that measures
the success of a business for a period of time in terms of net
income or loss. The most common period of time for a farm
business is a calendar year. Other names for this important
accounting statement include profit and loss statement, op-
erating statement, and income and expense statement.
The income statement shows the income earned during
the accounting period and the expenses that are properly as-
signable to that period. The difference between the two is net
income or net loss. The items included in an income statement
of a farm business can be classified into six major headings:
• Farm Cash Receipts
• Change in Inventory Value of Crops and Livestock
• Farm Cash Operating Expenses
• Change in Inventory Value of Accrued Expenses and
Supplies
• Interest Expenses
• Depreciation Expenses
Farm Cash Receipts
The principal source of farm income is from the sale of
livestock, grain, and other farm products. Other income
is from agricultural program payments, custom work, and
patronage dividends.
Accrued income represents income earned but not yet
received during the accounting period. Examples may include
crop insurance or custom work income not received at the
end of the period.
Changes in Inventory Value of Crops and
Livestock
Changes in crop and livestock inventory values must be
considered to determine gross revenue and value of farm pro-
duction on an accrual basis. Changes in crop inventories take
into account the beginning and ending balance sheet values
of all crops and hay held for sale or feed, and the investment
in growing crops. Livestock inventories take into account all
market and breeding livestock, since cull cows are considered
part of cash farm receipts and young “market” livestock may
be entering the herd as replacements. Therefore, the inventory
adjustment is made by considering the balance sheet begin-
ning and ending value of all market and breeding livestock.
If the crop and livestock inventory values are greater at the
end of the period, the increase in value is added to cash farm
receipts. If the inventory value is less at the end of the period,
the decrease in value is subtracted from the cash farm receipts.
If the total inventory value at the beginning of the period is
equal to the value at the end of the period, then inventories
have no effect on income.
Crop and livestock inventories are not required for fed-
eral tax returns computed on the “cash” basis. Consequently,
Schedule F with your income tax return is not a true income
statement for taxpayers computing taxes on the cash basis. To
determine the true profitability for a period, the gross receipts
as shown on Schedule F must be adjusted by changes in the
crop and livestock inventories. In addition, the Schedule F
gross receipts may need to be adjusted because income tax
regulations require the cost of livestock and other products
purchased for resale to be accounted for in the year the live-
stock and other products are sold.
Farm Cash Operating Expenses
Expenditures with benefits that usually expire within a
year are operating expenses. Hired labor, feed, seed, fertilizer,
chemicals, and insurance are examples of farm cash operating
expenses.
Changes in Inventory Value of Accrued
Expenses and Supplies
Changes in the inventory values of accrued expense and
supplies must be considered to determine total farm expense.
Accrued expense represents expenses — such as loan inter-
est and machine hire — that are owed, but not yet paid. The
difference in the beginning and ending balance sheet values
for Accounts Payable/Accrued Expenses is used to determine
this value. In addition, an accrual adjustment must be made
for Fertilizer and Supplies that are on inventory at the begin-
ning and ending of the year. If ending inventory is less than
beginning inventory, it can be assumed that these supplies
were used during the income period.
Interest Expense
The inventory change in accrued interest expense must be
added, or subtracted, from cash interest paid to obtain the total
accrued interest expense for the accounting period. Like de-
preciation, this expense is separated from other farm operating
expenses so financial efficiency ratios can be determined (see
publication Financial Ratios Used in Financial Management).
Depreciation Expense
Investments that last more than a year are called capital
expenditures. Depreciation is the method used to charge-off
capital expenditures in each annual accounting period for the
life of the capital asset. Depreciation represents the annual
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loss in value of capital assets. This loss is from gradual wear
and obsolescence.
Analysis of the Income Statement
The income statement represents a progress report of
the business. The net income or loss as shown on an income
statement shows the profitability of the business for a specific
period of time. A comparison of income statements for a busi-
ness over time shows the growth or decline in profitability.
Net farm income averages for farms of similar size and type
are sometimes available for comparison. Comparison of net
farm income from one farm business to the average of other
farm businesses similar in size and type can be used to evaluate
the efficiency of the business.
The table on the following page presents an example of an
income statement. These are available in spreadsheet format at
www.AgManager.info/Tools named KSU-Integrated Financial
Statements. Many of the accrual adjustments are already made
in this income statement by using the beginning and ending
values of the associated balance sheet. Financial efficiency
ratios, see Financial Ratios Used in Financial Management,
can be used to evaluate the relationship between accrual
expenses and income. These ratios are a good indicator of a
farm’s ability to control costs.
For further information on farm financial management,
see the following publications:
• Financial Ratios Used in Financial Management, MF270
• Cash Flow Projection for Operating Loan Determina-
tion, MF275
• Balance Sheet - A Financial Management Tool, MF291
• Computation of Deferred Tax Liability
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Example Income Statement
Farm Business Receipts:
1A) Crop Cash Sales ....................................................... $ 503,518
1B) Ending Crop Inventory ............................................ $ 83,250
1C) Beginning Crop Inventory ....................................... $ 96,413
1D) Crop Insurance Proceeds ......................................... $ 0
1) Accrual Gross Revenue from Crops ................................. $ 490,356
2A) Livestock and Milk Cash Sales ................................ $ 141,045
2B) Ending Livestock Inventory ..................................... $ 332,950
2C) Beginning Livestock Inventory ................................ $ 332,900
2D) Livestock Purchases .................................................. $ 5,000
2) Accrual Gross Revenue from Livestock and Milk ............. $ 136,095
3) Agricultural Program Payments ....................................... $ 46,336
4) Accounts Receivable Adjustment ...................................... $ 345
5) Other Farm Income ......................................................... $ 13,200
6) ACCRUAL GROSS FARM REVENUE ....................... $ 686,332
Farm Business Expenses:
7) Purchased Feed ................................................................. $ 21,583
8) VALUE OF FARM PRODUCTION ............................. $ 664,749
9) Labor Hired ..................................................................... $ 40,907
10) Repairs ........................................................................... $ 57,129
11) Seed ................................................................................ $ 67,074
12) Fertilizer ......................................................................... $ 90,685
13) Herbicide and Insecticide ................................................ $ 69,358
14) Veterinarian Expense ....................................................... $ 6,760
15) Storage & Marketing ..................................................... $ 2,540
16) Machinery Hire and Lease .............................................. $ 14,545
17) Fuel and Oil .................................................................... $ 25,709
18) Utilities ............................................................................ $ 3,470
19) Property Tax ................................................................... $ 1,420
20) Real Estate Tax ................................................................ $ 4,880
21) General Farm Insurance ................................................. $ 5,470
22) Crop Insurance Premiums .............................................. $ 15,565
23) Cash Rent ....................................................................... $ 46,240
24) Miscellaneous ................................................................. $ 11,150
25) Expense Inventory Adjustment ...................................... $ 12,945
26) ACCRUED OPERATING EXPENSES ..................... $ 497,430
27A) Cash Interest Paid ................................................... $ 44,565
27B) Accrued Interest Adjustment ................................... $ –2,817
27) Total Interest Expenses ................................................... $ 41,748
28) Depreciation ................................................................... $ 48,514
29) TOTAL FARM BUSINESS EXPENSES .................... $ 587,692
30) NET FARM INCOME ................................................. $ 98,640
Kansas State University Agricultural Experiment Station and Cooperative Extension Service
MF294 December 2017
K-State Research and Extension is an equal opportunity provider and employer. Issued in furtherance of Cooperative Extension Work, Acts of May 8
and June 30, 1914, as amended. Kansas State University, County Extension Councils, Extension Districts, and United States Department of Agriculture
Cooperating, John D. Floros, Director.
Publications from Kansas State University are available at: www.bookstore.ksre.ksu.edu
Contents of this publication may be freely reproduced for educational purposes. All other rights reserved. In each case, credit Robin Reid
and Kevin Herbel, Income Statement — A Financial Management Tool, Kansas State University, December 2017.
Appendix I. Income Statement Terminology and Explanations
1A) Crop Cash Sales – Revenue generated within the accounting
period on sales of raised crops/hay.
1B) Ending Crop Inventory – Balance sheet value of Crops Held
for Sale and Feed plus Investment in Growing Crops at the end
of the accounting period.
1C) Beginning Crop Inventory – Balance sheet value of Crops
Held for Sale and Feed plus Investment in Growing Crops at the
beginning of the accounting period.
1D) Crop Insurance Proceeds – Any Crop Insurance payment
received for crops grown using expenses in this accounting
period.
1) Accrual Gross Revenue from Crops – (Line 1A + Line 1B –
Line 1C + Line 1D) Gives the revenue generated from crops in
this accounting period adjusted for what is kept in inventory.
2A) Livestock and Milk Cash Sales – Revenue generated within
the accounting period on sales of livestock and milk.
2B) Ending Livestock Inventory – Balance sheet value of market
AND breeding livestock on hand at the end of the accounting
period.
2C) Beginning Livestock Inventory – Balance sheet value of
market AND breeding livestock on hand at the beginning of
the accounting period.
2D) Livestock Purchases – While this can be considered an expense,
it is subtracted here to get a true picture of livestock revenue
since purchased livestock would be added to inventory.
2) Accrual Gross Revenue from Livestock and Milk – (Line 2A
+ Line 2B – Line 2C – Line 2D) Gives the revenue generated
from livestock and milk in this accounting period adjusted for
what is kept in inventory.
3) Agricultural Program Payments – Any ARC/PLC, EQIP,
CRP, Livestock Indemnity, etc. payments received within the
accounting period.
4) Accounts Receivable Adjustment – Adjusts for the differ-
ence in Accounts Receivable from the beginning and ending
balance sheet, making the accrual income adjustment.
5) Other Farm Income – Any other revenue received within
the accounting period. Ex: Custom work income, patronage
dividends, grain futures income, etc.
6) Accrual Gross Farm Revenue – (Sum of Lines 1-5) Gives
the revenue generated within the accounting period adjusted
for inventory changes and livestock purchases.
7) Purchased Feed – Total value of feed purchased (not raised)
within the accounting period. This expense is separated from
other expenses for the calculation of Value of Farm Production.
8) Value of Farm Production – (Line 6- Line 7) This value is
commonly used in financial ratios (such as Asset Turnover and
Operating Profit Margin) to give a more accurate picture of
an operation that uses large amounts of purchased feed, such
as a backgrounding or feedlot operation.
9-24) Farm Business Expenses – Account for all farm expenses in
an accounting period within the given categories.
25) Expense Inventory Adjustment – This is brought in from
the balance sheet, making an accrual adjustment for the dif-
ference in Accounts Payable/Accrued Expenses and Fertilizer
& Supplies from the beginning to the end of the accounting
period.
26) Accrued Operating Expenses – Adds lines 7 and 9-25 above.
Total of all operating expenses that were used to generate the
associated revenue in Line 6.
27A) Cash Interest Paid – Total interest expense paid during the
accounting period.
27B) Accrued Interest Adjustment – Balance Sheet difference
in Accrued Interest from the beginning to the ending of the
accounting period.
27) Total Interest Expenses – (Line 27A + 27B) Gives an accrual
adjusted interest expense for the accounting period.
28) Depreciation – Represents value lost on machinery/equipment/
buildings throughout the accounting period. Typically follows
a schedule based on useful life. (Do not use tax depreciation).
29) Total Farm Business Expenses – (Sum of Lines 26-28) Rep-
resents total accrual adjusted expenses to generate revenue in
Line 6.
30) Net Farm Income – (Line 6 - Line 29) Overall profitability
of the farm business over this accounting period. Represents
money to pay for family living expenses or unpaid operator
labor, and to reinvest in the farm business, including principal
payments on noncurrent loans of the business.
Revision of MF294 by Dr. Michael Langemeier
