File C3-25
FM 1816 Revised July 2021
Ag Decision Maker
Your Farm
Income Statement
How much did your farm business earn last year?
Was it profitable? There are many ways to answer
these questions.
A farm income statement (sometimes called a
profit and loss statement) is a summary of income
and expenses that occurred during a specified
accounting period, usually the calendar year for
farmers. It is a measure of input and output in
dollar values. It offers a capsule view of the value
of what your farm produced for the time period
covered and what it cost to produce it.
Most farm families do a good job of keeping
records of income and expenses for the purpose
of filing income tax returns. Values from the tax
return, however, may not accurately measure the
economic performance of the farm. Consequently,
you need to have a clear understanding of the
purpose of an income statement, the information
needed to prepare the statement, and the way in
which it is summarized.
Net farm income, as calculated by the accrual or
inventory method, represents the economic return
to your contributions to the farm business: labor,
management, and net worth in land and other
farm assets. Cash net farm income also can be
calculated. It shows how much cash was available
for purchasing capital assets, debt reduction,
family living, and income taxes.
Preparing the Statement
The income statement is divided into two parts:
income and expenses. Each of these is further
divided into a section for cash entries and a section
for noncash (accrual) adjustments.
An example income statement is shown at the end
of this publication, along with a blank form. Blank
forms for developing your own income statement
are also available in ISU Extension and Outreach
publication FM 1824, AgDM C3-56: Farm
Financial Statements, https://store.extension.
iastate.edu/Product/1827.
Most of the information needed to prepare an
income statement can be found in common farm
business records. These include a farm account
book or program, Internal Revenue Service
(IRS) forms 1040F Profit or Loss From Farming
and 4797 Sales of Business Property, and your
beginning and ending net worth statements for
the year. If you use the IRS forms, you will need to
organize the information a bit differently to make
allowances for capital gains treatment of breeding
stock sales and the income from feeder livestock or
other items purchased for resale.
Cash Income
Cash income is derived from sales of livestock,
livestock products, crops, government payments,
tax credits and refunds, crop insurance proceeds,
and other miscellaneous income sources.
• Include total receipts from sales of both raised
livestock and market livestock purchased for
resale. Remember not to subtract the original
cost of feeder livestock purchased in the
previous year, even though you do this for
income tax purposes. Also include total cash
receipts from sales of breeding livestock before
adjustments for capital gains treatment of
income are made. These are termed “gross sales
price” on IRS Form 4797.
• Do not include proceeds from outstanding
USDA marketing loans in cash income even if
you report these as income for tax purposes.
• Do not include noncash income such as profits
or losses on futures contracts and options.
However, do include cash withdrawn from
hedging accounts.
• Do not include sales of land, machinery, or
other depreciable assets; loans received; or
income from nonfarm sources of income.
Page 2
Your Farm Income Statement
Adjustments to Income
Not all farm income is accounted for by cash sales.
Changes in inventory values can either increase
or decrease the net farm income for the year.
Changes in the values of inventories of feed and
grain, market livestock, and breeding livestock can
result from increases or decreases in the quantity
of these items on hand or changes in their unit
values (see Example 1). Adjusting for inventory
changes ensures that the value of farm products is
counted in the year they are produced rather than
the year they are sold. Subtract beginning of the
year values from end of the year values to find the
net adjustment.
Example 1
The beginning inventory of feeder pigs consists
of 420 head valued at $75 each, or $31,500.
Ending inventory is 450 head valued at $50
each, or $22,500. Inventory value decreased by
$9,000 even though the number of pigs on hand
increased by 30 head. The decline in value per
head more than offset the increase in numbers,
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 depreciation) are not included in the income
statement unless they are actually sold. Accounts
receivable and unpaid patronage dividends are
included, however, because they reflect income
that has been earned but not yet received.
Cash Expenses
All cash expenses involved in the operation of the
farm business during the business year should be
entered into the expense section of the income
statement. These can come from Part II of IRS
Schedule F. Under livestock purchases include
the value of breeding livestock as well as market
animals.
• Do not include death loss of livestock as an
expense. This will be reflected automatically by
a lower ending livestock inventory value.
• Income tax and Social Security tax payments are
considered personal expenses and should not be
included in the farm income statement, unless
the statement is for a farm corporation.
• Interest paid on all farm loans or contracts is a
cash expense, but principal payments are not.
• Do not include the purchase of capital assets
such as machinery and equipment. Their cost
is accounted for through depreciation. Land
purchases also are excluded.
• You may wish to exclude wages paid to family
members because these also are income to
the family.
• Include cash deposits made to hedging
accounts.
Adjustment to Expenses
Some cash expenses paid in one year may be
for items not actually used until the following
year. These include feed and supply inventories,
prepaid expenses, and investments in growing
crops. Subtract the ending value of these from the
beginning value to find the net adjustment (see
Example 2).
Example 2
Beginning inventory of fertilizer was zero.
Closing inventory is worth $11,000. Fertilizer
purchases during the year were $16,000, all paid
for. The change in inventory is a positive $11,000.
Even though $16,000 is shown for cash expense,
only $5,000 ($16,000 − $11,000) is charged to
the farm operation during the year covered.
The $11,000 of fertilizer still unused will be the
beginning inventory value for the following year,
and will be included in that year’s expenses.
Other expenses may be incurred in one year but
not paid until the following year or later, such
as farm taxes due, and other accounts payable.
Record accounts payable so that products or
services that have been purchased but not paid for
are counted. However, do not include any items
that already appear under cash expenses. Subtract
the beginning total of these items from the ending
totals to find the net adjustment. Note that interest
expense due is not included until later, after net
farm income from operations is calculated.
Page 3
Your Farm Income Statement
Depreciation is 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 be used, but you may want
to calculate your own estimate based on more
realistic depreciation rates. One simple procedure
is to multiply the value of these assets at the end of
the year by a fixed rate, such as 10%. This way you
can group similar items, such as machinery, rather
than maintain separate records for each item.
If you include breeding livestock under beginning
and ending inventories, do not include any
depreciation expense for them.
The beginning and ending net worth statements
for the farm are a good source of information
about inventory values and accounts payable
and receivable: ISU Extension and Outreach
publication FM 1791, AgDM C3-20: Your Net
Worth Statement, https://store.extension.iastate.
edu/Product/1814, provides more detail on how to
complete a net worth statement.
ISU Extension and Outreach publication FM 1824,
AgDM C3-56: Farm Financial Statements,
https://store.extension.iastate.edu/Product/1827,
contains schedules for listing adjustment items for
both income and expenses. Use the same values
that are shown on your beginning and ending net
worth statements for completing adjustments to
your net income for the year.
Summarizing the Statement
You have now accounted for cash farm income
and cash expenses (excluding interest). You also
have accounted for depreciation and changes
in inventory values of farm products, accounts
payable, and prepaid expenses. You are now ready
to summarize two measures of farm income.
Net Farm Income from Operations
Subtract total farm expenses from gross farm
revenue. The difference is the net income
generated from the ordinary production and
marketing activities of the farm, or net farm
income from operations.
Interest Expense
Interest is considered to be the cost of financing
the farm business rather than operating it.
Net interest expense is equal to cash interest
expense adjusted for beginning and ending
accrued interest.
Capital Gains and Losses
Some years income is received from the sale
of capital assets such as land, machinery, and
equipment. The sale price may be either more or
less than the cost value (or basis) of the asset.
For depreciable items the cost value is the
original value minus the depreciation taken.
For land it is the original value plus the cost of
any nondepreciable improvements made. The
difference between the sale value and the cost
value is a capital gain or loss. For purposes of the
farm income statement, capital gain would also
include the value of “recaptured depreciation”
from the farm tax return. Information for
calculating capital gains and losses can come from
the depreciation schedule or IRS Form 4797.
Sales of breeding livestock can be handled two
ways: (1) record sales and purchases as cash
income and expenses, and adjust for changes in
inventory, or (2) record capital gains or losses
when animals are sold and include depreciation as
an expense. Either method can be used, but do not
mix them.
Net Farm Income
Subtract interest expense, then add capital gains
or subtract capital losses from net farm income
from operations to calculate net farm income.
This represents the income earned by the farm
operator’s own capital, labor, and management
ability. It also represents the value of everything
the farm produced during the year, minus the cost
of producing it.
Further Analysis
Net farm income is an important measure of the
profitability of your farm business. Even more
can be learned by comparing your results with
Page 4
Your Farm Income Statement
those for other similar farms. ISU Extension and
Outreach publication FM 1845, AgDM C3-55:
Financial Performance Measures for Iowa Farms,
https://store.extension.iastate.edu/Product/1837,
contains information about typical income levels
generated by Iowa farms. It also illustrates other
important measures and ratios that can help you
evaluate the profitability, liquidity, and solvency
of your own business over time.
Other Financial Statements
Two other financial statements are often used
to summarize the results of a farm business.
While they are not as common as the net income
statement and the net worth statement, they do
provide useful financial information.
Statement of Cash Flows
A statement of cash flows summarizes all the cash
receipts and cash expenditures that were received
or paid out during the accounting year. It is
sometimes called a flow of funds statement. Unlike
the net income statement, it does not measure the
profitability of the business. It merely shows the
sources and uses of cash. The statement of cash
flows is divided into five sections:
• cash income and cash expenses
• purchases and sales of capital assets
• new loans received and principal repaid
• nonfarm income and expenses (sole proprietor)
• beginning and ending cash on hand
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, along
with a blank form.
Statement of Owner Equity
The statement of owner equity ties together
net farm income and the change in net worth.
Net worth will increase or decrease during the
accounting year based on three factors:
• net farm income (accrual)
• net nonfarm withdrawals (nonfarm income
minus nonfarm expenditures)
• adjustments to the market value of capital assets
(affects market value net worth only)
If these factors are recorded accurately and added
to the beginning net worth of the farm, the result
will equal the ending net worth.
An example of a statement of owner equity is
found at the end of this publication, along with a
blank form.
Further resources on financial information can be
found on the Ag Decision Maker website, www.
extension.iastate.edu/agdm/wdfinancial.html.
• Decision Tool C3-26, Cash to Accrual Net
Farm Income Worksheet, www.extension.
iastate.edu/agdm/wholefarm/xls/
c3-26accrualnfi.xlsx
• Decision Tool C3-56, Comprehensive
Financial Statements, www.extension.
iastate.edu/agdm/wholefarm/xls/c3-
56comprfinstatements.xlsx
This institution is an equal opportunity provider.
For the full non-discrimination statement or
accommodation inquiries, go to www.extension.
iastate.edu/diversity/ext.
Prepared by William Edwards,
retired extension economist
www.extension.iastate.edu/agdm
store.extension.iastate.edu
Page 5
Your Farm Income Statement
Net Farm Income Statement Example
Name
Cyclone Farm
Year
2019
Income
Cash Income (numbers in ( ) refer to IRS Schedule 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 (3a)
4,280
Market livestock
296,160 329,403
Agricultural program payments (4a) Accounts receivable
15,445
Crop insurance proceeds (6a) Unpaid cooperative distributions
24,581 28,861
Custom hire income (7)
8,740
Breeding livestock
201,000 222,600
Other income (8), cash only
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. Gross Farm Revenue (a + b)
$900,068
Expenses
Cash Expenses (numbers in ( ) refer to IRS Schedule 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
Farm accounts payable
$4,589 $1,859
Gasoline, fuel, oil (19)
11,899
Farm taxes due
4,400 4,750
Insurance (20)
18,913
Subtotal of adjustments (expenses due)
$8,989 $6,609
Interest paid (21a + 21b)
25,442
f. Net adjustment (ending − beginning)
($2,380)
Labor hired (22)
13,654
g. Depreciation
$53,150
Pension and profit-share plans (23) h. Total Operating Expenses (d + e + f + g)
$808,152
Rent or lease payments (24a + 24b)
125,600
(excluding interest)
Repairs, maintenance (25)
13,136
i. Net Farm Income from Operations (c − h)
$91,916
Seeds, plants (26)
56,800
Interest Adjustments Beginning Ending
Storage, warehousing (27) Accrued interest
23,725 22,484
Supplies purchased (28)
4,890
j. Net interest expense
$24,201
Taxes (farm) (29)
8,800
(cash − beginning + ending)
Utilities (30)
4,629
Total Farm Expenses (h + j)
$832,353
Vet. fees, medicine, breeding (31)
6,891
k. Sales of farmland
$100,000
Other expenses (32), cash only
4,588
l. Cost value of land sold
$80,000
Livestock purchased
132,500
m. Capital gains or losses (k − l)
$20,000
Hedging accounts deposits
20,000
d. Total Cash Expenses
$746,517
n. Net Farm Income (accrual) (i − j + m)
$87,715
Net Farm Income (cash) (a − d)
$152,509
Value of Farm Production
(c − purchases of feed & livestock)
$588,418
Page 6
Your Farm Income Statement
Statement of Cash Flows Example
Name
Cyclone Farm
Year
2019
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, excluding hedging 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 Example
Name_____
Cyclone Farm
____________________________________________ Year
2019
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 n, 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) xxx
21%
i. Percent of change in market value net worth from retained earnings this year
(g, cost value / g, market value)
xxx
11%
Page 7
Your Farm Income Statement
Net Farm Income Statement
Name _______________________________________________________________ Year _______________________________
Income
Cash Income (numbers in ( ) refer to IRS Schedule 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 (3a) Market livestock
Agricultural program payments (4a) Accounts receivable
Crop insurance proceeds (6a) Unpaid cooperative distributions
Custom hire income (7) Breeding livestock
Other income (8), cash only 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. Gross Farm Revenue (a + b)
Expenses
Cash Expenses (numbers in ( ) refer to IRS Schedule 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) Farm accounts payable
Gasoline, fuel, oil (19) Farm taxes due
Insurance (20) Subtotal of adjustments (expenses due)
Interest paid (21a + 21b) f. Net adjustment (ending − beginning)
Labor hired (22) g. Depreciation (Schedule J + L + M)
Pension and profit-share plans (23) h. Total Operating Expenses (d + e + f + g)
Rent or lease payments (24a + 24b) (excluding interest)
Repairs, maintenance (25) i. Net Farm Income from Operations (c − h)
Seeds, plants (26) Interest Adjustments Beginning Ending
Storage, warehousing (27) Accrued interest
Supplies purchased (28) j. Net interest expense
Taxes (farm) (29) (cash − beginning + ending)
Utilities (30) Total Farm Expenses (h + j)
Vet. fees, medicine, breeding (31) k. Sales of farmland
Other expenses (32), cash only l. Cost value of land sold
Livestock purchased m. Capital gains or losses (k − l)
Hedging accounts deposits
d. Total Cash Expenses n. Net Farm Income (accrual) (i − j + m)
Net Farm Income (cash) (a − d)
Value of Farm Production
(c − purchases of feed & livestock)
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, excluding hedging 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 n, 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 this year
(g, cost value / g, market value)
xxx
%
