Name Wondater muluneh_________________

Lab #2 Instruction Sheet

AGEC 562

1. Use the spreadsheet template and attachments A and B to construct an income

statement for a 640 acre, irrigated corn farm.
Income Statement Template for AGEC 562 Lab 2
Totals
Revenue:
Grain Sales 234,800
Government Payments 27,000
Inventory Changes:
Corn in Storage 130,000
Checking Account Balance 10,000  
Total Revenue $401,800
Expenses:
Cash operating Expenses:
Fertilizer $25,272
Repairs 5374
Seed 16,128
Herbicide 9,216
Insecticide 17,280
Chemical Applications 5,200
Combining and Hauling 31,000
Supplies 1,250
Fuel and Oil 23,000
Crop Insurance 2,400
Grain Drying 13,000
Utilities 1,200
Interest on Operating Loan 3,000
Misc. Variable Cash Expenses 1,500
Property Taxes 1,600
Insurance 1,500
Interest on noncurrent loan 10,500
Adjustments 168420
Accounts Payable -5000
Depreciation
Tractor 1 36,000
Tractor 2 20,000
Other Depreciable Mach 118,000

   

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 Total operating expenses 337,420
Net farm income from operations $56,880
Cash interest paid 13,500
Change in Interest Payable 3,500
Total interest expense 10,000
Total Expenses $354,920
Gain/loss sale of capital assets: 0
Total gain/loss on asset sale 0
Net farm Income $46,880

2, Calculate:

a. Rate of return on assets

b. Rate of return of equity
c. Return on labor and management
d. Return on labor
e. Return on management

Answers
A) Rate of return on asset(ROA)
ROA=return on asset/average value of asset
Adjusted net farm income=net farm income + interest expense
=67,380+10.000
=77,380
Return on asset
Adjusted net farm income 77,380
Less opportunity cost of labor _12,ooo
Less opportunity cost of management _5,000
Return on asset= 60,380
ROA=return on asset/average value of farm asset
=60,380/885,300×100% = 6.8

B) Rate of return on equity(ROE)

Return on equity = NFI -OCL -OCM
=67,380-12,000-5,000
´=50,380
ROE= Retern on equity/Average Equity
=50,380/512,700×100= 9.8

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 C) return to labor and management(RLM)

Opportunity cost of capital=Opportunity cost of interest ×

average value of asset ´=885300×0.08
=70,824
RLM = ANFI – Opportunity cost of all capital
=77,380-70,824
=6556
D) Return to labor (RL)
RL=RLM-OcL=6556-5000=1556
E) Return to management(RM)
RM= RLM-OcL=6556-12,00=-5,444
3, Return calculation
1
Ra 6.8%
te
of
ret
ur
n
on
as
set
s
2 Rate of return on equity 9.8%
3 Return to labor and
management 6556
4 Return to labor 1556
4 Return to management -5,444

2. Discuss your results in part 2 by giving an interpretation of each along

with
recommendations to the farmer with regards to if the measures are
acceptable and how to improve them.

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 Answers
ROA < ROE, 6.8 %< 9.8%
So, borrowed capital is earning, on average,
More than the interest rate

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 Attachment A:

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 Attachment B:

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