AECO 3430 Lab Work #5 Understanding Morgan Cattle's Financial Statements 1 (20pts) How does opening a $125,000 line of credit with Farm Credit immediately affect the Balance Sheet? Specifically demonstrate (with hypothetical numbers) how the relevant sections of the balance sheet demonstrate this. 2 (20pts) How can a business fail while showing accrual profits? Which financial statement(s) are needed to demonstrate the answer? Specifically demonstrate (with hypothetical numbers) how the relevant sections demonstrate this. 3 (20pts) What does it mean for a business to show a decrease in Retained Earnings? Which financial statement(s) are needed to demonstrate the answer? Specifically demonstrate (with hypothetical numbers) how the relevant sections demonstrate this. 4 (20pts) How does buying more assets immediately affect equity? Which financial statement(s) are needed to demonstrate the answer? Specifically demonstrate (with hypothetical numbers) how the relevant sections demonstrate this. 5 (20pts) How does making a final payment of $45,000 with 5% interest on an equipment loan affect equity? Which financial statement(s) are needed to demonstrate the answer? Specifically demonstrate (with hypothetical numbers) how the relevant sections demonstrate this. 6 (10pts) What did you learn from this lab exercise?

1.) If you were to take a $150,000 line of credit through Farm Credit your liabilities and cash would automatically increase on the balance sheet. Hypothetically speaking if your cash account had $100,000 and your total assets were $1,000,000 prior to taking out the line of credit, your total assets would increase to $1,150,000 and your cash account would increase to $250,000. If you already had $100,000 in notes payable, after accepting the line of credit that account would increase to $250,000. With these increases the balance sheet should still balance out if done correctly.

2.) An income statement could show a net profit but still not reflect the actual financial soundness of a business. Income statements show revenue and expenses but do not show the amount of cash on hand and/or other liquid assets. Making it where it could not accurately represent the businesses ability to pay a loan back. It could read a net income of $450,000 but the balance sheet could read that there is only $100,000 in cash and $250,000 in liabilities. To get an adequate representation of the businesses actual financial standing multiple financial statements must be used.

3.) Retained earnings show the relation between the balance sheet and income statement, events that cause net loss in cash flow will decrease retained earnings. This is usually the result of operating costs/expenses. A decrease in retained earnings represent a decrease in owners equity on the balance sheet, this is a result from an increase in expenses. These relates to problem 1 somewhat. If you were to take out a loan of $200,000 and your cash was at $300,000 it would increase to $500,000. Subsequently your notes payable would increase by $200,000 as well. The accounts would balance out in the end the same because they increased the same. However the interest expense would increase causing net farm increase to decrease. The retained earnings would decrease as a result of notes payable increasing.

4.) If the assets were purchased using cash your current assets would increase and cash account would decrease because it was purchased immediately with cash. If a new truck was purchased for $65,000 dollars your cash would decrease by that amount and your current assets account would increase by the same amount. If the asset was purchased at market value it doesnt affect your equity, because nothing was gained or loss in the acquisition of the truck.

5.) A final payment of $35,000 with 5% interest would decrease cash on the balance sheet and also decrease liabilities. The interest payments would increase and the farms net income would decrease on income statement. Statement of owners equity would show an increase on retained earnings amount.

6.) On this lab exercise I learned to show with words the things we have learned in class. I learned how to put into words the changes we see in financial statements and how they affect the outlook on a business. To me it makes more sense to see it in a word explanation than it does to look at it on paper. I feel like I have a better understanding of what is going on when it is in written form as opposed to when it is on a spreadsheet surrounded by other numbers where I get lost in it all. When it is in words I think it is easier to take that and go back to the financial statement and really see it. I think this is an important part of financial management whether you are the accountant or the business owner. It is important to be able to understand financial records and how they affect your business or the person you are working for. Either way it is necessary to know somewhat of both sides to understand it fully.

I just need these answers worded different.