Balance sheets For Mr. John Peterson for 1/1/2016 and 1/1/2017 are enclosed, as well as his

IRS Form 1040 - Schedule F for 2016.

1. Using the worksheet template provided, calculate the accrual-adjusted net farm income

for 2016. Additional information on feeder livestock purchase, equipment purchases,

sales, and hedging account deposits have been prepopulated in the sheet.

2. If you had 10 years of net cash income and accrual net farm income data for Mr. Peterson,

which series is more likely to have a higher standard deviation?

3. Is the change in prepaid and supplies likely to be positively or negatively correlated with

net cash income? Explain why.

Cash To Accrual Analysis: 2016 Income Statement Cash Income Cash Expense Feeder livestock purchase Sale of livestock and other resale items ??? 1,247,574 Sales of livestock, produce, grains and other Government payments Chemicals Custom hire (machine work) Feed 222 Cooperative distributions ?? Fertilizers and lime ??? Freight and trucking ?2? Gasoline, fuel, and oil ? Insurance (other than health) Interest, mortgage g99 Interest, other Labor hired T?? ??? Other expenses ??? Rent or lease: land, animals, etc. ? Repairs and maintenance Seeds and plants ??? Storage and warehousing Supplies ??? Taxes ??? Utilities ??? Veterinary, breeding, and medicine Gross cash income ? Total cash expense ??? Net cash income Inventory Changes Purchases/Deposits Beginning Inventory Sales/Withdrawals Ending Inventory Inventory Change Prepaids and supplies ?? Hedging gains or losses ? 8,520 Crops and feed ? Market livestock ??? Other assets ? Accrued interest ??? Total inventory change ??? Net operating profit ??? Depreciation Machinery and equipment Titled vehicles Beginning Inventory Purchases Sales Ending Inventory Depreciation 245,334 29,840 ? ?? ?? ??? ??? Buildings and improvements ? m Total depreciation ??? Net farm income ? Income Statement for 2016 Cash Flow Statement Sales Cash flows from operating activities 310,728 Cost of Goods Sold Net Farm Income 346,388 Depreciation 138346 Gross Profit 60,159 Other operating expenses (300) Change in accrued interest 394055 175584 (100,751) (7,496) Operating Income Gains from disposal of property and equipment Income from discontinued operations Change in crop inventory 15,300 433965 -69750 Change in livestock held for sale 123555 -39910 21,400 Change in Prepaid Expenses 1,900 -38660 (14,500) Add'l Info: Deposits: 16,113 Change in Hedging Accounts Cash withdrawal for family living 337,827 Earnings before interest and taxes 310410 20,779 Interest Net Cash Provided by operating activities Earnings before income tax 326,308 -245334 purchases 245334 Income Tax 29840 Net farm income sales 29840 310,728 (215,494) -215494 Cash Flows from investing activites Add'l Info Purchases of property and equipment Proceeds from disposal of property and equipment (245,334) Add'l Info (101,036) net change in c Net change in l Net change in p 29,840 -36289 Net cash provided (used) by investing activities (215,494) -20424 (31,950) 5143 Cash flows from financing activities (132,986) net change in ir -48662 (28,000) Net change in current loans net cash from fi -100232 (10,653) Net change in principal due in the next 12 months 3,100 -5316 (64,414) (26,800) Net change in intermediate loans Net change in long-term loans -5316 Net cash (provided by/ used in) financing activities (116,114) Increase in cash and cash equivalents (5,300) OMB No. 1545-0074 SCHEDULE F Profit or Loss From Farming (Form 1040) 2016 Attach to Form 1040, Form 1040NR, Form 1041, Form 1065, or Fom 1065-B. Attachment Department of the Treasury Intemal Revenue Service (99) Sequence No. 14 Information about Schedule F and its separate instructions is at www.irs.gov/schedulef. Name of proprietor John Peterson A Principal crop or activity Beef E Did you "materially participate" in the operation of this business during 2016? If "No," see instructions for limit on passive losses F Did you make any payments in 2016 that would require you to file Form(s) 1099 (see instructions)? Social security number (SSN) 191-29-1310 B Enter code from Part IV C Accounting method: 1 1| 2| 1| 1|1Cash Accrual D Employer ID number (EIN), (see instr) Yes No Yes No Yes No Farm Income-Cash Method. Complete Parts I and Il (Accrual method. Complete Parts Il and III, and Part I, line 9.) G If "Yes," did you or will you file required Forms 1099? Part I 2093459 a Sales of livestock and other resale items (see instructions) 1a b Cost or other basis of livestock or other items reported on line 1a 1b 950234 c Subtract line 1b from line 1a . 2 Sales of livestock, produce, grains, and other products you raised Cooperative distributions (Form(s) 1099-PATR) 1c 1143225 498952 3b Taxable amount 3a 3b 1020 1020 4b Taxable amount 4a Agricultural program payments (see instructions) 4a 11412 4b 11412 5a Commodity Credit Corporation (CCC) loans reported under election CCC loans forfeited .. 5a ..... 5b 5c Taxable amount 5c 6 Crop insurance proceeds and federal crop disaster payments (see instructions) Amount received in 2016 6b Taxable amount 6a 6b a Amount deferred from 2015 If election to defer to 2017 is attached, check here 6d 6d C 7 Custom hire (machine work) income 7 Other income, including federal and state gasoline or fuel tax credit or refund (see instructions) 8 Gross income. Add amounts in the right column (lines 1c, 2, 3b, 4b, 5a, 5c, 6b, 6d, 7, and 8) If you use the accrual method, enter the amount from Part II, line 50 (see instructions) Farm Expenses-Cash and Accrual Method. Do not include personal or living expenses (see instructions). 9 1654609 Pension and profit-sharing plans Rent or lease (see instructions): Vehicles, machinery, equipment b Other (land, animals, etc.) 10 Car and truck expenses (see 23 23 10 instructions). Also attach Form 4562 24 Chemicals ... -. 11 11 34162 24a 12 Conservation expenses (see instructions) 12 24b 192719 Custom hire (machine work) 13 13 3850 25 Repairs and maintenance 25 32677 26 Seeds and plants 26 Depreciation and section 179 expense (see instructions) Employee benefit programs other than on line 23 111458 14 2809 Storage and warehousing Supplies 14 295635 27 27 28 28 37913 15 es 29 15 29 1680 285173 91416 30 Utilities 30 16 Feed 16 6849 Fertilizers and lime 17 17 31 Veterinary, breeding, and medicine 31 14318 18 32 Other expenses (specify): 18 Freight and trucking Gasoline, fuel, and oil 28516 19 19 32a 27212 a 10715 20 Insurance (other than health) 20 b 32b 33728 21 Interest: 32c a Mortgage (paid to banks, etc.) b Other 22 Labor hired (less employment credits) d 32d 21a 43662 21b 67388 32e ... . . . 22 44939 32f f Total expenses. Add lines 10 through 32f. If line 32f is negative, see instructions 33 33 1366819 34 Net farm profit or (loss). Subtract line 33 from line 9 If a profit, stop here and see instructions for whe re to report. If a loss, complete lines 35 and 36. 34 287790 Yes No 35 Did you receive an applicable subsidy in 2016? (see instructions) Check the box that describes your investment in this activity and see instructions for where to report your loss. aAll investment is at risk. Some investment is not at risk. b For Paperwork Reduction Act Notice, see the separate instructions. Schedule F (Form 1040) 2016 Cat. No. 11346H Schedule F (Form 1040) 2016 Page 2 Part III Farm Income-Accrual Method (see instructions) Sales of livestock, produce, grains, and other products (see instructions) 37 37 38bTaxable amount 38a Cooperative distributions (Form(s) 1099-PATR) 38a 38b 39a Agricultural program payments 39a 39bTaxable amount 39b Commodity Credit Corporation (CCC) loans: 40 CCC loans reported under election 40a a b CCC loans forfeited 40c Taxable amount 40c 40b 41 Crop insurance proceeds 41 Custom hire (machine work) income 42 42 Other income (see instructions) 43 43 44 Add amounts in the right column for lines 37 through 43 (lines 37, 38b, 39b, 40a, 40c, 41, 42, and 43) 44 Inventory of livestock, produce, grains, and other products at beginning of the year. Do not include sales reported on Form 4797 45 45 46 Cost of livestock, produce, grains, and other products purchased during the 46 year 47 47 Add lines 45 and 46 48 Inventory of livestock, produce, grains, and other products at end of year 48 Cost of livestock, produce, grains, and other products sold. Subtract line 48 from line 47 49 49 50 Gross income. Subtract line 49 from line 44. Enter the result here and on Part I, line 9 50 "If you use the unit-livestock-price method or the fam-price method of valuing inventory and the amount on line 48 is larger than the amount on line 47, subtract line 47 from line 48. Enter the result on line 49. Add lines 44 and 49. Enter the total on line 50 and on Part I, line 9. Part IV Principal Agricultural Activity Codes Fruit and tree nut farming 111300 Do not file Schedule F (Form 1040) to report the following. Income from providing agricultural services such as 111400 Greenhouse, nursery, and floriculture production Other crop famming 111900 CAUTION Soil preparation, veterinary, farm labor, horticultural, or management for a fee or on a contract basis. Instead file Schedule C (Form 1040) or Schedule C-EZ (Form 1040). Income from breeding, raising, or caring for dogs, cats, or other pet animals. Instead file Schedule (Form 1040) or Schedule C-EZ (Form 1040) Sales of livestock held for draft, breeding, sport, or dairy purposes. Instead file Form 4797 Animal Production Beef cattle ranching and farming 112111 112112 Cattle feedlots 112120 Dairy cattle and milk production Hog and pig farming Poultry and egg production Sheep and goat farming Aquaculture Other animal production 112210 112300 112400 112510 These codes for the Principal Agricultural Activity classify farms by their primary activity to facilitate the administration of the Internal Revenue Code. These six-digit codes are based on the North American Industry Classification System (NAICS) Select the code that best identifies your primary farming activity and enter the six-di git number on line B 112900 Forestry and Logging 113000 Forestry and logging (including forest nurseries and timber tracts) Crop Production 111100 Oilseed and grain farming 111210 Vegetable and melon farming Schedule F (Form 1040) 2016 Cash To Accrual Analysis: 2016 Income Statement Cash Income Cash Expense Feeder livestock purchase Sale of livestock and other resale items ??? 1,247,574 Sales of livestock, produce, grains and other Government payments Chemicals Custom hire (machine work) Feed 222 Cooperative distributions ?? Fertilizers and lime ??? Freight and trucking ?2? Gasoline, fuel, and oil ? Insurance (other than health) Interest, mortgage g99 Interest, other Labor hired T?? ??? Other expenses ??? Rent or lease: land, animals, etc. ? Repairs and maintenance Seeds and plants ??? Storage and warehousing Supplies ??? Taxes ??? Utilities ??? Veterinary, breeding, and medicine Gross cash income ? Total cash expense ??? Net cash income Inventory Changes Purchases/Deposits Beginning Inventory Sales/Withdrawals Ending Inventory Inventory Change Prepaids and supplies ?? Hedging gains or losses ? 8,520 Crops and feed ? Market livestock ??? Other assets ? Accrued interest ??? Total inventory change ??? Net operating profit ??? Depreciation Machinery and equipment Titled vehicles Beginning Inventory Purchases Sales Ending Inventory Depreciation 245,334 29,840 ? ?? ?? ??? ??? Buildings and improvements ? m Total depreciation ??? Net farm income ? Income Statement for 2016 Cash Flow Statement Sales Cash flows from operating activities 310,728 Cost of Goods Sold Net Farm Income 346,388 Depreciation 138346 Gross Profit 60,159 Other operating expenses (300) Change in accrued interest 394055 175584 (100,751) (7,496) Operating Income Gains from disposal of property and equipment Income from discontinued operations Change in crop inventory 15,300 433965 -69750 Change in livestock held for sale 123555 -39910 21,400 Change in Prepaid Expenses 1,900 -38660 (14,500) Add'l Info: Deposits: 16,113 Change in Hedging Accounts Cash withdrawal for family living 337,827 Earnings before interest and taxes 310410 20,779 Interest Net Cash Provided by operating activities Earnings before income tax 326,308 -245334 purchases 245334 Income Tax 29840 Net farm income sales 29840 310,728 (215,494) -215494 Cash Flows from investing activites Add'l Info Purchases of property and equipment Proceeds from disposal of property and equipment (245,334) Add'l Info (101,036) net change in c Net change in l Net change in p 29,840 -36289 Net cash provided (used) by investing activities (215,494) -20424 (31,950) 5143 Cash flows from financing activities (132,986) net change in ir -48662 (28,000) Net change in current loans net cash from fi -100232 (10,653) Net change in principal due in the next 12 months 3,100 -5316 (64,414) (26,800) Net change in intermediate loans Net change in long-term loans -5316 Net cash (provided by/ used in) financing activities (116,114) Increase in cash and cash equivalents (5,300) OMB No. 1545-0074 SCHEDULE F Profit or Loss From Farming (Form 1040) 2016 Attach to Form 1040, Form 1040NR, Form 1041, Form 1065, or Fom 1065-B. Attachment Department of the Treasury Intemal Revenue Service (99) Sequence No. 14 Information about Schedule F and its separate instructions is at www.irs.gov/schedulef. Name of proprietor John Peterson A Principal crop or activity Beef E Did you "materially participate" in the operation of this business during 2016? If "No," see instructions for limit on passive losses F Did you make any payments in 2016 that would require you to file Form(s) 1099 (see instructions)? Social security number (SSN) 191-29-1310 B Enter code from Part IV C Accounting method: 1 1| 2| 1| 1|1Cash Accrual D Employer ID number (EIN), (see instr) Yes No Yes No Yes No Farm Income-Cash Method. Complete Parts I and Il (Accrual method. Complete Parts Il and III, and Part I, line 9.) G If "Yes," did you or will you file required Forms 1099? Part I 2093459 a Sales of livestock and other resale items (see instructions) 1a b Cost or other basis of livestock or other items reported on line 1a 1b 950234 c Subtract line 1b from line 1a . 2 Sales of livestock, produce, grains, and other products you raised Cooperative distributions (Form(s) 1099-PATR) 1c 1143225 498952 3b Taxable amount 3a 3b 1020 1020 4b Taxable amount 4a Agricultural program payments (see instructions) 4a 11412 4b 11412 5a Commodity Credit Corporation (CCC) loans reported under election CCC loans forfeited .. 5a ..... 5b 5c Taxable amount 5c 6 Crop insurance proceeds and federal crop disaster payments (see instructions) Amount received in 2016 6b Taxable amount 6a 6b a Amount deferred from 2015 If election to defer to 2017 is attached, check here 6d 6d C 7 Custom hire (machine work) income 7 Other income, including federal and state gasoline or fuel tax credit or refund (see instructions) 8 Gross income. Add amounts in the right column (lines 1c, 2, 3b, 4b, 5a, 5c, 6b, 6d, 7, and 8) If you use the accrual method, enter the amount from Part II, line 50 (see instructions) Farm Expenses-Cash and Accrual Method. Do not include personal or living expenses (see instructions). 9 1654609 Pension and profit-sharing plans Rent or lease (see instructions): Vehicles, machinery, equipment b Other (land, animals, etc.) 10 Car and truck expenses (see 23 23 10 instructions). Also attach Form 4562 24 Chemicals ... -. 11 11 34162 24a 12 Conservation expenses (see instructions) 12 24b 192719 Custom hire (machine work) 13 13 3850 25 Repairs and maintenance 25 32677 26 Seeds and plants 26 Depreciation and section 179 expense (see instructions) Employee benefit programs other than on line 23 111458 14 2809 Storage and warehousing Supplies 14 295635 27 27 28 28 37913 15 es 29 15 29 1680 285173 91416 30 Utilities 30 16 Feed 16 6849 Fertilizers and lime 17 17 31 Veterinary, breeding, and medicine 31 14318 18 32 Other expenses (specify): 18 Freight and trucking Gasoline, fuel, and oil 28516 19 19 32a 27212 a 10715 20 Insurance (other than health) 20 b 32b 33728 21 Interest: 32c a Mortgage (paid to banks, etc.) b Other 22 Labor hired (less employment credits) d 32d 21a 43662 21b 67388 32e ... . . . 22 44939 32f f Total expenses. Add lines 10 through 32f. If line 32f is negative, see instructions 33 33 1366819 34 Net farm profit or (loss). Subtract line 33 from line 9 If a profit, stop here and see instructions for whe re to report. If a loss, complete lines 35 and 36. 34 287790 Yes No 35 Did you receive an applicable subsidy in 2016? (see instructions) Check the box that describes your investment in this activity and see instructions for where to report your loss. aAll investment is at risk. Some investment is not at risk. b For Paperwork Reduction Act Notice, see the separate instructions. Schedule F (Form 1040) 2016 Cat. No. 11346H Schedule F (Form 1040) 2016 Page 2 Part III Farm Income-Accrual Method (see instructions) Sales of livestock, produce, grains, and other products (see instructions) 37 37 38bTaxable amount 38a Cooperative distributions (Form(s) 1099-PATR) 38a 38b 39a Agricultural program payments 39a 39bTaxable amount 39b Commodity Credit Corporation (CCC) loans: 40 CCC loans reported under election 40a a b CCC loans forfeited 40c Taxable amount 40c 40b 41 Crop insurance proceeds 41 Custom hire (machine work) income 42 42 Other income (see instructions) 43 43 44 Add amounts in the right column for lines 37 through 43 (lines 37, 38b, 39b, 40a, 40c, 41, 42, and 43) 44 Inventory of livestock, produce, grains, and other products at beginning of the year. Do not include sales reported on Form 4797 45 45 46 Cost of livestock, produce, grains, and other products purchased during the 46 year 47 47 Add lines 45 and 46 48 Inventory of livestock, produce, grains, and other products at end of year 48 Cost of livestock, produce, grains, and other products sold. Subtract line 48 from line 47 49 49 50 Gross income. Subtract line 49 from line 44. Enter the result here and on Part I, line 9 50 "If you use the unit-livestock-price method or the fam-price method of valuing inventory and the amount on line 48 is larger than the amount on line 47, subtract line 47 from line 48. Enter the result on line 49. Add lines 44 and 49. Enter the total on line 50 and on Part I, line 9. Part IV Principal Agricultural Activity Codes Fruit and tree nut farming 111300 Do not file Schedule F (Form 1040) to report the following. Income from providing agricultural services such as 111400 Greenhouse, nursery, and floriculture production Other crop famming 111900 CAUTION Soil preparation, veterinary, farm labor, horticultural, or management for a fee or on a contract basis. Instead file Schedule C (Form 1040) or Schedule C-EZ (Form 1040). Income from breeding, raising, or caring for dogs, cats, or other pet animals. Instead file Schedule (Form 1040) or Schedule C-EZ (Form 1040) Sales of livestock held for draft, breeding, sport, or dairy purposes. Instead file Form 4797 Animal Production Beef cattle ranching and farming 112111 112112 Cattle feedlots 112120 Dairy cattle and milk production Hog and pig farming Poultry and egg production Sheep and goat farming Aquaculture Other animal production 112210 112300 112400 112510 These codes for the Principal Agricultural Activity classify farms by their primary activity to facilitate the administration of the Internal Revenue Code. These six-digit codes are based on the North American Industry Classification System (NAICS) Select the code that best identifies your primary farming activity and enter the six-di git number on line B 112900 Forestry and Logging 113000 Forestry and logging (including forest nurseries and timber tracts) Crop Production 111100 Oilseed and grain farming 111210 Vegetable and melon farming Schedule F (Form 1040) 2016