MODULE 1.3

• Farm Inventory

  A detailed list of all farm resources at a specific point in time, with values assigned to each of them.
• Farm Inventory

  The inventory shows the distribution of the capital

  invested in the business among various types of assets such as land, machineries, and supplies.
• Farm Inventory

  It is essential at both the beginning and end of a season or year. A comparison between the beginning and end of the season or year shows how the financial position/progress of the farm has changed after one production cycle or year.
• Asset Valuation- process of determining the fair market or present value of assets.
• Book Value (BV) – the value of an asset as reflected on the balance sheet or financial

  statement.
• ASSET VALUATION METHODS

  1. Original cost
  2. Farm Production Cost
  3. Net Market/Selling Price
  4. Present Market Value
  5. Normal Market Value
  6. Acquisition Cost less Accumulated Depreciation
  7. Replacement Cost less Accumulated Depreciation
  8. Income Capitalization
• Original Cost

  • Value of the item at the time it was bought
  • Used for items that:
  • Have been purchased recently
  • Intended to be used up within a year
  • Have a short lifespan
  • Whose values do not chang drastically
  • E.g. Farm Supplies, Feeds, Fertilizers

  BV = purchase cost or original cost
• Farm Production Cost

  • Used for items that:
  • Are produced on the farm
  • E.g. standing crops, raised livestock
  • Good cost-of-production or enterprise records must be available

  BV = accumulated costs of producing the items at the time the inventory is taken, but should NOT include profit nor opportunity costs associated

  with the production.
• Net Market/Selling Price

  • Used for items that:
  • could or will be sold in a relatively short period of time as a normal part of business activities, and for which current market prices are available.
  • E.g. grain, feeder livestock, etc.

  BV = current market price less normal marketing

  charges, such as transportation, selling commissions, and other fees
• Present Market Value

  • Used for products that:
  • are supposed or intended to be sold at the time the inventory is conducted.
  • E.g. home-grown crops and livestock setaside from home consumption, etc.
  • Marketing Cost = 0

  BV = current selling/market price
• Normal Market Value

  • Used for:
  • properties whose values/prices change over time/more frequently, and will last for more than a year.
  • E.g. land, working animals, etc.
  • The averaging should be done for each inventory period.

  BV = average selling price of the property
• Acquisition / Original Cost less Accumulated Depreciation

  • Used for depreciable assets
  • Acquisition Cost (AC): price paid for the asset, INCLUDING taxes, delivery fees, installation, and any other expenses directly related to placing the asset into use.

  BV = AC – Accumulated Depreciation
• Acquisition / Original Cost less Accumulated Depreciation

  
  

  Depreciation

  • Annual loss in book value due to use, wear, tear, age, and technical obsolescence
  • Both considered as a
  • business expense that reduces annual profit and
  • a reduction in the book value of the asset
• Acquisition/Original Cost less Accumulated Depreciation

  
  

  Depreciable Assets have

  • A useful life of more than one year
  • A determinable useful life but not an unlimited life
  • Used in a business in order for the depreciation to be a business expense

  E.g. vehicles, machinery, tools, equipment, buildings, fences, livestock, irrigation wells/facilities, etc.
• Acquisition / Original Cost less Accumulated Depreciation

  
  

  Land and Land Improvements

  • Land is NOT a depreciable asset since it

  invalidates the second criterion (i.e., it has

  an unlimited life).

  • Land improvements (e.g., roads, canals,

  etc.) are depreciable assets.
• Acquisition Cost (AC): price paid for the asset, INCLUDING taxes, delivery fees, installation, and any other expenses directly related to placing the asset into use.
• Replacement Cost (RC): cost of replacing

  the property to its original purpose
• Replacement Cost less Accumulated Depreciation

  • This is based on the assumption that present costs are much more significant than past costs in determining future productive capabilities
  • Replacement Cost (RC): cost of replacing the property to its original purpose

  BV = RC – Accumulated Depreciation
• 8. Income Capitalization

  • Considers the time value of money

  
• General rule:

  1. conservatism
  2. consistency
• General Rule

  
  

  Conservatism: avoid placing too high a value

  on any asset
• General Rule

  
  

  Consistency: use the same valuation

  method/s over time.