Cash and Accrual Income Statement

John had total cash revenues of $1,500,000 and cash operating expenses of $1,525,000.  Thus, net cash income is negative $25,000.  It does not appear that John had a good year.  However, the tracking of just cash does not tell the whole story.  John has $140,000 of grain in storage from this year’s crop that he has not sold yet and thus it does not show up on the Cash Income Statement.  John also prepaid $30,000 of next years input expenses this year, which does shows up as a cash expense this year even though it is for inputs that will be used next year.  Adding the revenue that truly occurred this year and subtracting the expenses that truly belong to next year, John’s true performance is a positive $145,000 (-25,000+140,000+30,000).

Figures 1 and 2 illustrate adjustments for farmer Jill.

Figure 1 shows Jill’s revenue adjustments.  Jill performed custom work last year but did not collect on her work until this year.  Operationally, that was income earned last year, not this year and thus an adjustment must be made to move that $25,000 of revenue on this year’s Cash Income Statement to last year.  Similarly, Jill did the work of planting, caring for, and harvesting $100,000 of corn and soybeans this year, but she has not sold it yet.  The income was truly earned this year and thus an adjustment must be made to add it to this year’s revenues. 

Figure 2 shows similar adjustments, except in this case it is for expenses.  At the end of last year, Jill prepaid $20,000 worth of inputs (seed, fertilizer, etc.) that she will use on this year’s crop.  While the cash was paid last year, operationally, the inputs were not used until this year’s crop.  Likewise, she prepaid $40,000 of inputs this year (paid the cash this year), but it was for inputs that won’t be used until next year’s crop.  Thus, they “belong” as an expense on next year’s crop.

If any cash exchanged hands as a revenue or expense it goes on the Cash Income Statement.  If no cash exchanged hands then it does not go on the Cash Income Statement.

Answer: FALSE. Generally, this statement is true, but there are some important exceptions.  The non-cash expense, depreciation, is included on the Cash Income Statement.  Also, the cash outlay for principal payments and for capital asset purchases does not go on the Cash Income Statement.  Note, depreciation accounts for the expense of capital assets.

Answer: Accrual Income Statement. The Cash Income Statement accounts for the flow of cash, but does not account for the production and operational activities in a given accounting period. True realization of revenues and expenses is accounted for on the Accrual Income Statement.

Answer: The Beginning Balance Sheet and the Ending Balance Sheet enable managers to adjust the cash income statement for changes in inventory items. Adjustments are made for revenues, unused assets, unpaid items, accrued interest and taxes.

Answer: FALSE. The Internal Revenue Service (IRS) allows farm businesses to use cash accounting for income tax purposes. This is a useful management tool as farm managers can make decisions to either defer revenues or pre-pay expenses, all of which can lower tax liability. Therefore, the Cash Income Statement is the best for tax management.