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Bookwork, The Missing Management Component: Balance Sheet Valuations

Updated May 31, 2019

Heather Gessner

SDSU Extension Livestock Business Management Field Specialist

The financial crash of the 1980’s has been attributed to changes in producer’s balance sheets, due to a decline in land prices. After this time, a two-column balance sheet was developed to help prevent that type of balance sheet collapse from occurring in the future.

Asset Valuation

The two methods to value non-current assets, like land, machinery and equipment, breeding livestock etc. are Cost Valuation and Market Valuation.

Cost Valuation

This is the Remaining Value of the investment, or it could be considered the Book Value, where the purchase price is adjusted for accumulated depreciation. Not influenced by price changes.

Market Valuation

This is the Current Market Value, less any selling costs. Influenced by price changes, either higher or lower.

Developing a Balance Sheet

To develop an accurate balance sheet for consistent comparisons, use the information in Table 1.

Table 1

Balance Sheet Values
Asset Cost Basis Market Basis
Marketable Securities Cost Market
Marketable Investments Market Market
Accounts Receivable Cost Cost
Prepaid Expenses/Supplies Cost Cost
Growing crops Cost Cost
Purchased breeding livestock Cost Market
Raised breeding livestock Cost or Base Value Market
Machinery & Equipment Cost Market
Real Estate Buildings and Improvements Cost Market

Real Estate Example (Table 2) – land was purchased in 3 different years for a total of 468 Acres.

Table 2

Real Estate Buildings and Improvements Cost Market
395 Acres (1998) @$3500 $1,382,500 (@$6372) $2,516,940
24 Acres (2015) @$6000 $144,000 (@$6372) $152,928
49 Acres (2017) @$5275 $258,415 (@$6372) $312,228
  $1,784,975 $2,982,096

In this example, the land valuation has increased by approximately $1.2 million. Both the Cost Value and Market Value are important to know and can be used to make operating decisions. The Market Value provides information on the liquidity value of the assets and can be used to evaluate the owners borrowing ability. However, without knowing both numbers, if the value of the land begins to decrease the cost basis provides a base real estate value.

Other assets also need to be included on the double column balance sheet. (Table 3)

Crop and livestock inventories that are held for sale may be difficult to determine, as different financial associations have different recommended actions. However, here are some guidelines.

Table 3

Market Inventories Cost Market
Raised livestock/crops for sale Market1 Market
Purchased livestock for sale Either2  
Raised crops for production (feed) Market3 Market
Purchased feed stuffs for production Either2 Market
Purchased inputs for production (seed, fertilizer etc.) Cost Cost
1 Market Value less cost of disposal.
2 Recommended is the lower cost or Market Value. If kept separate from raised inventory then use cost. If co-mingled with raised inventory then practicality is market value.
3 Lower of cost or market is preferred, market value is acceptable.

Placing a value on market inventories is more complicated than land values as there are tracking issues, products maybe co-mingled and thus hard to determine which price to use. The key is to be consistent and conservative with your valuation methods.

Conservative Valuation Example (Table 4)

At harvest, the Edwards farm put 25,000 bushels of grain into the bin for sale later. At the time the grain was stored, the market value for the corn was $3.00/bu., for a total value of $75,000. (This is the accrual earnings discussed in Part 1.)

Table 4

Conservative vs. “Hopeful”
  Cost Market
25,000 bu. Corn held for sale @$3.00/bu. $75,000  
25,000 bu. Corn held for sale @$4.00/bu.   $100,000


Because Farmer Edwards is “hopeful” he will receive $4.00/bu. for the corn in the bin, his balance sheet would be over valued by $25,000, if the stored commodity was not represented as a cost and market value. These values are also components of many financial ratios including Rate of Return on Assets and Debt to Asset ratio. (Financial Ratio Calculator) Thus, their importance to the operations’ financial records and evaluation is critical. Creation of accurate balance sheets start with correct inventory counts and conservative and consistent asset valuation. Over-valued assets or changes in the valuation method year-to-year will provide inconsistent data resulting in poor decision-making tools.