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Measurement Issues in Assessing Farm Profitability through Cash Tax Returns

Author

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  • Barnard, Freddie L.
  • Ellinger, Paul N.
  • Wilson, Christine A.

Abstract

It is widely accepted that net farm income reported on an accrual-adjusted income statement is a more appropriate profitability measure than net farm income reported on Schedule F of the federal tax return, which is prepared using cash basis accounting. However, a common practice among agricultural lenders is to use Schedule F net farm income, which uses the cash basis of accounting, as a proxy for accrual-adjusted net farm income. A study of 1,045 individual Illinois farms’ records from 2002 through 2006 found the median absolute annual percentage difference between a three-year average cash and a three-year average accrual-adjusted net farm incomes is 57 percent for farms of stable size; 43 percent for farms with annual gross revenue increasing at rates of less than 5 percent, 50 percent at rates of 5-10 percent, and 58 percent at rates over 10 percent; and 61 percent for farms with a debt-to-asset ratio greater than 40 percent.

Suggested Citation

  • Barnard, Freddie L. & Ellinger, Paul N. & Wilson, Christine A., 2010. "Measurement Issues in Assessing Farm Profitability through Cash Tax Returns," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2010, pages 1-11.
    • Handle: RePEc:ags:jasfmr:96408
    DOI: 10.22004/ag.econ.96408
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    References listed on IDEAS

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    1. Wilson, Christine & Bernard, Freddie & Boehlje, Michael, 2007. "A Financial Analysis Program That Will PASS the Farm Manager “Interest Test”," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2007, pages 1-10.
    2. Ellinger, Paul & Barnard, Freddie & Wilson, Christine, 2007. "Financial Stages of a Farmer’s Life: Effects on Credit Analysis Measures," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2007, pages 1-8.
    3. Durguner, Seda & Katchova, Ani L., 2007. "Credit Scoring Models in Illinois by Farm Type: Hog, Dairy, Beef and Grain," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon 9356, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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    Cited by:

    1. Paul N. Ellinger & Bruce L. Ahrendsen & Charles B. Moss, 2012. "Balance sheet and income statement issues in ARMS," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 72(2), pages 247-253, July.
    2. Barnard, Freddie L. & Yeager, Elizabeth, 2013. "The Perfect Storm: A Case Study Illustrating How a Series of Events Led One Farm Operator to Develop a Risk Management Plan that Includes a Lender’s Perspective," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2013, pages 1-15, June.
    3. Banard, Freddie L. & Yeager, Elizabeth A., 2014. "Impact of Lower, More Volatile Net Farm Incomes, and Higher Interest Rates on Repayment Risk," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2014, pages 1-20.
    4. Yeager, Elizabeth A. & Banard, Freddie L., 2014. "Effectiveness of Increasing Liquidity as a Response to Increased Repayment Risk: A Case Study," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2014, pages 1-19.
    5. Barnard, Freddie L. & Yeager, Elizabeth & Miller, Alan, 2013. "New Features Added to the Purdue Farm Financial Analysis Spreadsheet," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2013, pages 1-14, June.

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    6. Yeager, Elizabeth A. & Banard, Freddie L., 2014. "Effectiveness of Increasing Liquidity as a Response to Increased Repayment Risk: A Case Study," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2014, pages 1-19.
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    Keywords

    Agricultural Finance;

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