Assessment of pits and potholes: Focus on the inventory

As people who live in rural areas, we are all used to potholes that shake our vehicles and chatter our teeth. Likewise, the financial statements that measure the position and performance of our dairy companies have potholes that are sometimes difficult to navigate.

The balance sheet is one of four financial statements recommended by the Farm Financial Standards Council (FFSC), an organization that provides standards for the creation and analysis of agricultural financial statements (

Balance sheets have three main sections: assets, liabilities and equity. While there is more to it, equity is usually a residue after subtracting liabilities from assets. The liabilities are pretty straightforward. How much do you owe others? There is the final section: Assets, Strewn with Holes and Potholes on how to determine a reasonable, accurate and consistent value.

Money is easy: $ 100 of cash is an asset value of $ 100. However, what is the reasonable, accurate and consistent value of the 10,000 bushels of grain in storage, the bunker filled with corn silage, feeder cattle, raised breeders, a tractor, a field or an open hedge?

Balance sheet basis

To complicate matters, there are two recommended check-ups:

1. Cost-based balance sheets generally measure assets at cost or cost less accumulated depreciation. The cost-based balance sheet does not include asset appreciation and therefore shows the financial position in relation to operations only and not asset appreciation.

2. The market-based balance sheet is the most common and shows assets valued at what they could be sold in today’s market. The market-based balance sheet includes asset appreciation and shows your financial position with respect to both operations and asset appreciation (or depreciation).

The challenge of reasonable, accurate and consistent valuation of assets is that cost is not always used for cost-based balance sheets, and market value is not always used for market-based balance sheets.

Table 1 is a basic sheet of how assets are valued for cost balances against market basis.

The assets above the bold line are current or market assets, and those below are non-current assets or fixed assets. Non-current (capital) assets do quite well in terms of the cost value used for the basic balance sheet and the market value used for the basic balance sheet. However, current (market) assets do not perform as well and have several exceptions. One of them is how to value stocks.

Think about the variety of ways you could stock corn.

  • Corn growing in the field, not yet harvested
  • Maize raised and harvested in storage for sale
  • Maize raised and harvested in animal feed storage
  • Corn purchased for later resale (not common)
  • Corn purchased for food
  • Purchased and raised corn that has been mixed
  • High corn that you contracted, hedged or guaranteed by a put option

Each of these types of corn stocks may be valued differently for the balance sheet.

The Farm Financial Standards Council (FFSC) provides guidelines on how to value stocks and other assets. The FFSC follows generally accepted accounting principles (GAAP) until the unique characteristics of production agriculture suggest an exception. Crops and livestock raised for sale are among these exceptions. GAAP requires that inventory be measured at cost. However, for inventories of crops and livestock intended for sale, the FFSC guidelines state:

“[A]agricultural producers can value these inventories at current estimated selling prices less disposal costs when all of the following conditions are met:

1. Reliable market price, easily determinable and achievable

2. Relatively insignificant and predictable disposal costs

3. Available for immediate delivery.

Four inventory categories

The FFSC separates stocks into four categories, from A to D. Category “A” includes crops and livestock that have been raised on the farm with the intention of selling them. This category meets the criteria listed above and therefore the recommendation is to use the current market price (minus any cost to sell) as the value of the asset.

Category “B” also includes products that have been raised on the farm, but the intention is not to sell them, but rather to use them as an input in another production process. Crops raised for animal feed are a common example. Typically, these products do not meet the criteria, and the FFSC recommends the lower of cost or market value. This can be a dilemma as there is no purchase cost, only the cost it took to raise the product, which may not be easily determined.

Category “C” is purchased inventory, but a specific type of purchased inventory, i.e. it could have been increased as well. Purchased feeder cattle and purchased corn (for animal feed) are two examples of purchased products that could have been grown on the farm. Category “C” has two subcategories. The first (C1) concerns products purchased with the intention of adding value and reselling them (feeder cattle). The nature of this type of inventory is this: its value changes as more books are put in, and the balance sheet must recognize the increase in value over its original cost. The second (C2) concerns products such as maize purchased with the intention of using them as an input (animal feed). The FFSC recommendation is the lower of cost or market value. Table 2 reflects my personal preference, which is to assess at cost.

Valuing inventory

Category “D” includes raw materials purchased for use as inputs and stocks that cannot be cultivated, such as seeds, fertilizers and fuel. There is a definable purchase price, and the FFSC recommends using the cost value on the balance sheet.

These recommendations are full of questions that begin with “but what if…”. For example, “but what if the corn that I buy with the intention of using it as food is mixed with corn that I have raised?” In the case of mixed products, the FFSC recommends assuming that all of the reared product is used first and that what remains is the purchased product. If more inventory is available than the quantity of product purchased, use a pro-rated value.

However, let’s refrain from chasing after squirrels with “but what if…” questions and instead recall three important words – reasonable, precise and consistent. The last of these words, “consistent”, may be the most important. Over time, you want your balance sheet to show “real” changes in your financial situation. If you are consistent in how stocks and other assets are valued, then the “change” in equity is more likely to be “real” rather than simply reflecting a change in valuation methods.


What does this mean for you tomorrow after breakfast? Talk to your bookkeeper / bookkeeper and find out how the different types of inventory are valued. Are different types of inventory classified and valued differently? If so, what is the categorization and how is it valued? Is it done the same way every year? What are the standard operating procedures for determining the appropriate inventory quantities and prices? Are these procedures written down? If changes are warranted, you may also want to edit the last two balance sheets so that your trends are comparable. Finally, be sure to provide footnote explanations of any written procedural changes for all to see.

An accurate balance sheet can be used with other financial statements to determine where the balls and chains that hold back profitability might be. However, asset valuation is fraught with pitfalls and potential potholes. These holes and potholes can be fixed by establishing reasonable, accurate and, most importantly, consistent accounting procedures and practices. end mark

Kevin bernhardt
  • Kevin bernhardt

  • Agricultural management specialist
  • Extension of the University of Wisconsin
  • Dairy Profitability Center and UW – Platteville
  • Email to Kevin Bernhardt

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