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Farm Management 9th Edition by Ronald Kay – Test Bank

 Sample Questions

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CHAPTER  2

 

SAMPLE TEST QUESTIONS – MULTIPLE CHOICE

 

1. Which function of management is concerned with monitoring the results of a decision and taking corrective action?
   1. planning
   2. implementation
   3. control
   4. organization

 

2. Which of the following shows the proper time sequence of management functions as they would be applied to a specific problem?
   1. planning, control, implementation
   2. planning, implementation, control
   3. control, planning, implementation
3. control, implementation, planning

 

3. A short summary of the primary reason(s) a particular business is in operation is called:
4. internal scanning
5. external scanning
6. a mission statement
7. whole farm plan

 

4. “Doubling the number of acres farmed within the next 10 years” is an example of a
5. long-run goal
6. short-run goal
7. mission statement
8. decision

 

5. Which of the following is an example of a strategic decision?

1. determining fertilizer levels for crops
2. deciding when to sell grain
3. determining what type of business/legal organization to use
4. setting milking times for a dairy

 

 

6. Which of the following is an example of a tactical decision?

1. balancing a livestock ration
2. forming a partnership with a relative
3. joining a feeder pig cooperative
4. installing an irrigation system

 

7. “What managers do” is best described by which of the following?

1. gather information
2. make decisions
3. analyze data
4. harvest crops

 

8. External scanning could include assessing:

1. the financial condition of the business
2. changes in consumer tastes
3. the basic values of the managers
4. the productivity of the farmland owned

 

9. One characteristic that makes decision making in agriculture different from other types of business is:

1. more government regulation
2. prevalence of very large business units
3. predictability of the production processes
4. fixed supply of a major resource such as land

 

10. The term that best describes how much time is available to make a decision is:

1. imminence
2. revocability
3. frequency
4. importance

 

11. Which phase of the strategic management process would be most influenced by a farm family’s basic values and attitudes about agriculture?
12. external scanning

1. internal scanning
2. setting goals
3. implementing strategies

 

12. A mission statement is:
13. a list of important jobs the farm manager needs to accomplish in the near future.
14. a comprehensive plan to reshape the farm business over the next decade
15. a set of goals to be achieved by a specific date
16. a short summary of why a business exists

 

13. The statement “To achieve an average feed conversion rate of 2.75 pounds of feed per pound of gain for my market hogs by 2019.” is:
    1. A mission statement
    2. A goal
    3. A strategy
    4. An example of external scanning

SAMPLE TEST QUESTIONS – TRUE/FALSE

 

T	F	1.  Short-run planning is more important than long-run planning.
T	F	2.   Goals must be defined before management decisions can be made.
T	F	3.   Because weather and prices are unpredictable, it is impossible to plan more than one year in advance in agriculture.
T	F	4.  Strategic planning only needs to be done by beginning farmers and ranchers.
T	F	5.   No management decision should be made until all possible information has been acquired.
T	F	6.   Maximizing profit is the only goal managers should use to make decisions.
T	F	7. More time should be spent on irrevocable decisions than on those which can be  easily reversed.
T	F	8.   Farm and ranch managers can usually set the selling prices for their products.
T	F	9.   Even choosing the best alternative action will sometimes produce undesirable results.
T	F	10. Biological production processes, such as in agriculture, are more predictable than industrial production processes.
T	F	11.  “Define the problem” is the first step in the decision-making process.
T	F	12.  Farm and ranch businesses tend to be small-scale compared to all U.S. businesses.
T	F	13.  Surveying consumer tastes for a product that a certain farm produces is an example of internal scanning.
T	F	14.  Internal scanning includes assessing a business’ financial, physical and human resources.
T	F	15. Before making any decision, a manager should have a goal(s).
T	F	16. The decision-maker must bear responsibility for any decisions made.
T	F	17. Completing all steps in the decision-making process will guarantee a perfect decision.
T	F	18. Management is mostly about making decisions.
T	F	19. Good management decisions can be made before goals have been determined.
T	F	20. The last step in the decision-making process is to implement the decision.
T	F	21. All farm/ranch managers have the same goal(s).
T	F	22. Goals should be written, specific, measurable, and have a timetable for completion.
T	F	23. Deciding whether to sell wheat today or wait until later in case prices improve is an example of a tactical decision.

 

 

SAMPLE TEST QUESTIONS – DISCUSSION

 

1. Briefly discuss how the characteristics of decisions – importance, frequency, revocability, imminence and number of alternative — impact the decision making process.

 

Each of these characteristics will affect how much time and effort a farm manager puts into making a decision.  More important decisions, in terms of how many dollars are at stake, for example, will warrant more careful consideration.  Decisions made daily likely become routine and don’t require much thought relative to decisions that happen once in a career.  Decisions that are not easy undone (irrevocable) would require more time and consideration.  Imminence refers to how quickly the decision must be made and affects the timing of the decision making process.  Finally the number of alternatives would affect the decision making process — perhaps having more alternatives would require more data collection and more consideration relative to a decision that is a yes or no type decision.

 

2. Give an example of a common farm management decision. In what ways would you, the farm manager, assess the relative importance of this decision?

Some of the ways to measure importance would include the size of the potential gain or loss, the permanence of the decision, and the possibility of revoking or changing the decision after making it.

 

CHAPTER 4

 

SAMPLE TEST QUESTIONS – Multiple Choice

 

1. Which of the following is an example of a noncurrent liability?
2. farm machinery
3. loan on feeder livestock
4. loan on farm machinery
5. prepaid expense

 

2. Which of the following is an example of a current asset?
3. dairy cows
4. farm buildings
5. farm machinery
6. none of the above

 

3. Another term which has the same meaning as owner’s equity is
4. net worth
5. net farm income
6. total asset value
7. total liabilities

 

4. Of the following, which is the most liquid asset?
5. farm machinery
6. balance in checking account
7. breeding livestock
8. feeder livestock

 

 

5. If a business has working capital greater than $0, its current ratio will be
6. greater than one
7. equal to one
8. less than one
9. there is no relationship between the amount of working capital and the current ratio

 

6. If the debt/asset ratio is increasing, then the debt/equity ratio will be
7. increasing
8. decreasing
9. constant
10. indeterminate, need more information

 

 

 

7. Which of the following best describes a balance sheet?
8. it shows changes in assets and liabilities over the last accounting period
9. it shows changes in assets and liabilities over a period of time
10. it shows assets and liabilities at a point in time
11. it shows profit for the last accounting period

 

8. The best description of a business which has increased its debt/asset ratio is one which has
9. purchased more assets
10. sold some assets
11. increased its debt
12. increased its debt relative to total assets

 

9. Which of the following assets would have the same value using either a cost or a market basis valuation?
10. land
11. machinery
12. prepaid expenses
13. purchased breeding livestock

 

10. The degree to which a farm’s assets adequately cover or exceed it liabilities is referred to as
11. solvency
12. profitability
13. liquidity
14. working capital

 

11. A statement of owner equity shows
12. a list of all assets and liabilities
13. the valuation adjustment for owner equity
14. owner equity for the past 20 years
15. the sources and amounts of changes in owner equity

 

12. Which financial statement covers only a single point in time rather than a period of time?
13. income statement
14. statement of owner equity
15. statement of cash flows
16. balance sheet

 

13. A lender would usually prefer to have farm assets valued at their ________ value on a balance sheet that is part of a loan application.
14. cash
15. accrual
16. cost
17. market

 

14. Another name for a balance sheet is
15. net worth statement
16. income statement
17. statement of owner equity
18. statement of cash flows

 

15. The “cost value” shown on a balance sheet for an asset such as a tractor is equal to
16. the original purchase price
17. the original purchase price less depreciation expense take to date
18. the original purchase price plus cost all repairs to date
19. the cost of a new tractor of the same size

 

16. A “contingent” or “deferred” income tax liability is one that
17. is owed but not yet paid
18. would be owed if and when an asset is sold
19. represents delinquent taxes from past years
20. would be due under cash accounting but not accrual accounting

 

17. The “cost” value of farmland can change due to
18. changes in the selling price of farmland
19. accumulated depreciation
20. the cost of nondepreciable improvements made, such as terraces and earthen dams
21. increases in property taxes

 

18. Which of the following is not a source of owner equity for a farm business?
19. loans received to purchase land
20. increases in the value of owned land
21. profit retained in the business
22. assets contributed to the business by the owner(s)

 

19. Using $20,000 in cash and a new loan of $80,000 to purchase land for $100,000 will cause equity to
20. increase by $100,000
21. increase by $20,000
22. increase by $80,000
23. not change

 

20. If $50,000 cash on hand is used to pay a $50,000 operating loan then on the day of the transaction:
21. net worth will not change but the current ratio will change
22. neither net worth nor the current ratio will change
23. net worth will increase but the current ratio will not change
24. net worth will increase and the current ratio will change

 

21. Paying a seed dealer a sum of money in December to be applied toward seed to be delivered in the spring would show up on a balance sheet as:
22. a prepaid expense
23. an account receivable
24. an account payable
25. supplies on inventory

SAMPLE TEST QUESTIONS – TRUE/FALSE

 

T	F	1.  The three major components of a balance sheet are assets, liabilities, and owner’s equity.
T	F	2.   The Farm Financial Standards Council recommends only two classes of assets, current and noncurrent.
T	F	3.   The primary purpose of a balance sheet is to measure and record net farm income.
T	F	4.   On a cost basis balance sheet, machinery would be valued at cost less accumulated depreciation.
T	F	5.   Working capital is one measure of solvency.
T	F	6.   Inventories of grain and feeder livestock would be valued at market on either a cost or market basis balance sheet.
T	F	7.   If total asset value increases, owner equity will also increase.
T	F	8.   Borrowing $20,000 to purchase additional dairy cows will decrease owner equity.
T	F	9.   Current liabilities are debts which must be paid in full within one year from the date of the balance sheet.
T	F	10. On a cost basis balance sheet, owner equity will increase if land values increase.
T	F	11. Noncurrent assets have a useful life of more than one year.
T	F	12. A balance sheet using cost-based valuation will always have a higher owner equity than it would if market-based valuation methods had been used.
T	F	13. A ranch business with a debt/asset ratio of 0.20 would be in a relatively strong financial condition.
T	F	14. Total liabilities cannot be greater than total assets.
T	F	15. A negative owner’s equity indicates an insolvent business.
T	F	16. A current ration greater than two indicates a business has good liquidity.
T	F	17. Market livestock and inventories of stored grain are noncurrent assets on a balance sheet.
T	F	18. If a depreciable asset is sold for exactly its book value, equity will not change.
T	F	19.  Marketable securities (stocks, bonds, etc.) and the cash value of life insurance are also easy to convert to cash and are considered liquid assets.
T	F	20.  Another name for owner’s equity is net worth.
T	F	21.  The statement of owner equity lists all assets and liabilities of a business at a point in time.
T	F	22.  If a new tractor is purchased by taking out a loan, the net worth will not change that day but the debt-to-asset ratio will change.
T	F	23.  Lenders normally prefer a debt-to-asset ratio that is greater than 1.
T	F	24.  A current ratio of more than 2.5 indicates strong liquidity.
T	F	25.   Net worth will change if outside capital is invested in a business.
T	F	26.  The difference in net worth on a cost-basis versus market-basis balance sheet is the valuation adjustment.

 

 

 

 

 

SAMPLE TEST QUESTIONS – FILL IN THE BLANK

 

 

1)  ___Current asset_______ is the most liquid type of asset; it can easily be converted to cash without disrupting the business.

 

2)  The debt-to-asset ratio measures _____solvency__________ or the long-term financial strength of the business.

 

3)  On a market-based balanced sheet net worth is $850,000.   Value adjustment is $200,000 and contributed capital is $50,000.  How much is retained earnings?  ____$600,000_________.

 

 

4) For each asset listed, place a “C” in the blank under the most appropriate valuation method to use for that asset when using a cost system.  Place an “M” in the blank under the valuation method that should be used under a market based valuation system.

 

 

Asset	Cost less Depreciation	Cost	Farm Production Cost	Market Value
Combine	C			M
Corn in storage				C/M
Purchased feeder cattle		C		M
Purchased beef breeding cows	C			M
Raised beef breeding cows			C	M
Wheat crop growing in the field			C/M
Land		C		M
Barn	C			M

 

 

SAMPLE TEST QUESTIONS – PROBLEMS

 

1. Consider the following farm balance sheet.

Assets		Liabilities
Current Assets	$40,000	Current Liabilities	$60,000
Noncurrent Assets	$240,000	Noncurrent Liabilities	$50,000
		Total Liabilities	$110,000
		Owner Equity	$170,000
Total Assets	$280,000	Total Liabilities + Equity	$280,000

1. a) What is the weakest part of this farm business’s financial position? Explain how you determined this.

 

This farm has a poor liquidity position (the weakest part of the customer’s financial condition. Working capital is negative:  $40,000 – $60,000 = -$20,000 meaning that there are not enough liquid assets to cover all the farm’s short term obligations.

 

However, the farm has relatively strong solvency position – positive net worth of $170,000 and a debt/asset ratio = $110,000/$280,000 = 0.39

 

1. b) Given the issue in part a) indicate which of the following is the best way to address the problem and briefly explain why.
2. Sell non-current assets
3. Restructure debt
4. Obtain a larger operating loan

 

Of these three the best option to solve the liquidity problem would be to restructure debt — obtain a non-current loan (loan against land or other fixed assets for example) and use some or all of those funds to pay down the current liabilities (shorter term debt).  This could solve the liquidity problem while the solvency position remained relatively strong.

 

Obtaining a larger operating loan would add to both current liabilities and current assets so won’t solve the liquidity problem.  Selling non-current assets might solve the cash flow problem, but depending on what you sold could negatively impact your ability to produce next year – if you sold equipment you weren’t using this could work, but if you sold for example, breeding stock, this would affect next year’s production.

 

2. On a market-based balanced sheet net worth is $600,000. Value adjustment is $250,000 and contributed capital is $200,000. How much is retained earnings?

 

$600,000 – $250,000 – $200,000 = $150,000

 

 

3. Enter each of the following assets or liabilities and its value in its proper section of the Net Worth Statement format below. Some items will require more than one entry. However, not all lines will be filled.

 

1. You have 200 head of feeder cattle in the feedlot that average 1,000 pounds each. Current selling price for similar cattle is $125 per hundredweight. You borrowed $150,000 from the bank 6 months ago to purchase them.  Interest has been accruing at a 6% annual rate.

 

500. A beef breeding bull purchased recently for $4,500.

 

1. A cattle trailer that was purchased for $25,000 three years ago. You have deducted $7,000 in depreciation expense on it so far, but your neighbor recently offered to buy it from you for $21,000.

 

500. You borrowed $20,000 to buy the trailer. You have made 2 payments of $5,000 principal each plus interest. In three months you will have to make another payment of $5,000 plus $700 interest. However, accrued interest as of today is only $500.

 

1. You have 300 large round hay bales stored, weighing an average of 1,000 pounds each. Hay is currently selling for $140 per ton at local auctions.

 

3. You prepaid for 1,000 gallons of diesel fuel at a price of $3.50 per gallon.

 

Net Worth Statement for Lonesome Acres Ranch February 1, 20XX
Current Assets			Current Liabilities
Feeder cattle   $250,000			Feeder cattle loan      $150,000
Hay   $21,000			Accrued interest on cattle loan    $4,500
Prepaid expense   $3,500			Trailer loan    $5,000
			Accrued interest on trailer loan   $500
Intermediate and Long-term Assets			Intermediate and Long-term Liabilities
Cost Value	Market Value
Bull  $4,500	Bull $4,500		Trailer loan    $5,000
Trailer $18,000	Trailer  $21,000

 

 

4. Use the following information to fill in the Balance Sheet below and to answer the questions on the next page.

 

 

 

Using the Balance Sheet from the previous page, calculate the following.  Be sure to set up and label the parts of the ratios.  You must show your work to get credit.

 

 

1)  Current Ratio:    1.2    CA/CL  larger is better (at least 2.0)

 

 

2)  Working Capital:    $20,000   CA-CL

 

 

3)  Debt-to-Asset Ratio:   0.50  (borderline, should be less than .5)

 

 

4)  Debt-to-Equity Ratio:   1.02

 

 

5) Debt Structure Ratio:   0.19   CL/TL

 

Answer the following questions.

 

6)  Analyze the financial situation of this individual.

 

Weak liquidity, borderline solvency

 

 

7)  If the operator sold a tractor valued at $50,000 and received $50,000 in cash, would the net worth change on the day of the transaction?

 

No.  

 

 

8)  For the situation described in question 7, would the debt-to-asset ratio change?  Why or why not?

 

 

No.  TA doesn’t change.  TL doesn’t change.