Measurement Issues in Assessing Farm Profitability through Cash Tax Returns

Freddie L. Barnard, Paul N. Ellinger and Christine Wilson

Journal of the ASFMRA, 2010, vol. 2010, 11

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.

Keywords: Agricultural; Finance (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:jasfmr:96408

DOI: 10.22004/ag.econ.96408

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