Inventory is any asset held with an intent to resell the asset at a future date. Inventory is one of the most common items held on any balance sheet, including balance sheets of farmers and ranchers.
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What is Inventory?
Inventory is a critical component of a farm’s balance sheet, representing the raw materials, work-in-progress goods, and finished products that are held by the farm for the purpose of sale or production.
In the context of agriculture, inventory encompasses various items that are essential for the farm’s operations and revenue generation.
Types & Examples of Inventory
On a farm balance sheet, inventory can take multiple different forms across the thousands of agricultural products held for sale.
- Crop Inventory – Harvested row crops (corn, wheat, soybeans, etc), fruits, vegetables, timber. Crop inventory is often held in storage such a grain bin, a grain silo, or other dedicated storage facility.
- Growing Crops – Crops currently growing in the production cycle and not yet harvested. These are typically crops in the field, greenhouse or planted area. Think of growing crops like a work in progress.
- Market Livestock – Livestock which can be sold including cattle, swine, poultry and goats.
- Livestock Products – Any sellable product derived from livestock such as leather, wool and honey.
In the context of farm balance sheets, there are typically dedicated accounts for each of the inventory types mentioned above. This is due to the unique measurements, tracking and production cycles of the various agricultural commodities mentioned above.
Inventory on the Balance Sheet
Inventory is usually expected to be converted to cash within the near future, usually within a year. As such, inventory is considered a current asset on the balance sheet.
General inventory is usually grouped closely to crop inventory, market livestock, livestock products and other inventory related accounts on the balance sheet.
Purpose of Inventory
For most all producers and agribusiness operations, inventory represents a significant amount of current assets. Ultimately, these assets are expected to be sold and converted to cash, thus sustaining the operation. As such, it is important to track inventory as this represents the total amount of sellable product that the producer current owns which can be sold in the market.
Proper inventory management is a crucial part of any agriculture operation and understanding inventory is also critical in understanding operational efficiency and how quickly inventory turns.
Inventory can be converted into cash through sales, making it an important component of a company’s liquidity management strategy. By tracking inventory levels on the balance sheet, businesses can assess their ability to meet customer demand and manage cash flow effectively. Sold crops may be reinvested in the operation in the form of cultivating new fields and crops, purchasing new equipment, buildings or real estate, or enabling the producer to take a distribution to cover personal expenses.
How to Record Inventory on Balance Sheet
Inventory on an agricultural balance sheet is typically valued on a balance sheet at its cost or market value. Here’s how it’s generally done:
- Cost Basis – Inventory is initially recorded at its cost, which includes all costs directly attributable to bringing the crop to its present location and condition. This includes expenses such as seed, fertilizer, pesticides, irrigation, labor, and other direct production costs.
- Market Basis – If the market value of the crop is lower than its cost, the inventory is written down to its market value. Market value is determined based on factors such as current market prices for similar crops, expected selling prices, and any costs necessary to complete the production process and sell the crop.
It’s important to note that inventory valuation methods may vary depending on accounting standards, industry practices, and specific circumstances of the agricultural operation. However, the objective is to ensure that the inventory is reported on the balance sheet at a conservative value that reflects its true economic worth.
Exclusions from Inventory on the Balance Sheet
When preparing a farm balance sheet, it’s important to accurately categorize and value inventory while excluding certain items that do not meet the criteria for inventory.
Common exclusions from inventory on a farm balance sheet ensure clarity and transparency in financial reporting. Here are typical exclusions:
- Breeding Livestock: Animals kept for reproduction purposes (e.g., breeding bulls, cows, rams, ewes, breeding sows) are excluded from inventory. They are classified as non-current assets under breeding livestock.
- Work Animals: Animals used for labor or other farm operations (e.g., draft horses, oxen) are excluded from inventory. These are considered non-current assets.
- Unborn or Unweaned Animals: Animals that are unborn or still dependent on their mothers (e.g., calves, piglets, lambs) are usually not included in inventory. They are categorized under breeding livestock or recorded separately until they are weaned and marketable.
- Consumables and Feed: Feed, supplements, and other consumables used for raising livestock are not included in inventory. These are classified as supplies or prepaid expenses.
- Supplies and Equipment: Farming supplies (e.g., fertilizers, pesticides, seeds) and equipment (e.g., tools, machinery) are not considered inventory. They are classified under supplies or fixed assets, respectively.
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