The income statement is organized into seven parts:
- Sales (Revenue)
- Cost of Goods Sold (COGS)
- Direct Operating Expenses (DOE)
- Operating Overheads (OH)
- Cost of Capital (COC)
- Interest Expense
- Other Income and Expenses
The following section explains these parts, their subcategories and what should be included in each.
This is the value of sales of products from farming operations. The section has spaces for crop and livestock sales as well as other sources of farm income. It should not include government payments except for production insurance. It should not include gains or losses on sales of assets such as machinery or land, nor any form of non-farm income or expenses. These items go at the end of the income statement under “other income and expenses”.
Non-Market Livestock: Are livestock that provide ongoing products. Includes breeding stock, milking animals or animals that provide another renewable product (e.g. wool). Sales of cull animals from these herds/flocks would appear as Market Livestock.
Market Livestock: Livestock sold for their meat, fur, etc
Cost of Goods Sold (COGS)
This is the cost of inputs that go directly into producing your product. For crops this includes expenses for seed, fertilizer and crop protection material. For livestock it is feed, feeder animals, veterinary fees, medicines, and breeding expenses. This category also includes costs of crop insurance and marketing fees.
Direct Operating Expenses (DOE)
These are costs of farm operations such as electricity, tools, repairs, operating labour, transportation costs, and custom work. The most common items are listed in the spread sheet, including changes in inventories and prepaids. We have adopted the practice of including any management salaries in the operating labour category instead of operating overheads because of the variety of ways owner-operators pay themselves.
Farmers sometimes expense machinery and equipment in this category instead of in Cost of Capital below. Please include only the annual cost of operating machinery and equipment in this category. Annual depreciation, leasing and/or rental expenses are capital costs. Entering them into this category will make your ratios inaccurate.
Cost of Capital (COC)
The costs that come from owning/renting/leasing land, equipment, facilities etc. This includes depreciation/amortization, land rent, machinery or building lease or rental fees, and land clearing/tiling.
The cost of financing your operation. Includes interest on long-term debt, interest on operating loans or lines, and, if it can be separated out, interest included in lease payments. It is helpful to list each of the three separately because this information may be important in developing a financing strategy for your business.
Revenue earned or expenses incurred that is not directly from the business – i.e. NOT from farming operations. Examples include interest income, rental house, solar panels, equity markets, gains or losses from sales of capital items, expenses for home renovations, etc.
Principal payments are not a part of the income statement. However, they are included on the income statement spreadsheet as this information is needed to calculate your debt-service ratio, found under the “Ratios” tab.
Additional definitions for terms you may find in the income statement can be found below
Calculated as revenue minus cost of goods sold.
Calculated as revenue minus cost of goods sold and direct operating expenses.
The purpose of this format is to assess the operations of the farm business, not the tax management aspects. Thus, income tax expenses are not included as expenses because of the wide range of methods used to manage income tax.
Earnings before interest, taxes, depreciation, and amortization.
Earnings before interest and taxes.
Calculated as all revenue minus all expenses.