Farm Finance & Loans
What financial ratio measures a farm’s ability to pay short‑term debts?
A. Debt/Asset Ratio
B. Current Ratio
C. Equity/Asset Ratio
D. Working Capital
The current ratio.
Explanation: Current ratio = Current Assets ÷ Current Liabilities. It evaluates liquidity and short‑term repayment capacity.
Which financial statement shows revenue, expenses, and net income for a period?
A. Cash Flow Statement
B. Income Statement
C. Balance Sheet
D. Ledger Summary
The income statement.
Explanation: This statement measures profitability over a time period (year or quarter).
Which type of risk is reduced by purchasing crop insurance?
A. Price Risk
B. Legal Risk
C. Financial Risk
D. Production Risk
Production risk.
Explanation: Crop insurance protects against yield losses from weather, pests, and disasters.
What term describes the difference between local cash price and futures price?
A. Margin
B. Spread
C. Basis
D. Market Discount
Basis.
Explanation: Basis = Cash Price – Futures Price; crucial for marketing decisions.
The principle where extra input results in smaller output increases is called:
A. Opportunity Cost
B. Elasticity
C. Fixed Cost Rule
D. Diminishing Marginal Returns
Diminishing Marginal Returns
Explanation: Beyond a point, each added input produces less additional output.
What type of loan is repaid with a series of equal payments of principal and interest?
A. Balloon Loan
B. Discounted Loan
C. Amortized Loan
D. Accrued Loan
An amortized loan.
Explanation: Amortized loans schedule equal total payments, each containing principal + interest.
What is the value of an asset after subtracting accumulated depreciation?
A. Market Value
B. Salvage Value
C. Replacement Value
D. Book Value
Book value.
Explanation: Book value reflects the remaining depreciable value for accounting and tax purposes.
Buying a put option protects a producer from what?
A. Rising Prices
B. Inflation
C. Lower Yields
D. Falling Prices
Falling prices.
Explanation: A put sets a price floor - useful when you expect markets to decline.
What law states that as price increases, quantity demanded decreases?
A. The law of demand
B. The law of supply
C. The law of diminishing returns
D. The law of price increases
The law of demand.
Explanation: Consumers buy less when prices rise, all else equal.
Which budget evaluates only the parts of the business that change?
A. Whole Farm Budget
B. Enterprise Budget
C. Partial Budget
D. Cash Flow Plan
Cash Flow Plan
Explanation: A Cash Flow Plan is used to analyze the profitability of a specific proposed change - what is coming in and out of the account.
If a business’s debt/asset ratio increases, what does this imply?
A. Solvency is improving
B. Profitability is unchanged
C. The farm is more leveraged and less solvent
D. Risk is reduced
The business is becoming less solvent (more debt relative to assets).
Explanation: Higher debt/asset ratios mean increased leverage and potentially higher financial risk.
Which accounting method records income when earned and expenses when incurred?
A. Cash Accounting
B. Single‑Entry Accounting
C. Accrual Accounting
D. Market‑Basis Accounting
Accrual accounting.
Explanation: Accrual better reflects true profitability by matching revenue and expenses.
What must a hedger be prepared for when using futures contracts?
A. Loan Restructuring
B. Contract Delivery
C. Margin Calls
D. Exercise of Options
Margin calls.
Explanation: Hedgers must maintain margin funds as market prices move. Margin funds (money put up upfront to protect the contract, cost of the contract-ish) in hedging act as collateral for derivative positions that protect a portfolio from volatility.
What type of cooperative function negotiates better contract terms for members?
A. Supply Coop
B. Production Coop
C. Bargaining Coop
D. Marketing Board
A bargaining cooperative.
Explanation: Bargaining co-ops leverage member volume to secure better prices or terms.
What is one of the best long‑term measures of financial progress?
A. Gross Farm Income
B. Debt Payments
C. Total Sales
D. Change in Net Worth
Change in Net Worth
Explanation: Net worth change captures multi‑year financial improvement. Net worth is a snapshot of your financial health, calculated as the total value of your assets (what you own) minus your total liabilities (what you owe). A positive net worth means assets exceed debts, while a negative number indicates the opposite. It is used to track financial progress, plan for retirement, and determine overall financial stability
What financial measure represents cash available after paying current liabilities using current assets?
A. Net Worth
B. Debt Structure
C. Current Ratio
D. Working Capital
Working capital.
Explanation: Working capital = Current Assets – Current Liabilities; a key liquidity indicator.
Where is an increase in inventory recorded?
A. Balance Sheet Only
B. Cash Flow Statement
C. Income Statement
D. Depreciation Schedule
On the income statement as an adjustment to revenue or expenses.
Explanation: Inventory changes modify net farm income under accrual accounting.
What risk is reduced by shifting from a variable‑rate to a fixed‑rate loan?
A. Production Risk
B. Marketing Risk
C. Financial Risk
D. Legal Risk
Financial risk.
Explanation: Fixing the interest rate protects against rising borrowing costs.
What federal act protects agricultural cooperatives from certain antitrust laws?
A. Farm Bill
B. Nutrition Act
C. Packers & Stockyards Act
D. Capper‑Volstead Act
The Capper‑Volstead Act.
Explanation: It allows producers to collectively market products with “one member, one vote” and limited return on capital.
Which production stage is considered the rational stage?
A. Stage I
B. Stage II
C. Stage III
D. Stage IV
Stage II
Explanation: In Stage II, the Marginal Physical Product is positive but declining, and input use is most efficient.
What is the main goal of capital budgeting for farm investments?
A. Highest Payback Period
B. Lowest Total Cost
C. Highest Internal Rate of Return
D. Highest Net Present Value (NPV)
To select projects with the highest net present value (NPV).
Explanation: NPV incorporates the time value of money and determines long-term profitability.
Which financial statement shows assets, liabilities, and equity at a single point in time?
A. Income Statement
B. Cash Flow Statement
C. Owner Equity Statement
D. Balance Sheet
The balance sheet.
Explanation: It represents financial position and solvency at a specific date.
Why is hedging effective for reducing price risk?
A. Futures are cheaper than cash
B. Futures are guaranteed by USDA
C. Cash and futures prices move together
D. Options eliminate all risk
Because cash and futures prices tend to move together.
Explanation: This correlation allows losses in one market to be offset by gains in the other.
If demand for beef increases and supply stays constant, price will:
A. Decrease
B. Stay the Same
C. Increase
D. Fluctuate Randomly
Increase
Explanation: Higher demand shifts the demand curve right, raising equilibrium price.
Which cost must be paid even when no production occurs?
A. Variable Costs
B. Opportunity Costs
C. Marketing Costs
D. Fixed Costs
Fixed Costs
Explanation: Fixed costs (insurance, taxes, depreciation) occur regardless of output.