How to Determine Schedule F Income in FINPACK

by Dale Nordquist

FINPACK uses IRS Schedule F data in two analysis tools – the Schedule F type Tax Form and the Schedule F Cash to Accrual tool. Several items on the Schedule F tax form have both total and taxable entries. Because of this, questions arise about which Schedule F entries are used in the different FINPACK analysis tools. The FINPACK Team has created this fact sheet on the topic. Today’s post focuses on Schedule F income utilized in the Schedule F Cash to Accrual tool. This FINPACK tool takes cash income from Schedule F, along with beginning and ending balance sheets, to arrive at accrual adjusted income for the year.

Schedule F Cash to Accrual

The Schedule F Cash to Accrual tool in FINPACK uses the Schedule F tax form to generate its accrual-adjusted income statement. The cash portion of the income statement is built from the Schedule F entries. In general, the total entries are used rather than the taxable entries in order to capture the total cash income for the year. Examples of this include:

• Line 1 – Sale of livestock and other resale items: FINPACK uses Line 1a to capture the gross sale of feeder livestock and other resale items. Because FINPACK captures inventory change from the balance sheets, Line 1b is not used. Instead, the actual cash expenditure for resale items is entered in Schedule F Cash to Accrual data entry.
• Line 3 – Cooperative distributions: Here FINPACK uses the taxable amount on Line 3b. This exception to the rule results from grain sales being reported on Form 1099-PATR. Some tax preparers include the value of grain sales reported on the 1099-PATR for a producer on line 3a, exclude them on Line 3b, and instead report the grain sales on Line 2 (Sales of livestock, produce, grains, and other products you raised). Using this method ensures income is not double-counted by FINPACK in the analysis. Note: if the difference between Line 3a and 3b is material and it is determined the income difference is not included elsewhere on Schedule F, it should be added as “Other income (not on Schedule F)” in data entry.
• Line 4 – Agricultural program payments: FINPACK uses Line 4a, total payments.
• Line 5 – Commodity Credit Corporation (CCC) loans reported under election: FINPACK always treats CCC loans as loans, no matter the elected tax treatment. Therefore, Line 5a is excluded. Crops under loan are not included as income until they are sold and the loan is repaid. At that time, the income will be reported on Line 1a, 2, or 3 of Schedule F. See the FINPACK Knowledge Base fact sheet on Discrepancies Caused by CCC Loans in Schedule F Cash to Accrual for more detailed information on this topic.
• Line 6 – Crop insurance proceeds and federal crop disaster payments: FINPACK uses Line 6a, total crop insurance proceeds received. The taxable amount may be less if proceeds were deferred until the following year for tax purposes. Also, Line 6d, Amount deferred from previous year, is excluded because this was included as cash income the previous year.

Additional Income Information

Don’t forget, that there may be other sources of income for the farm or ranch that are not found directly on the Schedule F tax form. The FINPACK Team has created a worksheet to help gather this information from the producer. This input form includes the income source and where to find the necessary information. For example, cull income, from the sale of breeding livestock, is found on Form 4797.

Schedule F debt coverage

Cash available for debt service begins with Net Farm Profit or Loss from the Schedule F tax form. Adjustments to arrive at the accurate cash income are made in Other non-taxable income. Specific details on these adjustments can be found in this FINPACK Knowledge Base fact sheet.

More FINPACK ‘How-tos’

The FINPACK Knowledge Base has resources, input forms, and other helpful topics to aid in using FINPACK.  It’s a great place to start as you begin using FINPACK or if you are looking for helpful hints and tricks to enhance your use of the software. Remember, you can also find great tips and guides in the HELP section of FINPACK.

Which Tool is Best — Global Cash Flow or Cash Flow Projection?

by Mariah Beverly

https://finpack.umn.edu/news/which-tool-is-best-global-cash-flow-or-cash-flow-projection/

FINPACK offers a number of cash flow tools to aid in evaluating a borrower’s financial position. This article explains the cash flow tools available in the commercial version of FINPACK and offers advice on which may be the right tool for your analysis.

The commercial version of FINPACK offers two types of cash flow tools: global cash flow analysis and cash flow projections.

Global Cash Flow Analysis

Global cash flow analysis calculates the debt coverage ratio when commingling a primary business with any secondary businesses and/or personal funds. This analysis shows you where cash comes in and where it goes out. You can examine multiple entities and multiple guarantors and see any weak points in the cash flow. Global cash flow is typically the go-to tool for analyzing the debt servicing capability of multiple entities. This analysis is a great way to get a historical snapshot of multiple entities and allows for proposed new income or debt to be entered and show the effect on global debt coverage.

Cash Flow Projections

The cash flow projection tool in the commercial version of FINPACK can be used to create either monthly or annual cash flow projections. This tool differs from global cash flow analysis by shifting from a historical look to a forward look at the business. The cash flow projection in FINPACK creates a projected balance sheet, income statement, statement of equity, and cash drivers analysis. It can also be used to create multi-year projections. It is important to note the cash flow projection tool can be used with consolidated balance sheets and income statements from multiple entities.

Which Tool Should I Use?

Both the global cash flow analysis and the cash flow projection tool in FINPACK provide great insight into the debt repayment capacity of borrowers. The best tool for the job depends on the reason the borrower is seeking funding. Is the borrower considering a major change to the business, or just beginning a business? Then the cash flow projection might be the best tool. If the borrower is renewing an existing loan or not considering major changes then a global cash flow may be better suited for analysis.

In summary, global cash flow analysis allows for a quick historical debt coverage snapshot of the borrower and any other related entities. Cash flow projection enables a more detailed look at future changes to the business. The first step in choosing the right tool is understanding the borrower’s use of funding, and then deciding whether looking back at historical performance or looking forward to future performance makes more sense for analysis.

Unlocking Business Secrets with UCA Cash Flows

by Mariah Beverly

https://finpack.umn.edu/news/unlocking-business-secrets-with-uca-cash-flows/

In the commercial lending world, the uniform credit analysis (UCA) cash flow is a powerful tool allowing lenders to accurately determine sources and uses of cash for a business and determine the ability of a business to repay a loan. In this article, we will discuss UCA cash flows in FINPACK, how to use the UCA cash flow, and how to sleuth for discrepancies in the UCA cash flow.

UCA Cash Flows in FINPACK

A UCA cash flow is a tool to help turn accrual-based income statements into cash-based. To utilize the UCA cash flow, the business needs beginning and ending balance sheets, as well as an income statement, for the period being analyzed. FINPACK allows for UCA cash flows to be analyzed for multiple periods. UCA cash flows are part of the output in a C&I Business Analysis.

How to Use UCA Cash Flow for Analysis

UCA cash flow breaks down the cash from business activities into cash from sales, trading, and operations to arrive at net cash income. The current portion of long-term debt is subtracted from net cash income to reveal the cash available to the business after debt amortization. The business’s financing surplus/requirement is then calculated by examining cash outlays for capital expenditures, investing, and changes in other noncurrent and intangible assets. Finally, changes in short and long-term debt and equity describe the cash available to the business after financing. When using the UCA cash flow for analysis, look for the section where UCA cash flow turns negative. At this point, the analysis will show what part of the business is causing the weak cash flow. In the example below, the business has positive cash flow each year for cash after debt amortization, but the financing surplus/requirement is negative for the business. On further examination, the driving factor for negative cash at the financing surplus/requirement line is the cash outlay of the business for capital expenditures. In other words, this business is using their cash to purchase property, buildings, or equipment. This tells the analyst that they will have to pursue financing in order to preserve their cash reserves.

How to Sleuth Discrepancies in UCA Cash Flows

UCA cash flow analysis in FINPACK also shows discrepancies between the change in the cash balance on the balance sheet between periods, and the change in cash calculated by the UCA cash flow. The example below shows an example of discrepancies in UCA cash flow:

We see in the example above that for each period, the actual change in cash differs from the cash after financing calculation in the UCA cash flow. These discrepancies are caused by issues on the balance sheet. If your UCA cash flow analysis shows a discrepancy, ensure the following:

• Are the beginning balances for cash correct in each period?
• Were asset values depreciated?
• Were loan payments accounted for properly?
• Are contributed capital, owner withdrawals, and other equity items appropriately recorded?

These are just a few suggestions to begin sleuthing the cause of the UCA cash flow discrepancy, but any incorrect value on the balance sheet will cause a UCA cash flow discrepancy. In the above example, the causes of the discrepancies in each year were due to copying forward equipment values from the previous year without adjusting for depreciation or new pieces of equipment, incorrectly recording loan balances on current loans, and missing contributed capital values. After making these adjustments, the cash after financing calculation and the actual change in cash match, and there are no discrepancies in our UCA cash flow analysis.

Understanding the Debt Coverage Ratio Calculation in FINPACK

FINPACK’s November 2022 update included updates to the financial ratios provided from FINPACK tools. One major change was the addition of a new Repayment Capacity measure — Total Debt Coverage. In our latest FINPACK News post, Kevin Hamilton and Pauline Van Nurden explain the calculation details of total debt coverage.

https://finpack.umn.edu/news/understanding-the-debt-coverage-ratio-calculation-in-finpack/