Contents

What’s in an Annual Report? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Why Are Financial Statements Needed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

What Do Financial Statements Represent? . . . . . . . . . . . . . . . . . . . . . . . . 4

Limitation of Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Balance Sheet ..................................................................... 5

Basic Equation ............................................................ 5

Balance Sheet Terms ................................................. 5

Statement of Operations ..................................................... a

Definition of Terms ...................................................... 10

Distribution of Net Income .......................................... 11

Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Financial Analysis ............................................................... 13

Comparative Financial Statements ............................ 13

Financial Ratios .......................................................... 15

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Cooperative Information Report 43

November 1991
Working with Financial Statements

Guide for Cooperative Members

Roger A.Wissman

Agricultural Economist

This report is designed to help members understand and analyze their cooperative’s financial statements. The financial

statements contained in a cooperative’s annual report are the

members’ chief source of financial information about their

cooperative.

Grain and farm supply cooperatives are the two largest

groups of agricultural cooperatives, and examples will concentrate on these groups. The discussion is at a basic level for

members unfamiliar with financial statements.

WHAT’S IN AN ANNUAL REPORT?

Contents of annual reports vary among cooperatives, but

annual reports contain, at least, a balance sheet and statement

of operations. Lists of officers, directors, management staff,

and employees are often included. Reports by the board president and general manager may be presented. Trends are sometimes used to give a longer view of a cooperative’s history.

Financial statements of cooperatives are similar to statements of other businesses; however, because of the way cooperatives operate, some terms and the distribution of net

income are different.

1
WHY ARE FINANCIAL STATEMENTS NEEDED?

During each business day, many transactions occur between a

cooperative and its patrons, suppliers, employees, and customers. To understand and control the entire business operation, information must be brought together from all parts of

the organization. Managers of individual operations or

departments need information on physical units such as tons

of fertilizer or number of auto batteries. However, to manage

all operations, financial records are needed to control the total

business.

Financially, the performance of a business is judged as a

single unit. Banks look at the total business when lending.

Suppliers want to know about the strength of the total business before granting credit. Managers and directors use financial information for the entire organization in making many

decisions, including if purchases of new facilities are possible

or when member equity can be redeemed.

Members and patrons also have an interest in understanding cooperative financial statements. Financial strength

determines a cooperative’s ability to control its future and

provide services for its members and patrons. Services provided by a local cooperative can be an important part of members’ operations. Members depend on financially strong organizations to serve their current and future needs.

Members build an equity investment in their cooperative.

Usually cooperatives do not pay dividends on this investment

but redeem the equity upon the board of directors’ decisions.

A financially secure cooperative is able to redeem equity regularly. A financially weak cooperative may delay equity

redemption indefinitely.
Many people are interested

in the cooperative’s financial statements

I

Bankers, Directors, Members, Managers, Suppliers

I

3
WHAT DO FINANCIAL STATEMENTS REPRESENT?

Financial statements are developed from day-to-day transactions entered in a cooperative’s accounting records. A transaction is an economic exchange between two parties. A purchase

by a patron or an order placed with a supplier are examples.

Some transactions, such as construction of grain storage

facilities, represent long-term decisions. When the job is complete, the building contractor is paid. However, the storage

facility will be around for many years. The financial statements will reflect both the initial purchase and the use of the

storage facility over time.

Sometimes, accounting adjustments are made when conditions change. Increasing the allowance for bad debts because

of greater credit losses is an example of such an adjustment.

LIMITATION OF FINANCIAL STATEMENTS

Over time, conditions change and financial statements may

not reflect current market values. For example, a cooperative’s

grain elevator may be built on land purchased a generation

ago. The association’s financial statements will continue to

carry the land at the original purchase price. However, real

estate values of the property may have changed drastically.

Accounting records do not necessarily reflect the current value

of the property. The financial statements are a record of transactions that have occurred. If a property’s current value is

needed, the financial statements give a starting point for analysis but do not attempt to give an up-to-date value. If a business is being sold, then values of the financial statements must

be examined carefully to see how they relate to current values.

An independent analysis may be needed for a current

appraisal.
BALANCE SHEET

The balance sheet statement can be considered as two lists.

One list includes all property owned, and the other includes

all claims against the organization by suppliers, lenders, and

owners. A balance sheet is prepared as of a particular day and

is often compared with a snapshot of a business - a look at a

business at a point in time. Each cooperative may choose the

date for its business year to end. Often, a period of low activity when inventories and accounts are low will be chosen for

the year ending.

Basic Equation

When accounting practices are followed, total assets equal

total liabilities and members’ equity. There is nothing magical

about this. Each accounting transaction results in either an

equal change in both sides of the balance sheet or a shift

among accounts on either the asset or liability/equity side.

The balance between assets and claims against the assets

remains unchanged.

Balance Sheet Terms

Assets

The terms found on the balance sheet are discussed in the

order they appear on a balance sheet. The term being defined

will be underlined.

On financial statement 1, current asset accounts are the

first asset accounts. Current assets are cash or are items

expected to be converted into cash within 12 months. Q&

includes checking accounts and funds in other accounts that

are readily available.

Accounts receivable are amounts owed to the cooperative. In a supply cooperative, many of these accounts are due

from the farmer patrons who owe for feed, fertilizer, and other

5
Financial Statement l-BALANCE SHEET (Example)

ASSETS y

CURRENT ASSETS

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . ..I....

Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OTHER ASSETS

Investments in Cooperatives . . . . . . . . . . . . . . . . . . . . .

FIXED ASSETS

Land, Buildings, and Equipment . . . . . . . . . . . . . . . .

Less Accumulated Depreciation . . . . . . . . . . . . . . . .

Net Fixed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$62,585

915,000

555.QQQ

1,532,585

570,000

i,ao4,815

(629.150)

. 1,175,665

.$3,278,250

LIABIIJTIES ANDMEMBERS'EQUITY

CURRENT LIABILITIES

Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accrued Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Patronage Refunds Payable . . . . . . . . . . . . . . . . . . . . . .

Loan Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

LONG-TERM LIABILITIES

Mortgage Loan Payable

- Long-Term Portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MEMBERS’ EQUITY

Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Allocated Equity Credits . ..*.........................

Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL LIABILITIES AND EQUITY ..,..............

$211,125 $ 129,000

39,000 33,750

27,000 21,000

41,250 52,500

166.58Q 170.004

484,955 356,250

779,250 634,500

172,500

1,305,000

2,014,045

$3 278 350

$144,240

870,000

47o.ooo

1,434,240

555.000

1,381,910

1475.4001

906,510

$2,895,750

165,000

i,282,500

457.50Q

1,905,000

$2.995754

6
supplies. In a grain marketing cooperative, for example,

accounts receivable include accounts of grain customers who

purchased grain, but have not yet paid.

For grain and supply cooperatives, inventories are the

products available for sale. In manufacturing or processing

organizations, inventories also include raw materials used in

processing. Inventory amounts vary according to the time of

year. For instance, farm supply inventories increase before the

spring planting season, while grain inventories are usually large

after harvest.

Investments in other cooneratives are investments one

cooperative has in another. Cooperatives handling farm supplies form cooperatives to provide fertilizer, petroleum, and

other supply products. Grain marketing cooperatives join

together to process soybeans and jointly market grain.

The land, buildings, and eauinment account includes

land, all types of buildings, vehicles, and other equipment.

Usually the original cost is listed with depreciation subtracted

to arrive at a net land, buildings, and equipment total.

Depreciation is a charge made against the original cost of

buildings and equipment to reflect the use of an asset over time.

Liabilities

Liabilities are financial claims against an organization. Current

liabilities are due within 12 months. Accounts payable to suppliers, payments due employees, loan payments, and amounts due

members are included in current liabilities.

Lonp-term liabilities are amounts not due in the next 12

months. Mortgage loans on building and equipment are listed in

this section.

The final section is members’ equity accounts.

Cooperatives use a variety of names for equity accounts.

Common stock is used by many cooperatives. Often a member’s first share of common stock signifies a member’s right to

vote. Common stock may be purchased or, as is often the case,

earned through patronage refunds. Patronage refunds are

7
based on business done with a cooperative and are the most

important way members acquire equity in cooperatives.*

Allocated equity credits include yearly additions of

retained patronage refunds. Cooperative members are usually

unable to demand their equity investment whenever they

want. Cooperatives adopt procedures that determine when

equity will be redeemed. The board of directors considers the

financial condition and needs of the cooperative when they

decide on the amount of equity that can be redeemed.

Retained earnings are not allocated to individual members, since they are usually from business done with nonmembers. Other terms, such as general reserves or unallocated capital reserve, are also used for equity not allocated.

STATEMENT OF OPERATIONS

The statement of operations reports the business results of the

current year and often includes the previous year’s results for

comparison. At the bottom of the operating statement, the net

income for the year’s operation is shown (financial statement

2). After all expenses are deducted from total revenues, net

income remains. Cooperatives sometimes use other terms,

such as net savings and net margins; they have the same

meaning as net income.

Net income is the focus of this statement. A high net

income is a measure of success. A loss raises questions about

the current year’s performance. Continued losses may cause a

cooperative to discontinue operations.

1 Some marketing cooperatives have agreements with their members to

deduct part of their marketing proceeds and issue per-unit capital

retains for the amount deducted.
Financial Statement 2-STATEMENT OF OPERATIONS (Example)

SUPPLY SALES .............................................

GRAIN SALES ...............................................

TOTAL SALES ..........................................

COST OF SUPPLY SALES .............................

COST OF GRAIN SALES ...............................

TOTAL COST OF SALES ..........................

GROSS MARGINS ON SUPPLY’& GRAIN ....

OTHER OPERATING INCOME

Grain Storage ............................................

Grinding, Mixing, & Drying .........................

Fertilizer Services ......................................

Finance Charges .......................................

Total Other Operating Income ...................

TOTAL GROSS MARGIN ...............................

OPERATING EXPENSES

Labor ..........................................................

Depreciation ...............................................

Insurance ...................................................

Truck Operating Expenses ........................

Utilities .......................................................

Property Taxes ..........................................

Reserve for Bad Debts ..............................

Interest .......................................................

Other Operating Expenses ........................

Total Operating Expenses .........................

NET INCOME FROM

OPERATIONS ...........................................

OTHER INCOME

Patronage Refunds Received ....................

NET INCOME BEFORE INCOME TAXES ......

INCOME TAXES .........................................

NET INCOME AFTER TAXES ...................

3.465000 3.45o.oQQ

. 9.465000 8,887,500

5137,500 4,593,750

3 206.250 3.191 354

8,343,750 7,785,OOO

1,121,250 1 ,102,500

90,000 157,500

82,500 90,000

127,500 108,750

101.254 97.504

401,250 453,750

‘1,522,500 1,556,250

558,750 536,250

153,750 150,000

105,000 86,250

76,125 75,000

47,105 55,110

35,475 35,285

33,750 12,750

115,500 99,000

119.254 133.504

1,244,705 1,183,145

277,795 373,105

9.375 3.75.Q

287,170 376,855

16.875 20.62

$270,295 $356,230

Current Previous

Year Year

,. $6,000,000 $5437,500

Distribution of Net Income

Patronage Refunds - Cash $41,250 $52,500

. . . . . . . . . . . . . . . . . . . . . . . . . . .

Equity Credits 150,000 210,000- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Retained Earnings. 79.045 93.730 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Distribution of Net Income $270,295 $356,230

. . . . . . . . . . . . . . . . . . . . . .

9
Definition of Terms

The primary revenue sources are listed first on the operating

statement. Sales is the amount received for products sold. In

financial statement 2, grain sales and farm supply sales are

shown separately. Sales are often shown on operating statements with no breakdown by product.

Cost of sales or cost of poods sold is the amount a cooperative pays for products it sells. For example, the amount a

cooperative paid to its supplier for fertilizer is the cost of sales

of the fertilizer.

Gross margins on sales represents the difference between

sales and cost of sales. Farm supply gross margins are usually

larger than grain gross margins, because farm supply products usually require more time and effort to store, handle, and

sell and a larger margin is required to cover the costs.

Other oueratinp income includes income not from selling

products but from providing services. Grain storage, fertilizer

services, and service charges are examples of other operating

income.

Total gross margins combines margins from sales and

service income. ExDenses are listed next and represent the

costs of goods and services used in the year’s operations.

Salaries, utilities, taxes, and fuel are examples. Most expenses

are amounts spent by a cooperative to provide for needed

products and services. Some expenses are not actual payments

but represent accounting adjustments made to match the

charge for an expense item to the year in which it was used.

Depreciation is usually the largest expense that was not

paid in cash during the year. Depreciation is an accounting

charge for the use of buildings and equipment during the

year. For example, since a truck usually lasts more than a year,

it is not fair to charge the entire cost of the truck to the year

the truck was purchased. The cost is spread over the expected

life of the truck, and each year the operating statement is

charged with depreciation, a share of the cost of the truck.

Patronage refunds or natronage dividends received rep10
resents refunds from one cooperative to another. Cooperatives

join together to form cooperatives in the same way farmers

do. Net income of these cooperatives is often distributed back

to its member cooperatives based on the business volume

done with the cooperative. Cooperatives with other cooperatives as members are referred to as federated cooperatives.

Federated cooperatives providing farm supplies include some

of the largest cooperatives in the United States.

Net income earned on member business is usually allocated to members in a combination of cash and noncash equity allocations. The board of directors, subject to the bylaws

and other agreements, decide on the distribution of net

income. Based on the year’s results, directors decide on

patronage refunds rates and the proportion of patronage

refund to be paid in cash and noncash equity allocations.

When a cooperative has a loss, directors are faced with a different set of decisions. They decide how the loss will be allocated and if other decisions are required.

Distribution of Net Income

Distribution of net income is not a part of the operating statement, and not all annual reports present a separate listing of

the distribution of net income. However, including the distribution of net income at the bottom of the operating statement

is a clear way to show what happens to the income the cooperative has earned.

The board of directors makes decisions on how net

income will be distributed. In making these decisions, board

members consider the plans of the cooperative, agreements

with lenders, and interests of current and past patrons.

11
STATEMENT OF CASH FLOWS

Not all cooperatives include a statement of cash flows in their

annual report. However, this statement is gaining wider use.

This is a very basic statement that shows a cooperative’s ability to meet its immediate obligations to lenders, suppliers, and

members. This is especially important for lenders watching

the cooperatives’ ability to repay their loans, and also for

cooperative personnel responsible for maintaining cooperatives’ ability to finance all their activities.

Only cash payments or receipts are included. For example, only cash and checks received in payment for supplies

would be included, and credit sales not yet received would be

excluded.

The cash flow statement divides all cash payments and

receipts into three activities - operating, investing, and

financing activities.

Operating activities include business activities involved

in providing goods and services. Sales of grain and supplies

Financial Statement S-STATEMENT OF CASH FLOWS (Example)

Cash Flow From Operating Activities

Cash Received from Customers . . . . . . . . . . . . . . . . . . . . . .

Cash paid to Suppliers and Employees . . . . . . . . . . .

Cash Paid in Interest and Taxes . . . . . . . . . . . . . . . . . . . . .

Net Cash from Operating Activities . . . . . . . . . . . . .

Cash Flow From Investing Activities

Purchase of Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net Cash from Investing Activities . . . . . . . . . . . . . .

Cash Flow From Financing Activities

Net Increase in Loans Payable to Banks . . . . . . . . .

Net Cash from Financing Activities . . . . . . . . . . . . .

Net Increase (Decrease) in Cash . . . . . . . . . . . . . . . . . . . . .

$9,850,000

(9,250,OOO)

fl75.000)

425,000

1475.OOQ

(475,000)

180.000

180,000

$ 130,000

12
are examples that bring in cash through operating activities,

and payments to suppliers and for salaries are examples that

send out cash.

Acquiring new production facilities and investment in

another cooperative are examples of investinp activities that

use cash. Sale of land or redeeming investments in another

firm are investing activities that generate cash. Financing

activities obtain or return financial resources from members or

others. Obtaining or repaying a bank loan is an example.

Financial statement 3 gives a simplified example of how

information is shown on a statement of cash flows. In this

example, the cooperative generates $425,000 from operations,

purchases $475,000 worth of new equipment, and obtains an

additional $180,000 bank loan. This statement brings all these

activities together on the same statement.

A cooperative’s statement of cash flows includes activities for an entire year, so more items would be included than

are shown in the example.

FINANCIAL ANALYSIS

The next step after dealing with accounting definitions is

putting the accounting information to work. When the dollar

values of the financial statements are put into a logical framework, the information can be used to help make decisions.

Comparative Financial Statements

Most cooperative annual reports include financial statements

for the past 2 years. A comparison of changes between the 2

years is a good analytical tool. What changes have occurred

between the 2 years? What factors outside the cooperative and

what factors from within the organization can help explain

these changes?

The statement of operations is a good place to start yearto-year comparisons. Comparing sales between the 2 years

will show how the size of business operations has changed.

13
Financial Decision Process

Information

I

Analysis

Decision

Changes between years need to be judged in light of market

conditions, prices, and even weather conditions in the cooperative’s trade area. Conditions that affect members’ operations

may also affect cooperatives’ operations.

Changes in the individual line items for income or

expenses may reflect changes in operations, such as a change

in store locations. Information members have about their local

area and cooperative can be matched with the changes found

in the financial statements. Decreases in grain prices may

show up in lower cooperative grain sales. A new location

serving an expanded trade area may account for higher farm

supply sales. Changes in balance sheet accounts show how the

mix of assets used by a cooperative has changed and how

these assets are being financed.

Simple explanations may not be easily found for many

14
changes, and a member should feel free to ask questions of the

manager, directors, or other sources directly involved in a

cooperative’s operations.

Two years’ information is not long enough to identify

trends affecting a cooperative. A longer period is needed to

show if positive or negative trends are occurring. Reports of

the board president and manager at the annual meeting deal

with the cooperative’s experience in the past year and explain

the cooperative’s leaders’ view of the forces and trends that

are influencing the cooperative’s performance. Understanding

financial statements makes these management reports more

useful. In addition to reports, annual meetings give an opportunity for questions and discussion.

Not all annual reports include written reports of the

board president and manager. This is an area where some

cooperatives could improve their reporting to members.

Financial Ratios

In this section, assets, net income, and members’ equity are

used to calculate financial measures for evaluating cooperative performance. The financial measures used in this discussion apply best to cooperatives that buy or sell at market

prices with their member/patrons. Net income for these cooperatives is the amount earned by a cooperative after market

prices have been paid.

Marketing cooperatives, except grain cooperatives, often

operate on a market pool basis. Patrons of these cooperatives

are not paid a market price at delivery but receive cash

advances during the year, followed by a final pool payment.

The total of these payments represents both the value of products delivered and value added by the cooperatives’ operations. Cooperatives operating market pools should be judged

on how their marketing pools are structured. Financial ratios

using net income may not apply. Since most grain and farm

supply cooperatives do not operate on a pooling basis, net

15
income for these cooperative is probably the best available

measure of financial performance.

Many different ratios can be used in financial analysis. A

ratio looks at only a part of a business operation, and no single ratio can measure an organization’s total performance.

Only three ratios are discussed here. For each ratio, summarized values of small- to medium-sized grain and farm

supply cooperatives are shown in graph form. (Information

for graphs is based on a sample of 3,373 grain and farm supply cooperatives with sales under $15 million.)

Eguity/Asse t Ratio

Some method is needed to provide for all the assets a cooperative needs in order to operate. Providing for or financing of

assets occurs in several different ways. Accounts payable provide an important source of financing on a short-term basis.

However, the majority of financing must come from either

members’ equity or loans from banks or other sources.

The equity-to-asset ratio shows the proportion of a cooperative’s assets financed by members’ equity. The ratio is total

equity divided by total assets. On the sample balance sheet

(financial statement l), total assets are $3‘278,250 for the current year, and total equity is $2,014,045. Therefore, this cooperative’s equity/asset ratio is 61.4 percent.

Cooperatives vary widely in the proportion of financing

provided by members’ equity. In figure 1, the line represents

the relative number of cooperatives within each equity-toasset range, and the bars represent the average assets per

cooperative for cooperatives within a range.

Few cooperatives had less than 30 percent equity, and

most cooperatives had equity asset ratios above 50 percent.

However, the 30-to-40 percent equity-to-asset level had the

largest cooperatives. The smallest cooperatives were those

with the lowest and the highest equity-to-asset ratios. The

cooperatives that had grown were those that had used considerable borrowed funds.

16
Figure l-Distribution of Cooperatives and Average

Assets by Equity Asset Ratio’

$ million

5.00

3.75

2.5a

1.25

C

Percent of cooperatives

Percent of cooperatives

20-30 40-50 60-70 60-90

Equity as percent of assets

1 Based on grain and farm supply cooperatives with sales

of less than $15 million, fiscal year 1987.

20

15

10

5

0

Cooperatives with low levels of equity might not have the

reserves to weather difficult times. Low levels of equity are

caused by operating losses, low initial equity investment, or

financial plans not designed to build equity. The continuing

existence of these cooperatives may depend on favorable

interest and continued successful operations.

Cooperatives with high levels of equity have the benefit

of low or no interest expense; however, in building their high

equity base, they may have delayed expansion or placed

heavy burdens on their members for financing and may not

develop their potential.

A cooperative’s level of equity is determined by net

income over time, equity investments, and decisions on

growth and distribution of income. Cooperatives decide what

to do with the income earned; they can pay out larger

amounts to members in cash or build up equity by retaining it

17
in the cooperative. Active member participation and support

play a necessary role in these decisions.

Return on assets

The return-on-assets ratio considers the financial return to

both debt and equity. Interest paid is added to net income to

measure total return to assets. How a cooperative is financed

is not considered. The question answered is “How much total

income has the cooperative earned with the assets employed

by it?”

Figure 2 shows the total returns, net income and interest

payments, earned by small- to medium-sized grain and farm

supply cooperatives within each return-on-assets range.

Management of each cooperative tries to have as high a return

as possible. Figure 2 demonstrates how this group of cooperatives performed. Only a small proportion of cooperatives had

either negative returns or very high returns on assets.

Changes in market conditions and cooperative performance

cause return on assets to change from year to year.

From financial statement 2, the total of interest paid and

net income before taxes for the current year equals $402,670.

This total divided by total assets from the balance sheet equals

a 12.3-percent return on assets.

By comparing year-to-year changes, members can follow

how effectively their cooperative is utilizing its assets. The

returns shown on figure 2 can be used for comparison.

Return on Assets = (Net Income + Interest) + Assets

18
Figure 2-Distribution of Cooperatives

by Returnon-Assets Levels’

Percent of cooperatives

25

v

-15 -10 -5 0 5 10 15 20 25 30

Percent return on assets

1 Based on grain and farm supply cooperatives with sales

of less than $15 million, fiscal year 1987.

The return-on-equity ratio weighs yearly earnings against

total equity and takes a slightly different view of performance

than the return-on-assets ratio. This measure considers not

only the earnings from operations but also how operations

were financed.

Return on Equity = Net Income t Equity

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The level of net income and equity are both elements in determining the return on equity. If a cooperative has a large proportion of its assets financed by member equity, the return on

equity and on assets will be relatively close. However, when a

cooperative is using a high degree of borrowed funds, the

return on equity can vary greatly depending on how the interest rate paid compares to the return on assets.

Each cooperative must decide through its management

and board of directors what level of borrowed funds it is comfortable with and how this risk fits its objectives.

Members can calculate the return on equity for their

cooperative for each year and along with reports from management can evaluate the current effectiveness of their cooperative.

Using information from sample financial statements 1

and 2, current year’s net income before taxes equals $287,170.

Figure SDlstribution of Cooperatives

by Return-on-Equity Levels’

Percent of cooperatives

25

I

2o I

7.5 15 22.5 30

Percent return on equity

f Based on grain and farm supply cooperatives with sales

of less than $15 million, fiscal year 1987.

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This net income divided by total equity equals a 14.3 percent

return on equity. On figure 3, the distribution of net income is

shown within each return-on-equity range.

CONCLUSION

The financial health and performance of cooperatives can

have a major impact on the financial conditions and operations of cooperative patrons. Financial statements are cooperatives’ report to their lenders, suppliers, and members.

Member understanding of these statements is critical to the

long-term performance and potential of cooperatives. It is the

responsibility of cooperative members, as patrons and owners,

to have accurate knowledge of their cooperative’s condition

and where it is going. The continued presence and performance of cooperatives is not assured but depends on the support of cooperative members. Understanding the financial

condition and performance of cooperatives is an important

element in developing cooperative support.

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