Name: 
 

2001 Ohio State Farm Business Management Test



Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

 1. 

A farmer operating a cash grain farm has constructed a balance sheet and calculated four ratios. The net capital ration is 6.0:1. The current ration is 5.4:1. The intermediate ration is 1.6:1. The leverage ration is .74:1. Which of the following is an appropriate conclusion based on these ratios?
a.
This farmer will not have cash flow problems during the next year.
b.
The value of borrowed capital is greater than net worth.
c.
Most of the machinery which the farmer owns has been purchased with borrowed capital.
d.
Net worth is greater than total liabilities.
 

 2. 

Which business would most probably have cash flow difficulties given the following “current ratios”?
a.
Business A 1:1
c.
Business C 2:1
b.
Business B 0.5:1
d.
Business D 3:1
 

 3. 

If the expected price of lettuce exceeds its marginal cost of production, a lettuce farmer will probably:
a.
Reduce his production of lettuce
b.
Remain at his present level of production
c.
Expand his production of lettuce
d.
Reduce labor costs
 

 4. 

Profit will be at its maximum level:
a.
Where marginal revenue is at its maximum level, and marginal cost is at zero
b.
Where marginal revenue is equal to zero and marginal cost is at its maximum
c.
Where marginal revenue equals marginal cost
d.
Where marginal revenue is at its minimum, and marginal cost is at its maximum
 

 5. 

Rate of return on investment for a farm business is found by:
a.
Dividing total asset value by total liabilities
b.
Subtracting total liabilities from total asset value
c.
Dividing return to equity by net work
 

 6. 

The best indication of the amount that a farmer has for family living expenses, loan repayments and additional investments would be=
a.
a partial budget
c.
a net farm income statement
b.
an inventory change statement
d.
a net worth statement
 

 7. 

Which of the following statements is not one of the three tests the Internal Revenue Service applies when looking at prepaid farm expenses?
a.
The expenditure must be a payment --- not a deposit.
b.
The farmer must not be using the cash basis method of accounting.
c.
The payment must not materially distort the farmer’s income.
d.
The payment must have a valid business and not be made to avoid taxes.
 

 8. 

The difference between net worth and total assets is
a.
Capital gain
c.
Total liabilities
b.
Capital loss
d.
Net profit
 

 9. 

The document which is used to study the growth of a farm over time is
a.
A balance sheet (net worth statement)
c.
A cash flow statement
b.
An income statement
d.
An inventory statement
 

 10. 

Which of the following is the primary purpose of a current ratio?
a.
To determine net worth
b.
To include in your tax return
c.
To determine your ability to meet immediate financial obligations
d.
To aid in evaluating your farm profitability
 

 11. 

In preparing a cash flow for the coming year, a farmer estimates that cash inflows exceeds cash outflows for the month of July. This indicates that
a.
the operating loan will likely increase during the month of July
b.
Cash will be available to reduce the operating loan in July
c.
Family living expenses should be reduced during the month of July
d.
Net farm income will be higher than last year
 

 12. 

A subchapter S corporation when compared to a subchapter C corporation will
a.
Allow a farmer to reduce his taxes
b.
Offer better protection against liability claims
c.
Be the preferred form of farm business incorporation
d.
Be exempt from federal corporation income tax
 

 13. 

If the price of a commodity increases by 5% and the quantity purchased decreases by 10%, then the demand for this commodity is
a.
Upward sloping
c.
Elastic
b.
Inelastic
d.
Decreasing
 

 14. 

The amount of a patronage refund from the cooperative is based upon
a.
How long the member has been in the cooperatives
b.
The amount of capital stock the member owns
c.
The volume of business the member does with a cooperative
d.
How well the members get along with the cooperative’s manager
 

 15. 

The cost of producing one additional unit of output is called
a.
Opportunity cost
c.
Average cost
b.
Substitution cost
d.
Marginal cost
 

 16. 

Marginal revenue and marginal cost are useful concepts in determining the profit maximizing output level. Profit will be at its maximum level where
a.
Marginal revenue is at its maximum level and marginal cost equals zero
b.
Marginal revenue is equal to zero and marginal cost is at its optimum
c.
Marginal revenue equals marginal cost
d.
Marginal revenue is at its minimum and marginal cost is at its maximum
 

 17. 

Which of the following would tend to reduce the risk for a manager of a farm business
a.
Selecting the crop with the highest net return
b.
Speculating on the futures market
c.
Diversifying into several enterprises
d.
Specializing in a single enterprise
 

 18. 

The most important reason for a complete farm record keeping systems should be
a.
provide information for farm management decision making
b.
to answer questions on insurance claims
c.
to meet the requirements for reporting hired labor
d.
for income tax reporting
 

 19. 

On Nov. 1, I borrowed $3,000 to buy cattle to place in my feedlot. On May 1, I repaid the $30,000 plus $ 2,250 interest. What rate of interest did I pay?
a.
8.0%
b.
10.5%
c.
15.0%
d.
16.5%
 

 20. 

Which of the following would be expected to result in the largest increase in the market place?
a.
An increase in demand with no change in supply
b.
A decrease in demand with an increase in supply
c.
An increase in demand with a decrease in supply
d.
An increase in supply with no change in demand
 

 21. 

You purchased feeder pigs averaging 50 pounds and sold them as slaughter hogs at 200 pounds. Feed cost is $51 per hog. The feed cost per pound of gain was
a.
$0.25 cents
b.
$0.34 cents
c.
$0.37 cents
d.
$0.42 cents
 

 22. 

Farmers many times have had low market prices in which costs of production exceed revenue generated by the farm enterprise. Farmers can continue in the short run only if
a.
total revenue exceeds the fixed costs of production
b.
total revenue exceeds both fixed and variable costs of production
c.
total revenue exceeds variable costs of production
d.
total revenue exceeds interest and principal on loan needed for production costs
 

 23. 

The operator is liable for claims on the business, he pays income and all other taxes. He can obtain loans from the FHA. The business is a
a.
Sole proprietorship
c.
Subchapter S corporation
b.
General partnership
d.
Regular corporation
 

 24. 

Which of the following is a disadvantage of the partnership form of doing business?
a.
Initial capital is more easily obtained
b.
There is access to additional skills
c.
Operating capital is more easily obtained
d.
There is unlimited liability to equity holders
 

 25. 

Ron sold a tractor for $1,000 that had been depreciated out to zero. When figuring his taxes he must
a.
Not list the thousand dollars since it was totally depreciated
b.
Declare the $1,000 as capital gains
c.
Declare the $1,000 as ordinary income
d.
Declare the $1,000 as non-taxable income
 

 26. 

You provide land worth $185,000 and $12,000 cash. I put $50,000 worth of machinery, $15,000 in labor, and $47,000 cash. Based on our contributions, my share of $250,000 gross income is
a.
$112,000
b.
$135,000
c.
$90,000
d.
$125,000
 

 27. 

The objective of determining repayment capacity for a farm or ranch business should be
a.
To determine return on land, labor and management for the farm business
b.
To determine how much debt the business can safely handle
c.
To determine the rate of return to the farmer’s equity capital
d.
To determine the net worth of the business for the end of the year.
 

 28. 

A farmer using the accrual system of accounting purchases gasoline on credit. The gasoline purchases should
a.
Not be recorded since it has not been paid for.
b.
Be recorded as a liability with no other entries made.
c.
Be recorded as an expense with no other entries made.
d.
Be recorded as an expense and also a liability.
 

 29. 

An enterprise system of accounts
a.
Separates taxable income from nontaxable.
b.
Differentiates between the value of operators labor, management and capital.
c.
Involves keeping records of receipts and expenses for each product or enterprise.
d.
Is required for income tax purposes.
 

 30. 

The purpose of calculating efficiency factors is to
a.
Eliminate unprofitable enterprises
b.
Get a more accurate picture of return to management
c.
Identify operational changes giving operator a likelihood of success
d.
Determine salary adjustments for employees
 

 31. 

What would be the best measure to use to compare the profitability of two farms?
a.
Debt-asset ratio
c.
Gross farm income
b.
Ratio of return to equity capital
d.
Gross farm income minus capital gains
 

 32. 

Which of the following best describes an operating statement? (Other names may include income and expense statement, profit and loss statement and income statement.)
a.
Cash and capital income minus cash and capital expenses give net income
b.
Income minus expenses give cash income and non-cash adjustments
c.
Listing of assets and liabilities, the being owner equity
d.
Cash and capital income minus cash and capital sales:   difference is net capital flow
 

 33. 

You are hired to determine if a neighboring farm is over-capitalized. You report to the bank that yes, it is over-capitalized; in other words, the farm operator is
a.
late in making his loan payments
b.
has more machinery than he really does
c.
has large crop inventories
d.
has above average variable cost
 

 34. 

When calculating the value of feed fed to livestock, home grown feed should be valued according to
a.
Cost of production
c.
Amount of gain the feed produced
b.
Purchase price of similar feed
d.
Market price minus selling price
 

 35. 

Accrued interest on a balance sheet refers to
a.
Interest that is past due
b.
Interest that has accumulated since the last loan payment
c.
Interest on short term debt
d.
Interest forgiven by the lender
 

 36. 

Which of the following is an advantage of forward contracting with an individual buyer as opposed to hedging in the futures market?
a.
A forward contract typically offers a higher price than the futures market
b.
Easier to avoid delivery  on forward contract because you are dealing locally
c.
Forward contract typically offers a more certain price than does hedging
d.
A forward contract does not represent a legal obligation to deliver
 

 37. 

The amount of a commodity, such as beef demanded by consumers, is determined by
a.
the price of the commodity, of competing commodities and per capita income
b.
federal market orders
c.
total reduction of the commodity during the year
d.
the consumer price index
 

 38. 

Farmer Jones can either sell his corn or feed it to is cattle. In deciding which alternative will yield the highest profit, he should compare
a.
the price of corn with the price of cattle
b.
the price of corn minus hauling costs to the increase in value of the cattle
c.
cost of hauling corn to market with cost of hauling heavier cattle to market
d.
the current price of corn with the cost of storing six months
 

 39. 

The demand curve represents a relationship between
a.
total cost and total revenue
c.
price and quality produced
b.
price and quantity produced
d.
profits and losses
 

 40. 

If a hedger is to carry through to completion, the hedges
a.
will always make a profit
b.
will always deliver the hedged commodity to the local elevator
c.
must be prepared to meet all margin calls
d.
will take a higher risk
 

 41. 

The nearby hog futures contract closed at $49.80 with a local basis of $1.85. The local cash market was
a.
$47.95
b.
$49.80
c.
$50.00
d.
$51.65
 

 42. 

A farmer who as feeder pigs could use the options market to reduce his risk by
a.
buying a hog put options
c.
buying a hog call option
b.
selling a hog put options
d.
selling a hog call option
 

 43. 

The purchase of a put option on corn means the buyer
a.
Is required to sell a corn futures contract at a set price
b.
May, but is not required to sell a corn futures contract at a set price
c.
May, but is not required to buy a corn futures contract at a set price
d.
Is required to buy a corn futures contract at a set price
 

 44. 

Which of the following would indicate a use for partial budgeting?
a.
Calculating last year’s state and federal income taxes
b.
Deciding whether to harvest corn as grain or silage
c.
Determine the current net worth of he farm business
d.
Deciding whether or not to depreciate the cost of a new combine
 

 45. 

In preparing a partial budget.......
a.
Only those costs and returns that change with a new way of business are
b.
It is necessary to estimate the total costs and total receipts to determine the anticipated change in income
c.
Fixed and variable costs should not be considered
d.
All of these are correct
 

 46. 

What would be the net gain of loss of changing from a cash grain farm to a beef farm if crop receipts are down $9,000---crop costs are down $5,000---beef receipts are up $18,000 and beef costs are up $10,000?
a.
Gain $4,000
c.
Gain $23,000
b.
Gain $16,000
d.
Loss $18,000
 

 47. 

At harvest time a farmer has invested $40/acre for labor-seed-and machinery costs. What should he do if he expects a 20 bu/acre yield-a market price of $2/bu and it costs $14/acre to harvest the crop.
a.
Harvest and sell the crop
b.
Sell the oat crop as pasture of $5/acre
c.
Sell the oat crop for hay at $6/acre
d.
Assume his loss of $40/acre and leave the crop in the field
 

 48. 

What information does a projected cash flow budget for the coming year provide?
a.
Rate of return on farm investments
b.
Net worth of the farm business
c.
Total investment credit that will be allowed during the year
d.
Projected borrowing requirements and repayment ability for the farm business
 

 49. 

A projection of all income and expenses associated with growing an acre of a particular crop would be called
a.
A partial budget
c.
A whole farm budget
b.
An enterprise budget
d.
A balancing budget
 

 50. 

A constant payment loan with payments consisting of principal and interest is called:
a.
An amortized loan
c.
A capital loan
b.
A discounted loan
d.
A fixed rate loan
 



 
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