Cash versus Accrual Measures of Farm Income

This article examines discrepancies between cash and accrual measures of farm profitability for a sample of Illinois farm operators for the years 1981-1984. Results indicate a substantial percentage difference between the two measures of income (an annual average of 88%), with differences being much larger for financially stressed farms. When income figures are averaged over a four-year period, cash-accrual discrepancies diminish to about 36%. The accounting item, Change in Inventory, is shown to account for 93% of cash-accrual differences. Based on the results of this study, farmers and farm lenders using only cash accounting records can get a grossly inaccurate perception of true net farm income.