FORECASTING FINANCIAL STATEMENTS

February 10, 2003

Additional Operating Topics

Include graphs/graphics in your report See p. 3 of Trico 3/18/02 report (www.burkenroad.org) Visual descriptions of segments (p. 8 of Trico)

Write-up of operating forecasting section in report – note that this is NEW this year

Primary focus is revenue & cost of sales Include discussion of the primary drivers that you considered in modeling revenues

Add “OTHER” information to the financials Sanderson Farm Earnings Stmt (3/20/02) – page 10 Gulf Island (2/15/02) – page 16

Adjusted earnings per share At a minimum you should show diluted EPS for all periods excluding goodwill

amortization. Look at the reporting practices of analysts for your company or for companies in the

same industry

Additional Operating Topics

Calculating EPS Basic & Diluted

Simple Structure--Single EPS onlySimple Structure--Single EPS onlyBasic Earning Per Share (BEPS)

Net income - P/S dividends = BEPS

Weighted average # shares outstanding

–P/S dividend is current year only (no arrearages).

–If net loss then P/S dividend increases the loss.

Computing basic & diluted weighted Computing basic & diluted weighted average sharesaverage shares

See example worksheet.

Non-operating Sections

1. Investing sections of the financials Fixed assets Investments in available for sale securities and held-to-

maturity securities

2. Financing sections of the financials Debt Common stock Treasury stock Dividends

3. Line items that are not categorized as operating, investing or financing – e.g. retained earnings

Forecasting Overview

We prepare the forecasts in 3 stages:

Operating items on the income statement, balance sheet and cash flow statement

Investing items on the income statement, balance sheet and cash flow statement

Financing items on the income statement balance sheet and cash flow statement

Operating cash flows:Net income $XX,XXXDepreciation expense XX.XXXGain on sale of fixed assets (XX)Change in A/R (X,XXX)Change in Inv (X,XXX)Change in A/P X,XXXTotal cash used by operating activities $ XX,XXX

Cash used by investing activities:Purchase of fixed assets ($XX,XXX)Proceeds from sale of fixed assets X,XXXPurchase of investments, NET (X,XXX)Total cash used in investing activities (XX,XXX)

Cash from financing activities: Borrowing, net of repayments (XX,XXX)Payment of dividends (XX,XXX)Total cash provided by financing activities (XX,XXX)

Net inflow for the year (XX,XXX) Beginning cash balance: XX,XXX Ending cash balance $ XX,XXX

Cash Flow StatementInvesting

The Starting point for forecasting INVESTING line items is the cash flow statement.

Cash Flow Example Balance Sheet

Assets:Cash $ XX,XXXAccounts Receivable XX,XXXInventory XX,XXXInvestments XX,XXXFixed assets, net XXX,XXXTotal $XXX,XXXLiabilities and Equity:Accounts Payable $ XX,XXXLong-term debt XX,XXXCommon Stock XXX,XXXRetained Earnings XX,XXXTotal $XXX,XXX

Investing

The INVESTING items on the cash flow statement create the inputs for balance sheet models.

Income StatementRevenues: $XXX,XXXOperating expenses ( XXX,XXX)Operating income: XX,XXX Interest expense ( X,XXX)Investment income X,XXXGain on sale of fixed assets XXIncome before income tax XX,XXXless: Income Tax ( XX,XXX)Net Income $ XX,XXX

Investing

Note that Depreciation expense is usually not included as a line item on the income statement. Here it is included in operating expenses.

Forecasting fixed asset line items

Will the company dispose of significant fixed assets during the forecast period? If so, prepare a schedule of asset dispositions including the expected proceeds, the book value of disposed assets and the historical cost of the assets disposed.

Proceeds – Book value = Gain/loss Book value = Cost – accumulated depreciation

Cost of assets (disposed) 20,000 ForecastAccumulated depreciation (disposed) (14,000) ForecastBook value (disposed) 6,000

Forecast proceeds 7,000 ForecastBook value (disposed) (6,000) Link to aboveGain/loss 1,000

Forecasting fixed asset line items

Cost of assets (disposed) 20,000 Forecast

Accumulated depreciation (disposed) (14,000)Forecast

Book value (disposed) 6,000

Forecast proceeds 7,000Forecast

Book value (disposed) (6,000)Link to above

Gain/loss 1,000Equals the Proceeds from sale of Fixed AssetsLine Item in the INVESTING CASH FLOW section

Use to create the gain/loss item on both the INCOME STATEMENT and in the OPERATING CASH FLOW section

Forecasting fixed asset line items

Prepare a schedule of fixed assets at cost for all periods presented.

BB + CAPX + Acquired in acquisition – cost of fixed assets disposed = EB

Beginning balance of fixed assets 500,000

Add: CAPX from ICF 60,000

Add: Fixed assets acquired in acquisition -0-

Deduct cost of fixed assets disposed (20,000)

Ending balance of fixed assets 540,000

Average cost of fixed assets 520,000

Forecasting fixed asset line items

Beginning balance of fixed assets 500,000

Add: CAPX from ICF 60,000

Add: Fixed assets acquired in acquisition -0-

Deduct cost of fixed assets disposed (20,000)

Ending balance of fixed assets 540,000

Average cost of fixed assets 520,000

Equals the CAPX Line Item in the INVESTING CASH FLOW section

See prior schedule created

Forecasting fixed asset line items

Calculate the historical rate of depreciation for each period presented. Check the footnotes to determine the depreciation method used & check for

changes in useful life. Determine the depreciation expense (often disclosed on the cash flow

statement along with amortization) Depreciation expense/average cost of fixed assets = depreciation rate

QTRL 4 QTR 1Historical Forecast

Average cost of fixed assets 500,000 520,000Depreciation expense 12,500 ?

Rate 2.5%Annual rate 10.0%Average Useful life 10 year

Forecast depreciation XP = 520,000 X 2.5% = 13,000

Operating cash flows:Net income $XX,XXXDepreciation expense XX.XXXGain on sale of fixed assets (XX)Gain on sale of investments (X)Change in A/R (X,XXX)Change in Inv (X,XXX)Change in A/P X,XXXTotal cash used by operating activities $ XX,XXX

Cash used by investing activities:Purchase of fixed assets ($XX,XXX)Proceeds from sale of fixed assets X,XXXPurchase of investments, NET (X,XXX)Total cash used in investing activities (XX,XXX)

Cash from financing activities: Borrowing, net of repayments (34,000)Payment of dividends (5,000)Total cash provided by financing activities (39,000)

Net inflow for the year (10,000) Beginning cash balance: 35,000 Ending cash balance $ 25,000

Cash Flow StatementInvesting

Forecasting investments

Will the company sell investments (either available for sale or held to maturity investments?)

Proceeds – cost = Gain/lossForecast proceeds 3,000

Forecast

Cost (2,500)Forecast

Gain/loss 500Equals the Proceeds from sale of investments (Either a separate Line Item in the INVESTING CASH FLOW section or part of net amount if proceeds and purchases are combined)

Use to create the gain/loss item on both the INCOME STATEMENT and in the OPERATING CASH FLOW section

Note: It is usually appropriate to complete the investing line items at the end of the forecasting since the amount of increase(decrease) usually depends on cash requirements..

Forecasting investments

BB + Purchases + Acquired in acquisition – cost of investments sold= EB

Beginning balance of investments 50,000Add: PURCHASES 10,000Add: Investments acquired in acquisition -0-Deduct cost of investments sold (2,500)Ending balance of investments 57,500

Average cost of investments 53,750

Forecasting investment line items

Calculate the historical earning rate of investments for each period presented.

Check the footnotes & try to distinguish gains and losses from dividend and interest income

Investment revenue/average cost of investments = earning rate

QTRL 4 QTR 1Historical Forecast

Average cost of investments 40,000 53,750Investment revenue 300 ?

Rate .75%Annual rate 3.0%

Forecast investment income = 53,750 X .75% = 403

Operating cash flows:Net income $XX,XXXDepreciation expense XX.XXXGain on sale of fixed assets (XX)Gain on sale of investments (X)Change in A/R (X,XXX)Change in Inv (X,XXX)Change in A/P X,XXXTotal cash used by operating activities $ XX,XXX

Cash used by investing activities:Purchase of fixed assets ($XX,XXX)Proceeds from sale of fixed assets X,XXXPurchase of investments, NET (X,XXX)Total cash used in investing activities (XX,XXX)

Cash from financing activities: Issuance of stock XXPurchase treasury stock (XXX) Borrowing, net of repayments (XX,XXX)Payment of dividends (X,XXX)Total cash provided by financing activities (XX,XXX)

Net inflow for the year (XX,XXX) Beginning cash balance: XX,XXX Ending cash balance $ XX,XXX

Cash Flow StatementFinancing

Cash Flow Example Balance Sheet

Assets:Cash $ XX,XXXAccounts Receivable XX,XXXInventory XX,XXXInvestments XX,XXXFixed assets, net XXX,XXXTotal $XXX,XXXLiabilities and Equity:Accounts Payable $ XX,XXXLong-term debt XX,XXXCommon Stock XXX,XXXTreasury Stock (XXX)Retained Earnings XX,XXXTotal $XXX,XXX

The FINANCING items on the cash flow statement create the inputs for balance sheet models.

Financing

Income StatementRevenues: $XXX,XXXOperating expenses ( XXX,XXX)Operating income: XX,XXX Interest expense ( X,XXX)Investment income X,XXXGain on sale of fixed assets XXIncome before income tax XX,XXXless: Income Tax ( XX,XXX)Net Income $ XX,XXX

Financing

Forecast interest expense = Average interest bearing debt X Forecast rate (This calculation is already included at the bottom of your ratio worksheet.)

Line items that are not categorized as Operating, Investing or Financing

1. RETAINED EARNINGS

2. CASH

3. “OTHER” line items