1. FORECASTING FINANCIAL STATEMENTS February 10, 2003

2. Additional Operating Topics Include graphs/graphics in your report See p. 3 of Trico 3/18/02 report (www.burkenroad.org)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

3. Additional Operating Topics Calculating EPS Basic & Diluted

4. Simple Structure--Single EPS only Simple Structure--Single EPS only Basic 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.

5. Computing basic & diluted weighted average shares Computing basic & diluted weighted average shares See example worksheet.

6. 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

7. 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

8. Operating cash flows: Net income$XX,XXX Depreciation expenseXX.XXX Gain on sale of fixed assets(XX) Change in A/R(X,XXX) Change in Inv(X,XXX) Change in A/PX,XXX Total cash used by operating activities$ XX,XXX Cash used by investing activities: Purchase of fixed assets($XX,XXX) Proceeds from sale of fixed assetsX,XXX Purchase 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 Statement Investing The Starting point for forecasting INVESTING line items is the cash flow statement.

9. Cash Flow Example Balance Sheet Assets: Cash$ XX,XXX Accounts Receivable XX,XXX Inventory XX,XXX Investments XX,XXX Fixed assets, net XXX,XXX Total $XXX,XXX Liabilities and Equity: Accounts Payable$ XX,XXX Long-term debt XX,XXX Common Stock XXX,XXX Retained Earnings XX,XXX Total$XXX,XXX Investing The INVESTING items on the cash flow statement create the inputs for balance sheet models.

10. Income Statement Revenues: $XXX,XXX Operating expenses( XXX,XXX) Operating income: XX,XXX Interest expense ( X,XXX) Investment income X,XXX Gain on sale of fixed assets XX Income before income tax XX,XXX less: 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.

12. 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 Forecast Accumulated depreciation (disposed)(14,000)Forecast Book value (disposed)6,000 Forecast proceeds7,000Forecast Book value (disposed)(6,000)Link to above Gain/loss1,000

13. Forecasting fixed asset line items Cost of assets (disposed)20,000 Forecast Accumulated depreciation (disposed)(14,000)Forecast Book value (disposed)6,000 Forecast proceeds7,000Forecast Book value (disposed)(6,000)Link to above Gain/loss1,000 Equals the Proceeds from sale of Fixed Assets Line 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

14. 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 assets500,000 Add: CAPX from ICF60,000 Add: Fixed assets acquired in acquisition-0- Deduct cost of fixed assets disposed(20,000) Ending balance of fixed assets540,000 Average cost of fixed assets520,000

15. Forecasting fixed asset line items Beginning balance of fixed assets500,000 Add: CAPX from ICF60,000 Add: Fixed assets acquired in acquisition-0- Deduct cost of fixed assets disposed(20,000) Ending balance of fixed assets540,000 Average cost of fixed assets520,000 Equals the CAPX Line Item in the INVESTING CASH FLOW section See prior schedule created

16. 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 4QTR 1 HistoricalForecast Average cost of fixed assets500,000520,000 Depreciation expense12,500 ? Rate2.5% Annual rate10.0% Average Useful life10 year Forecast depreciation XP = 520,000 X 2.5% = 13,000

17. Operating cash flows: Net income$XX,XXX Depreciation expenseXX.XXX Gain on sale of fixed assets(XX) Gain on sale of investments(X) Change in A/R(X,XXX) Change in Inv(X,XXX) Change in A/PX,XXX Total cash used by operating activities$ XX,XXX Cash used by investing activities: Purchase of fixed assets($XX,XXX) Proceeds from sale of fixed assetsX,XXX Purchase 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 Statement Investing

18. Forecasting investments Will the company sell investments (either available for sale or held to maturity investments?) Proceeds – cost = Gain/loss Forecast proceeds3,000Forecast Cost(2,500)Forecast Gain/loss500 Equals 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..

19. Forecasting investments BB + Purchases + Acquired in acquisition – cost of investments sold= EB Beginning balance of investments50,000 Add: PURCHASES10,000 Add: Investments acquired in acquisition-0- Deduct cost of investments sold (2,500) Ending balance of investments57,500 Average cost of investments53,750

20. 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 4QTR 1 HistoricalForecast Average cost of investments40,00053,750 Investment revenue300 ? Rate.75% Annual rate3.0% Forecast investment income = 53,750 X.75% = 403

21. Operating cash flows: Net income$XX,XXX Depreciation expenseXX.XXX Gain on sale of fixed assets(XX) Gain on sale of investments(X) Change in A/R(X,XXX) Change in Inv(X,XXX) Change in A/PX,XXX Total cash used by operating activities$ XX,XXX Cash used by investing activities: Purchase of fixed assets($XX,XXX) Proceeds from sale of fixed assetsX,XXX Purchase of investments, NET(X,XXX) Total cash used in investing activities(XX,XXX) Cash from financing activities: Issuance of stockXX Purchase 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 Statement Financing

22. Cash Flow Example Balance Sheet Assets: Cash$ XX,XXX Accounts Receivable XX,XXX Inventory XX,XXX Investments XX,XXX Fixed assets, net XXX,XXX Total $XXX,XXX Liabilities and Equity: Accounts Payable$ XX,XXX Long-term debt XX,XXX Common Stock XXX,XXX Treasury Stock (XXX) Retained Earnings XX,XXX Total$XXX,XXX The FINANCING items on the cash flow statement create the inputs for balance sheet models. Financing

23. Income Statement Revenues: $XXX,XXX Operating expenses( XXX,XXX) Operating income: XX,XXX Interest expense ( X,XXX) Investment income X,XXX Gain on sale of fixed assets XX Income before income tax XX,XXX less: 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.)

24. Line items that are not categorized as Operating, Investing or Financing 1. RETAINED EARNINGS 2. CASH 3. “OTHER” line items