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Trend Analysis : an important tool of Analysis and interpretation of financial statements

TREND ANALYSIS
Trend Analysis is also an important tool of Analysis and interpretation of financial statements. Trend means tendency in general term. The Comparative financial statements study changes which have occurred in each item of the balance sheet and profit and loss account within a period of two years but do not indicate the trend of progress during past years. Trend analysis discloses changes in the financial and operating data of financial statements between specific periods in relation to any past year called the base year and makes possible for the analyst to form an opinion about the favorable or unfavorable tendencies as reflected by the accounting data. This method of Analysis is immensely helpful in making Comparative Study of Financial Statements for several years.

The trend analysis of business operations and other financial data may be done in any of the following ways:-
Trend Percentage
Trend Ratios
Graphic or Diagrammatic presentation

COMPUTATION OF TREND PERCENTAGE
Financial statements is tabulated and taking the earliest year or any one year as base , the percentage, increase or decrease for other years is calculated. The percentages are called trend percentages which give an idea about the changes in comparison to previous years.
For example value of sales for the five years is given as follows:-
Year
(31st march)
2009
2010
2011
2012
2013
Sales (in Rs.)
1,50,000
1,80,000
1,30,500
1,65,000
1,87,500
           
If we measure the changes in the sales value for other years taking 1999 as the base year the result will be as follows:-

TREND PERCENTAGE



31ST March


Sales (Rs.)

Increase/decrease in comparison to 2003
Increase/decrease In
% in comparison to 2003
Increase/decrease×100
Sales for the base year
2009
1,50,000
-----
-----
2010
1,80,000
+ 30,000
+  20%
2011
1,30,500
    -  19,500
    -   13 %
2012
1,65,000
+ 15,000
+ 10%
2013
1,87,500
+ 37,500
+ 25 %

This shows percentage increase or decrease in the sale value in relation to the base year, but the method is not good in the sense that it contains plus (+) and minus (-) signs. It is better to convert all the items of the statements into percentages taking one year as base. They are also called trend ratios.

Precautions in Calculating Trend Percentages:-
The base year should be selected carefully. It should be normal year free from any unexpected event.
The accounting policies and practices should be kept consistent otherwise comparison will be affected adversely.
Trend percentages should be studied after considering the absolute figures on which they are based. Otherwise they may give misleading results.
It is better to adjust the current year’s figures in the light of the price level changes so that comparison may be realistic.

TREND RATIOS
Trend ratio method is considered more suitable then this method. The calculation of trend ratio involves the arithmetical relationship which each item of several years bears to the same item of the base year. One particular year is taken as base and the value of each item is regarded equal to 100 and the values of other years are converted in the same ratio. This method is also used while preparing index numbers.

The Trend rations in the following example will be as follows:-
Years
Sales
Stock
Profit before Tex
2009
1,881
709
321
2010
2,340
781
435
2011
2,655
816
458
2012
3,021
944
527
2013
3,768
1,154
672

Trend Ratios
(Base year 2003= 100)


     Years
                     Sales 
                Stock
  Profit before Tex
Amount (In Rs. Lakhs)                      
Trend %
Amount
(in Rs.Lakhs)
Trend %


Amount
(in Rs.Lakhs)
Trend %

2009
1,881
100
709
100
321
100
2010
2,340
124
781
110
435
136
2011
2,655
141
816
115
458
143
2012
3,021
161
944
133
527
164
2013
3,768
200
1,154
162
672
209

Current year   × 100
 Base year

Interpretation:-
  1. The sale of the firm has continuously increased over a period of five years commencing from 2003. There has been a substantial increase in the amount of Sales in the year 2007 when it increases by 39%.
  2. The Trend Stock also upwards. The increase in these items has been constant yet in 2007 the increase has been exceptionally high.
  3. The Profits of the firm has increase at much higher  rate in comparison to increase in Sales and Stock during the Period under Study.


The overall analysis of the financial items indicates that the firm is doing well and, its financial position is found to be good.

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