Trend Analysis PDF

Preview

Summary

Lecture notes on trend analysis...

Description

Trend Analysis Trend analysis calculates the percentage change for one account over a period of time of two years or more. Percentage change

To calculate the percentage change between two periods: 1. Calculate the amount of the increase/(decrease) for the period by subtracting the earlier year from the later year. If the difference is negative, the change is a decrease and if the difference is positive, it is an increase. 2. Divide the change by the earlier year's balance. The result is the percentage change.

Calculation notes: 1. 20X0 is the earlier year so the amount in the 20X0 column is subtracted from the amount in the 20X1 column.

2. The percent change is the increase or decrease divided by the earlier amount (20X0 in this example) times 100. Written as a formula, the percent change is:

3. If the earliest year is zero or negative, the percent calculated will not be meaningful. N/M is used in the above table for not meaningful. 4. Most percents are rounded to one decimal place unless more are meaningful. 5. A small absolute dollar item may have a large percentage change and be considered misleading. Trend percentages

To calculate the change over a longer period of time—for example, to develop a sales trend— follow the steps below: 1. Select the base year. 2. For each line item, divide the amount in each nonbase year by the amount in the base year and multiply by 100. 3. In the following example, 20W7 is the base year, so its percentages (see bottom half of the following table) are all 100.0. The percentages in the other years were calculated by dividing each amount in a particular year by the corresponding amount in the base year and multiply by 100.

Calculation notes: 1. The base year trend percentage is always 100.0%. A trend percentage of less than 100.0% means the balance has decreased below the base year level in that particular year. A trend percentage greater than 100.0% means the balance in that year has increased over the base year. A negative trend percentage represents a negative number. 2. If the base year is zero or negative, the trend percentage calculated will not be meaningful. In this example, the sales have increased 59.3% over the five‐ year period while the cost of goods sold has increased only 55.9% and the operating expenses have increased only 57.5%. The trends look different if evaluated after four years. At the end of 20X0, the sales had increased almost 20%, but the cost of goods sold had increased 31%, and the operating expenses had increased almost 41%. These 20X0 trend percentages reflect an unfavorable impact on net income because costs increased at a faster rate than sales. The trend percentages for net income appear to be higher because the base year amount is much smaller than the other balances....