Trends

Common Size And Index Number Trend Analysis Of Financial Statements

When you analyze a company's financial statement, it's essential to compare accounts over multiple years to determine any trends. For easier comparison, you can turn each account's dollar amount into a trend percentage. Using trend percentages, you can easily determine whether an account has decreased or increased each year compared to the base year. In this article, we explore what a trend percentage is, discuss how to calculate trend percentages and provide some examples of trend percentage calculations.

Đang xem: Index number trend analysis

A trend percentage, also called an “index number,” allows you to compare financial information, such as net sales, cost of goods sold, operating expenses, gross profit and inventory, over time to a base period or year. It's a form of horizontal analysis that reveals a change or trend in a company's financial statement accounts over a period of time.

Calculating trend percentages is a part of trend analysis. Trend analysis, which is considered a type of comparative analysis, is the process of analyzing the current trends to predict future ones. This can include attempting to identify whether current market trends—such as gains in a specific market sector—are likely to carry on, as well as whether trends in one market area could cause trends in another. While a trend analysis may require a large amount of data, there's no guarantee that the outcome will be correct.

Proper trend analysis doesn't end after you calculate the decreases and increases in trend percentages or amounts over several years. Such changes usually indicate areas that are worthy of further analysis or investigation and are just clues that may result in significant findings. Precise predictions depend on several factors, such as political and economic conditions, promotional outlays, plant expansion, management plans for new products and expected competitor activity. Taking these factors into account, along with trend analysis, vertical analysis and horizontal analysis, gives you a reasonable basis for forecasting future performance.

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You can measure trend percentages for one or multiple accounts to determine areas of weakness or strength in a company's financial statements. To best review trend percentages, organize them in a table with one column per year and one row per account. Here are the steps to calculate trend percentages:

The base year or period refers to the earliest or first year of the trend, with which you compare the balances in each subsequent year. Have at least two years of historical financial statement data. The more years you include, the more perspective you can get on changes to your accounts.

For instance, if you want to calculate trend percentages for the three most recent years, the financial statement figures from three years ago represent your base-year data to which you compare the other two years.

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2. Assign a weight of 100% to the figures or amounts that appear on the base-year financial statements

In the second column of your financial statement, write “100%” to represent the base-year percentage. For example, say you want to calculate the trend percentage for 2017, 2018 and 2019. Your base year would be the year 2017, so you have to replace the values under that year with “100%”. Use the percentage symbol instead of spelling it out.

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To calculate the trend percentage for the second year, divide the dollar amount in the second year by the dollar amount in the base year, and then multiply the result by 100.

For instance, say your small company had $30,000, $40,000 and $25,000 in cash in the years 2017, 2018 and 2019, respectively. Your base-year balance is $30,000. You have to divide $30,000 by itself and then multiply the outcome by 100 to get 100% for the base-year trend percentage. The trend percentage for the base year is always 100. To calculate the trend percentage for 2018, you have to divide $40,000 by $30,000 to get 1.33, and then multiply it by 100. The result, which is 133%, is your trend percentage for 2018.

If the trend percentage is greater than 100%, it means the balance in that year has increased over the base period. However, if the trend percentage is less than 100%, it means the balance has decreased below the base year level in that particular year.

Negative trend percentages represent negative numbers. If the base year amount is negative or zero, the trend percentage calculated will not be meaningful. If an account's amount is usually shown as a negative number, such as treasury stock, consider each amount as a positive number when computing trend percentages.

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Related: How To Calculate Percentage, Percentage Change and Percentage Difference

Once you get the trend percentage for the second year, write the result as a percentage in the third column on your financial statement to represent the percentage of the second year. For instance, write “133%” in the second column to represent the growth of the cash account in the second year compared to the base year.

To calculate the trend percentage for the third year, divide the amount of the account in the third year by the amount in the first year and then multiply the result by 100. In the example above, you would divide $25,000 by $30,000 and then multiply by 100 to arrive at 83.33%. Because the trend percentage is less than 100%, the account has decreased compared to the base year.

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After getting the trend percentage for the third year, write the result as a percentage in the fourth column on your financial statement to represent the third year's percentage. For instance, write “83.33%” in the fourth column to show that the account decreased in the third year compared to the base year.

Examples of trend percentage calculations

Here are some examples that illustrate the calculation of trend percentages:

Example 1: Three-year trend percentage calculation for InnoTek Company's accounts

Historical Data
Account 2017 2018 2019
Net Sales $10,106.50 $12,025.80 $11,498.80
Cost of Goods Sold 5,697.00 6,225.80 6,340.20
Gross Profit 5,509.50 5,906.10 6,157.20
Operating Expenditures 4,355.70 5,469.50 5,100.00
Income Before Taxes 2,066.90 1,102.20 2,250.50

Using the historical data above, you should calculate the trend percentages using 2017 as the base year, so everything in 2017 must be 100%. For net sales in the second year, take $12,025.80 from 2018, divide it by $10,106.50 from the base year and then multiply the result by 100 to get 118.99%. The same process continues for each account of the company using the amount for each account in the base year 2017. The table would look like this after calculating the trend percentages (with the calculations added next to each column):

Historical Data
Account 2017 2018 2019
Net Sales 100 % 118.99% $12,025.80 / $10,106.50 x 100 113.78% $11,498.80 / $10,106.50 x 100
Cost of Goods Sold 100 % 109.28% $6,225.80 / $5,697.00 x 100 111.29% $6,340.20 / $5,697.00 x 100
Gross Profit 100 % 107.20% $5,906.10 / $5,509.50 x 100 111.76% $6,157.20 / $5,509.50 x 100
Operating Expenditures 100 % 125.57% $5,469.50 / $4,355.70 x 100 117.09% $5,100.00 / $4,355.70 x 100
Income Before Taxes 100 % 53.34% $1102.20 / $2,066.90 x 100 108.88% $2,250.50 / $2,066.90 x 100

The trend percentages above indicate the changes that occur in the company and emphasize the direction of these changes. For example, the percentage of sales is growing every year compared to the base year.

The cost of goods sold (COGS), which refers to the direct costs of manufacturing the goods a company sells, increased at a lower rate compared to the net sales in 2017 and 2019, which causes gross profit to increase at a higher rate compared to net sales. Operating expenditures in 2018 grew due to the provision for restructured operations, which caused a huge reduction in income before taxes.

Historical Data
Account 2015 2016 2017 2018 2019
Inventory 100% 110.47% 112.42% 112.42% 113.34%
Property and Equipment 100% 95.38% 93.88% 115.10% 108.60%
Current Liabilities 100% 105.49% 103.36% 113.02% 104.36%
Sales 100% 107.32% 117.07% 119.51% 158.54%
Cost of Goods Sold 100% 103.66% 105.59% 130.62% 154.73%
Operating Expenses 100% 109.41% 121.18% 139.23% 155.44%
Net Income (loss) 100% 159.84% 232.66% (65.58)% 239.51%
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In this example, the company's sales increased by 58.54% over the five-year period, while the operating expenses increased only by 55.44%. Also, the cost of goods sold grew only by 54.73%. The trends look different if assessed after four years. At the end of 2018, the sales increased by almost 20%, but the operating expenses increased by 40%. Also, the cost of goods sold increased by almost 31%.

The 2018 trend percentages indicate an unfavorable effect on the company's net income, as costs increased at a higher rate compared to sales. The net income's trend percentages appear to be higher because the base year's amount is much smaller than the other balances.

Example 3: Diego's Soft Drink Company's five-year trend percentages for net sales and operating income

Historical Data
Account 2010 2011 2012 2013 2014
Net Sales $25,088.00 $29,944.00 $32,994.00 $31,990.00 $36,199.00
Operating Income $7,308.00 $8,252.00 $9,446.00 $9,231.00 $9,449.00
Trend Percentages
Account 2010 2011 2012 2013 2014
Net Sales 100% 119.36% 131.51% 127.51% 144.29%
Operating Income 100% 112.92% 129.26% 126.31% 129.30%

In this example, all percentages are relative to the fiscal year 2010, which is the base year. Notice that the increase in operating income of 29.30% from 2010 to 2014 was less than the increase in net sales of 44.29% for the same period. This indicates that Diego's Soft Drink Company's operating expenses increased at a higher rate compared to its net sales during this period.

Calculating trend percentages can be useful for many financial jobs that involve analysis and reporting. Here are 10 jobs that may be good for skilled mathematicians:

1. Accountant

2. Financial analyst

3. Controller

4. Sales manager

5. Financial advisor

6. Banker

7. Investment manager

8. Vice president of finance

9. Actuary

10. Mergers and acquisitions manager

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