7.7 Trend analysis

Question 1

What is trend analysis?

Answer 1

The process of analysis financial data to identify consistent results or trends.

Question 2

What are the two types of trend analysis?

Answer 2

Horizontal

Vertical

Question 3

What is horizontal trend analysis?

Answer 3

Comparison of line items in a company’s financial statements over multiple time periods.

Question 4

What is vertical trend analysis?

Answer 4

The proportional analysis of line items as a percentage of base items.

Question 5

How can trend analysis be helpful?

Answer 5

• analysing revenue patterns, products, geography etc
• checking the impact of any unusual one-off expenditure
• preparing financial projections
• comparing result from multiple companies

Question 6

What is the formula for calculating change in a line item in horizontal analysis?

Answer 6

Change (in amount) = current period amount - base period amount

Question 7

Is vertical analysis done for a single period or across multiple periods?

Answer 7

A single period (horizontal is across multiple periods).

Question 8

How is vertical analysis conducted? Which figures are used as the base items?

Answer 8

Line items in the income statement are shown as a percentage of sales, awhile line item sin the balance sheet are shown as a percentage of the total assets.