Meaning

Trend analysis is also termed as trend percentage. It is used for the

purpose of comparative study of financial statements over a number of years. In case
of trend analysis minimum three year financial data is a must. Out of the periods
under study, one year is taken as the base year and each item in this year is taken as
100. Trend percentages are computed by dividing amount of each item in the
statement of each remaining year with the corresponding item in the base statement
and the result is expressed in percentage.

Amount of year under study

Trend Percentage = x 100
Amount of base year

A downward trend will be clearly indicated by the trend percentages

being less than 100. An upward trend will be indicated by the trend percentages being
more than 100.

The trend percentage facilitates an efficient comparative study of the

financial performance of a business enterprise over a period of a time. While
preparing a trend analysis the base year selected must be a representative of a normal
year. During inflationary periods the data over a period of time becomes
incomparable unless the absolute rupee is adjusted. Even though the trend percentage
provide significant information, undue importance must not be laid down on the
percentage when there is small number in the base year in such a case even a slight
variation will be magnified by the percentage change. Trend analysis might also be
useful to compare such trends with similar trends in business generally and the
industry concerned in particular.
 Features of Trend Analysis

(1) In case of trend analysis all the given years are arranged inan ascending
order.

(2) The first year is termed as the “base year” and all figure of the base year is
taken as 100%.

(3) Items in the subsequent year are compare with that of the base year.

(4) In the percentage in the following years is above 100% it indicates an increase
over the base year and if the percentage are below the 100% it indicates a
decrease over the base year.

(5) A trend analysis helps in analysing the financial performance of the business.

(6) Trend analysis gives a better picture of the overall performance of the
business.

(7) A trend analysis indicates in which direction business is moving i.e. upward
or downwards.

(8) For trend analysis at least three year data is required.

Particulars Rs Rs.

Net Sales xx
Less: Cost of goods Sold xx
Gross Profit xx
Add: Operating Income xx
xxx
Less: Operating Expenses
(1) Administrative Expenses xx
(ii) Selling and Distribution Expenses xx
(iii) Finance Expenses xx xx
Earning Before Depreciation interest and
Tax(EDBIT) xxxx
LESS: Depreciation xx
Earning Before Interest and Tax(EBIT) xxxx
Less: Interest on long term Borrowings xx
Net operating Profit/Operating Net Profit xxxx
Add: Non-Operating Income xx
xxxx
Less: NON Operating Expenses xx
NET Profit Before tax(NPBT) xxxx
Less: provision for Income Tax xx
Net Profit after Tax (NPAT) xxxx

Rs.

(I)Sources Of Funds
(1) Owned Funds xxxx
(2) Borrowed Funds xxxx
xxxx

Total Employed Funds

xxxx
(Ii) Application Of Funds xxxx
Fixed Asset xxxx
Long Term Investments xxxx

Working Capital
Total Net Assets Owned
 Illustration on Trend Analysis of Income Statement

Four Years revenue/income statements are given below. Trend Analysis is

to be made and commented on it.

2002 2003 2004 2005

Rs. Rs. Rs. Rs.
Sales 50000 60000 72000 86400
Less: Cost of Sales 32000 38000 46000 56000
Margin 18000 22000 26000 30400
Management Expenses 3000 3500 4000 4500
Sales Expenses 5000 6000 7200 8640
Interest on Loans 3000 4000 5000 6000
Total Expenses 11000 13500 16200 19140
Profit before Depreciation 7000 8500 9800 11260
Depreciation 5000 4500 6000 6500
Profit before Tax 2000 4000 3800 4760
Income Tax 800 2000 1850 2400
Profit after Tax 1200 2000 1950 2360
 2002 2003 2004 2005

Rs. % Rs. % Rs. % Rs. %

Net Sales 5000 100 6000 120.00 7200 144.00 8640 172.80

Less: Cost of Sales 3200 100 3800 118.75 4600 143.75 5600 175.00

Gross Margin 1800 100 2200 122.22 2600 144.44 3040 168.89

Less: Operating Expenses:

Management Expenses 300 100 350 116.67 400 133.33 450 150.00

Sales Expenses 500 100 600 120.00 720 144.00 864 172.80

Total Operating Expenses 800 100 950 118.75 1120 140.00 1314 164.25
Profit/Earnings Before
Depreciation,
Interest & Tax (EBDIT) 1000 100 1250 125.00 1480 148.00 1726 172.60

Less: Interest in Loans 300 100 400 133.33 500 166.67 600 200.00
Profit/Earnings Before
Depreciation &
Tax 700 100 850 121.43 980 140.00 1126 160.86

Less: Depreciation 500 100 450 90.00 600 120.00 650 130.00

Profit/Earnings Before Tax 200 100 400 200.00 380 190.00 476 238.00

Less: Income Tax 80 100 200 250.00 185 231.25 240 300.00

Profit/Earnings After Tax 120 100 200 166.67 195 162.50 236 196.67
 Comments

Net Sales:

In the year 2002, net sales amounted to Rs. 5000. In the year 2003,
it came to Rs.6000, and in the subsequent years like in 2004 & 2005 it
increased to Rs. 7200 & Rs. 8640 respectively. As every company wants
to sustain and grow in the market, it has to increase its sales and thereby
profit. Therefore by increasing net sales every year the company was
simultaneously increasing its profits also.

Gross Margin:

With the increasing net sales of the company, gross margin was
also increasing. This shows that the company is concentrating properly
on gross margin.

Total Operating Expenses:

 Total operating Expenses comprises of Management Exp. & Sales
Exp. The graph of total operating expenses is the upward movement, it
means that expenses are also increasing and this exp. are increasing
because of increase in amount of sales as well as it may be that either the
expenses of carrying out sales are being increased.

EBDIT:

Earnings before depreciation, interest, and tax. This graph is also

showing the constant rise in trend as everything is stable and attaining the
steps of growth.

EBDT:

Earnings before depreciation, & tax, but after deducting Interest.

In 2002, the interest was Rs.700, then it was Rs.980 in 2004 and further
increase was Rs.1126 in 2005. This states that the amount of interest
company was paying was not fluctuating much.

EBT:
 Earnings before tax, and after depreciation and interest. In year
2002, it was Rs.200, and then it increased to rs.400 in the year 2003, i.e.
twice of the base year, in 2004 it reduced to rs.380 and again rose to
Rs.476 in 2005. We can say that it reduced in 2004 due to rise in
depreciation amount that year. As the depreciation was more, the amount
after deducting (ID) resulted in a fall in EBT that year.

Earnings after tax:

Earnings or profit were fluctuating due to fluctuation in the rate of

depreciation or change in current assets.
 Illustration on Trend Analysis of Income Statement

Four Years revenue/income statements are given below. Trend Analysis is

to be made and commented on it.

Base
Years
Year
2005 2004 2003 2002
(Rs.) (Rs.) (Rs.) (Rs.)
(in (in (in (in
000) 000) 000) 000)
Assets:
Fixed Assets 1000 2000 1250 1250
Accumulated Depreciation @ 20%
200 400 250 250
of Original Cost
Written Down Value 800 1600 1000 1000
Current Assets 1400 1000 800 1000
Less: Current Liabilities 700 600 500 500
Working Capital 700 400 300 500
Capital Employed 1500 2000 1300 1500
Liabilities:
Share Capital 1000 1100 520 1000
Reserves 320 100 300 200
Net Worth 1320 1200 820 1200
Debts 180 800 480 300
Capital Employed 1500 2000 1300 1500
 2002 2003 2004 2005

Rs. % Rs. % Rs. % Rs. %

(I) Sources of Funds:

(1) Owned Funds:

Share Capital 1000 100 520 52.00 1100 110.00

1000 100

Reserves 200 100 300 150.00 100 50.00320 160

Net Worth 1200 100 820 68.33 1200 100.00

1320 110

(2) Borrowed Funds:

Debts 300 100 480 160.00 800 266.67180 60

Capital Employed 1500 100 1300 86.67 2000 133.33

1500 100

(II) Application of Funds:

(1) Fixed Assets: (At Cost) 1250 100 1250 100.00 2000 160.00
1000 80

Less: Accumulated Depretiation

@ 20% of Original Cost 250 100 250 100.00 400 160.00200 80

WDV 1000 100 1000 100.00 1600 160.00800 80

(2) Working Capital:

Current Assets 1000 100 800 80.00 1000 100.00

1400 140

Less: Current Liabilities 500 100 500 100.00 600 120.00700 140
Working Capital 500 100 300 60.00 400 80.00700 140

Capital Employed 1500 100 1300 86.67 2000 133.33

1500 100

Comments

Net Worth:

Net Worth has decreased in the year 2003 but increased in the following years.
The face value of each share has decreased, this may be a reason which resulted in a
fall in net worth during 2003. The reason of increase in the net worth during 2004 and
2005 may be the face values of shares have raised or the company may have issued
additional shares.

Borrowed Funds:

Borrowed funds have increased in the years 2003 and 2004 but in the year 2005 it
indicates a decline. The reason for the increase in 2003 and 2004 may be due to
additional borrowings and the reason for the decline in debts during the year 2005
was may be due to redemption of debentures or it may be such that the company had
enough of funds so there is no need to borrow.

Fixed Assets:

Fixed assets has remained the same in the year 2003; in the year 2004 it indicates an
increase but in the year 2005
Working Capital:

Capital Employed: