Trend Analysis: the Method
Chapter Fourteen
Syllabus topic 2, "Trend Analysis – Concept, selection of base year, computation of trend percentages and interpretation of trends in sales, profits, assets, liabilities and shareholders’ funds."
Pages 33 to 35 of 162
In one line
Trend analysis expresses every year's figure as a percentage of the same base year, so that the direction and the speed of movement become visible.
The formula
Trend percentage = (figure for the year / figure for the base year) x 100
The base year's own trend is therefore 100 by definition, and every later or earlier year is read against it.
Why an index and not a rupee change
Because rupee changes cannot be compared across items of different size.
| Item | 2023, Rs | 2027, Rs | Change, Rs | Trend at 2027 |
|---|---|---|---|---|
| Sales | 10,00,000 | 20,00,000 | 10,00,000 | 200 |
| Administrative expenses | 50,000 | 1,25,000 | 75,000 | 250 |
In rupees, sales grew far more. In trend, the expense grew faster, and that is the finding: an expense outrunning the sales it supports. The rupee column hides it and the index column shows it in one glance.
The three steps
1. Choose the base year. The next chapter is about nothing else, because a bad choice makes every figure after it lie.
2. Compute the index for every year and every item. Divide, multiply by a hundred, and round to the nearest whole number unless the question asks otherwise.
3. Read the indices against each other, not one by one. A single trend is almost never the answer; the answer is in the gap between two of them.
Worked
The figures of Sunrise Industries Ltd for five years. Take 2023 as the base.
| Year ended 31 March | Net sales, Rs | Cost of goods sold, Rs | Administrative expenses, Rs |
|---|---|---|---|
| 2023 | 10,00,000 | 7,00,000 | 50,000 |
| 2024 | 12,00,000 | 8,40,000 | 60,000 |
| 2025 | 14,00,000 | 9,80,000 | 80,000 |
| 2026 | 16,00,000 | 11,20,000 | 90,000 |
| 2027 | 20,00,000 | 14,00,000 | 1,00,000 |
The trend statement.
| Year ended 31 March | Net sales | Cost of goods sold | Administrative expenses |
|---|---|---|---|
| 2023 | 100 | 100 | 100 |
| 2024 | 120 | 120 | 120 |
| 2025 | 140 | 140 | 160 |
| 2026 | 160 | 160 | 180 |
| 2027 | 200 | 200 | 200 |
Now read it.
Sales and cost of goods sold move together at every point. Both stand at 200 in 2027, so the gross profit ratio has been held at exactly 30 per cent throughout the five years. That is a strong finding and it takes one sentence.
Administrative expenses ran ahead in the middle years. They reached 160 when sales were at 140 and 180 when sales were at 160, so between 2025 and 2026 the company was carrying an overhead growing faster than its business. By 2027 the gap has closed, so the overhead was brought back into line, which suggests a deliberate correction rather than drift.
Nothing in the rupee columns says any of that.
How to read a trend, in four questions
| Question | What it finds |
|---|---|
| Is it rising, falling or flat? | Direction |
| Is it rising faster or slower than it was? | Acceleration, which often matters more than direction |
| How does it compare with a related trend? | The real finding, as with expenses against sales |
| Is there a year where the direction changed? | The turning point, which is where the explanation lies |
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