Page 41 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes Trend Percentages
Inventory 104.8 103.9 103.1 102.0 100.0
Property & equipment 108.7 115.3 93.8 95.3 100.0
Current liabilities 104.5 113.5 103.5 105.7 100.0
Sales 159.3 119.8 117.3 107.4 100.0
Cost of goods sold 155.9 131.3 105.7 103.7 100.0
Operating expenses 157.5 140.7 122.0 109.8 100.0
Net income (loss) 213.3 (36.7) 206.4 133.6 100.0
Solution: We have to remember that 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.
Also, 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 2008, the sales had increased almost 20%,
but the cost of goods sold had increased 31%, and the operating expenses had increased almost
41%. These 2008 trend percentages reflect an unfavorable impact on net income because costs
increased at a faster rate than sales. On an overall basis, the trend percentages for net income
appear to be higher because the base year amount is much smaller than the other balances.
Using the restated amounts from trend analysis makes it much easier to see how effective and
efficient the company has been during the recent years. Trends may be categorized as:
1. Short-term trends capture rapidly emerging trends.
2. Mid-term trends capture trends developing in between.
3. Long-term trends capture trends developing over long periods.
Trend analysis is also advantageous for (short-term) sales forecasting, growth rates, growth
percentages, trend significance, trending types, and so on. Use of trend analysis includes:
1. Sales trend analysis – revenue and volume analysis.
2. Product sales trend analysis.
3. Market trend analysis.
4. Equity (share) price trend analysis.
5. Accounting trend analysis.
6. Work force recruit forecasting.

7. Healthcare fraud detection and so on.
Timely identification of newly emerging trends is very important to businesses. Trend analysis
can also include the monitoring of a company’s financial ratios over a period of many years.

Self Assessment

Fill in the blanks:

15. In the analysis of financial information, trend analysis is the presentation of amounts as a
……………… of a base year.
16. Trend analysis can also include the monitoring of a company’s ……………… over a period
of many years.

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