A particular kind of horizontal analysis called a “trend percentage” depicts changes in a financial statement account over time. The “base year,” or the earliest year of the trend, is used to compare the amounts in subsequent years. In separate columns, you convert the amounts from each succeeding year into a percentage of the amount from the base year. The third year’s amount, for instance, might be equal to 150 percent of the base year. To find areas of strength or weakness on a company’s financial statements, you can compute trend percentages for one or more accounts.
To determine the trend percentage for the following year, divide the amount in the second year by the amount in the first year, and then multiply the result by 100. For example, divide $6,300 by $5,000, which equals 1. 26. To get the percentage, multiply this by 100 and get 126 percent. A percentage greater than 100 indicates that the account has grown since the base year.
To determine the trend percentage for the third year, divide the account’s third-year balance by its first-year balance and multiply the result by 100. To arrive at 94 percent in our example, divide $4,700 by $5,000 and then multiply by 100. A percentage of less than 100 indicates a decrease in the account from the base year.
- Select the base year or period. …
- Assign a weight of 100% to the figures or amounts that appear on the base-year financial statements. …
- Compute the trend percentage for the second year. …
- Write your result as a percentage in the third column. …
- Calculate the trend percentage for the third year.
How to calculate trend percentages
To identify weak or strong areas in a company’s financial statements, you can measure trend percentages for one or more accounts. The best way to review trend percentages is to put them in a table with one row per account and one column per year. Here are the steps to calculate trend percentages:
1. Select the base year or period
The earliest or first year of the trend, with which you compare the balances in each succeeding year, is referred to as the base year or period. Have at least two years of historical financial statement data. The more years you include, the more insight you can gain on account changes.
For instance, the financial statement data from three years ago serves as the base-year data with which you compare the other two years when calculating trend percentages for the three most recent years.
2. Assign a weight of 100% to the figures or amounts that appear on the base-year financial statements
Write “100%” in the second column of your financial statement to indicate the base-year percentage. Let’s say you want to determine the trend percentage for the years 2017, 2018, and 2019. The year 2017 would serve as your base year, so you must enter “100%” in place of all values under that year. Use the percentage symbol instead of spelling it out.
3. Compute the trend percentage for the second year
Divide the amount in the second year by the amount in the base year, and then multiply the result by 100 to determine the trend percentage for the second year.
Say, for example, that in 2017, 2018, and 2019 your small business had $30, $40, and $25 in cash, respectively. Your base-year balance is $30,000. In order to obtain 100% for the base-year trend percentage, you must divide $30,000. The result must then be multiplied by 100. The trend percentage for the base year is always 100. The trend percentage for 2018 is calculated by dividing $40,000 by $30,000, which gives you 1. 33, and then multiply it by 100. Your trend percentage for 2018 is the result, which is 133%.
The balance in that year has increased relative to the base period if the trend percentage is greater than 100%. However, if the trend percentage is less than 100%, it indicates that the balance in that particular year has decreased below the level of the base year.
Negative trend percentages represent negative numbers. The trend percentage will not be meaningful if the base year amount is negative or zero. When calculating trend percentages, treat each amount as a positive number if an accounts amount is typically displayed as a negative number, such as treasury stock.
4. Write your result as a percentage in the third column
Write the result as a percentage in the third column of your financial statement to represent the percentage of the second year once you have the trend percentage for the second year. In the second column, for instance, put “133%” to show how much the cash account increased from the base year to the second year.
5. Calculate the trend percentage for the third year
By dividing the account’s third-year balance by its first-year balance and multiplying the result by 100, you can determine the third-year trend percentage. To get to 83 in the example above, divide $25,000 by $30,000 and then multiply by 100. 33%. The account has shrunk versus the base year because the trend percentage is less than 100%.
6. Write your result as a percentage in the fourth column
Write the result as a percentage in the fourth column of your financial statement to represent the trend percentage for the third year after obtaining it. For instance, write “83. The account decreased in the third year compared to the base year, as indicated by the entry “33%” in the fourth column.
What is a trend percentage?
You can compare financial data such as net sales, cost of goods sold, operating expenses, gross profit, and inventory over time to a base period or year using a trend percentage, also known as an “index number.” It’s a type of horizontal analysis that shows how the financial statement accounts of a company have changed or trended over time.
Calculating trend percentages is a part of trend analysis. The process of examining current trends in order to anticipate future ones is known as trend analysis and is regarded as a type of comparative analysis. Trying to determine whether current market trends, such as gains in a particular market sector, are likely to continue as well as whether trends in one market area could influence trends in another are examples of this. Even though a trend analysis may need a lot of data, there is no guarantee that the results will be accurate.
After calculating the trend percentages or amounts over several years, a proper trend analysis doesn’t end there. These changes typically point to areas that merit additional study or investigation and are merely hints that could lead to important discoveries. Precise forecasts are dependent on a number of variables, including the political and economic climate, marketing budgets, plant expansion, product management strategies, and anticipated competitor activity. You can reasonably predict future performance by taking into account these factors, trend analysis, vertical analysis, and horizontal analysis.
Examples of trend percentage calculations
The following examples show how to calculate trend percentages:
Example 1: Three-year trend percentage calculation for InnoTek Companys accounts
You should use 2017 as the base year to calculate the trend percentages using the historical data above, 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, followed by a 100 percent increase to get 118. 99%. Using the amount for each account in the base year 2017, the same procedure is repeated for each account of the company. After calculating the trend percentages, the table would appear as follows (with the calculations added next to each column):
The trend percentages above highlight the direction of the changes in the company that are occurring. For instance, the proportion of sales is increasing each year relative to the base year.
In 2017 and 2019, the cost of goods sold (COGS), which measures the direct costs of manufacturing the products a company sells, increased more slowly than net sales, causing gross profit to rise more quickly than net sales. Due to the provision for restructured operations, operating expenses increased in 2018, which significantly reduced income before taxes.
Example 2: Five-year trend percentage calculation for EQUF Brewery, Inc.
In this example, the companys sales increased by 58. Operating expenses increased only by 54% over the five-year period, whereas sales increased by 54%. 44%. Also, the cost of goods sold grew only by 54. 73%. The trends look different if assessed after four years. Sales increased by almost 20% at the end of 2018, but operating costs rose by 40%. Also, the cost of goods sold increased by almost 31%.
Due to costs rising faster than sales in 2018, the trend percentages show a negative impact on the company’s net income. Since the base year amount is much lower than the other balances, the net income trend percentages seem to be higher.
Example 3: Diegos Soft Drink Companys five-year trend percentages for net sales and operating income
All percentages in this illustration are compared to the base year, which is the fiscal year 2010. Notice that the increase in operating income of 29. 30% less than the 44.4% increase in net sales from 2010 to 2014 29% for the same period. This shows that, during this time, Diegos Soft Drink Company’s operating expenses grew faster than its net sales.
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Trend percentage problem #Financial statement analysis
FAQ
How do you calculate increase in trend?
To calculate trend percentages, divide the current year by the base year (2006). For instance, $35,119 (the net sales for 2010) divided by $24,088 (the net sales for the base year 2006) gives the net sales 2010 trend percentage of 146 percent.
What is a trend percentage analysis?
To find the growth trend as a decimal, divide the size change by the initial size. To get 0 in this example, divide 1,000 by 15,000 0667. To change the result from a rate to a percentage, multiply the result from the previous step by 100.
How do you calculate a 3 month trend?
A trend percentage converts non-base-year amounts into percentages. A particular kind of horizontal analysis called a “trend percentage” depicts changes in a financial statement account over time. The “base year,” or the earliest year of the trend, is used to compare the amounts in subsequent years.
