Trend Analysis overcome the limitation of Common Size Statements by providing a basic standard to indicate whether the proportion of an item is normal or abnormal. This method is an important and useful technique in financial statement analysis. The calculation of trend ratio involves ascertainment of arithmetical relationship with each item for several years to the same item of base year.
From the following data relating to purchases of an item of a firm, prepare Trend Percentages and Trend Ratios and interpret the results.
Assuming the base year as 1990, let us calculate the Trend Percentages and Trend Ratios as below.
Like the above example, we can find the trend ratios for any parameter in the income statement and balance sheet.