comparative,size and trend analysis

8/3/2019 Comparative,Size and Trend Analysis

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Comparative, common size and trend

analysis.

By: Ankush Gupta

Vaibhav SrivastavaAnkesh.j. Dave

Abhinav Upadhyay

Mohit jain

Vivek Gupta


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` A financial statement is an organized collection of dataaccording to logical and consistent accounting

proceedures.

` Its purpose is to convey an understanding of some

financial aspects of a business firm.` It may show a position at a moment of time as in a case

of a balance sheet or may reveal a series of activities over

a given period of time, as in the case of an income

statement.


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Techniques of financial statement analysis

` Trend analysis

` Common size statement analysis

` Funds flow analysis

` Cash flow analysis

` Ratio analysis

` Value added analysis

` Comparative statement analysis


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Trend analysis

` Trend analysis seeks out and examines systematic

historical patterns in financial statements or other

quantitative data. Such analysis of data over time can vary

from primarily descriptive techniques to more complexcause-and-effect methods. Here we minimizes discussion

of cause-and-effect analysis and focuses on the descriptive

methods of trend analysis


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` Trend analysis usually involves choosing one fiscal periodas a base period and then expressing subsequent

quantities as a percentage of the data associated with this

base period. In the case of an income statement, changes

in all items could be assessed in relation to the baseperiod.

` Note that trend analysis can be performed to determine

changes in the number of physical units as well as of

amounts.


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` T

hese techniques generally compare the entity to itself.However, it is also possible to compare the entity to externalpoints of reference through cross sectional analysis. This typeof analysis compares the data being audited to an externalnorm or data generated by a similar external entity. However,examining data over time is generally not part of cross-

sectional analysis.` Trend analysis as described here is related to a broader

discipline called time series analysis. Time-series analysis mayinvolve more advanced analysis techniques such as:

` ARIMA, which aids in detecting seasonal patterns and

fluctuations` Fourier, which reduces time-series information into underlying

wave forms

` Time-lagged correlation, when a time lag exists between thepredictor and dependent variables -- for example, betweenadvertising and sales


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` Trend analysis is valuable when one wants to usehistorical data to predict future values or to calculate

expected values for comparison to actual current values.

Trend analysis is also useful for identifying unexpected

variances that may indicate strategic or operationalchanges or entity weaknesses worthy of additional

exploration and analysis.

` See more example at pg no 385 ( Ravi M. Kishore)

The following is an example of a simple trend analysis:

1990 1991 1992 1993 1994Fund Equity 335,398 366,044 361,704 234,666 192,921

% Change -- 8.37% -1.20% -54.14% -21.64%


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Advantages

Trend analysis can:

` reveal potentially fruitful areas of audit investigation

` detect significant variations over time

` be easily understood and communicated

` be readily accepted due to its widespread use


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Disadvantages

Trend analysis can:

` provide little insight into the root causes of variations

` fail to indicate what the entitys normal or benchmark

position is

` be undermined by frequent changes in financial reporting

formats

` be heavily influenced by the choice of the base fiscal

period


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Common size statement analysis

` A company financial statement that displays all itemsas percentages of a common base figure.This type of financial

statement allows for easy analysis between companies or

between time periods of a company.

`

While most firms don't report their statements in commonsize, it is beneficial to compute if you want to analyze two or

more companies of differing size against each other.

` Common-size statements analysis expresses balance sheet

components as a percentage of total assets and income

statement components as a percentage of total revenue. Thisapproach facilitates identifying deviations in the components of

statements by focusing on relative differences through time.


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` Figures shown in financial statements- P&L account andbalance sheet, income statement are converted to

percentages so as to establish each element to the total

figure of the statement.

` This statement will also assist in analyzing theperformance over years and also with the figures of

competitive firm in the industry for making analysis of

relative efficiency.

` Common size ratio = item of interestReference item


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Example


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See more example at pg no 383 ( Ravi M. Kishore)


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Comaparative statement analysis

` In brief, comparative study of financial statements is thecomparison of the financial statements of the business

with the previous years financial statements.

` It enables identification of weak points and applying

corrective measures.` Practically, two financial statements (balance sheet and

income statement) are prepared in comparative form for

analysis purposes.


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` The comparative balance sheet shows the different assetsand liabilities of the firm on different dates to make

comparison of balances from one date to another.

` The comparative balance sheet has two columns for the

data of original balance sheets. A third column is used toshow change (increase/decrease) in figures.The fourth

column may be added for giving percentages of increase

or decrease.


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` While interpreting comparative Balance sheet theinterpreter is expected to study the following aspects :

` (i) Current financial position andLiquidity position

` (ii) Long-term financial position

` (iii) Profitability of the concern


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Interpretation

` The comparative income statement given above showsthat there has been an increase in net sales of 14.65%.

The cost of goods sold has increased by 11%.This has

resulted in increase of gross profit by 19.4%.

` Operating expenses have increased by 8%.The increase ingross profit is sufficient to cover the operating expenses.

There is also an increase in net profit after tax of Rs

38000 i.e. 42.22%.

` It is concluded from the above analysis that there issufficient progress in the performance of the company

and the overall profitability of the company is good.

See more example at pg no 380 ( Ravi M. Kishore)


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Thank u.

comparative,size and trend analysis

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