TREND ANALYSIS

The process of trend analysis entails gathering data from several time periods and putting it on a
horizontal line for further examination. The goal of this research is to find actionable patterns in the data
supplied. In the corporate world, trend analysis is often applied in two ways:

Analysis of revenue and costs. Revenue and cost data from a company's income statement can be
plotted on a trend line over many reporting periods, and trends and inconsistencies can be investigated.
A sharp increase in one period followed by a sharp decrease in the next can suggest that an expense was
booked twice in the first month, for example. As a result, trend analysis is very beneficial for checking
preliminary financial statements for mistakes and determining whether or not changes should be made
before the statements are released for general use.

Analyze your investments. An investor can utilise previous share prices to establish a trend line and use
that knowledge to forecast future price movements in a stock. To evaluate if the causal relationship may
be utilised as a forecast of future stock prices, the trend line can be combined with other data that has a
cause-and-effect relationship. Trend analysis can also be used to detect signals of an oncoming shift
from a bull to a bear market, or vice versa, for the entire stock market. The reasoning behind this study
is that an investor who follows a trend is more likely to make money.

When using trend analysis to forecast the future, keep in mind that the factors that previously
influenced a data point may no longer do so to the same level. This means that extrapolating a historical
time series into the future does not always result in a valid prediction. As a result, when utilising trend
analysis to create predictions, it should be accompanied by a substantial quantity of extra research.

TREND ANALYSIS FORMULA

Change in Amount = Current Year Amount – Base Year Amount

HORIZONTAL ANALYSIS
Horizontal analysis is a method of analysing financial statements that involves comparing
specific financial data from one accounting period with data from subsequent periods. Analysts
use this method to examine historical trends.

The requirements for the preparation of financial statements, as described in the Generally
Accepted Accounting Principles (GAAP), require financial statements to be consistent and
comparable in order to appropriately compare and analyse firms and their financial
performance. The term "consistency constraint" refers to the requirement to employ the same
accounting procedures and principles each year since they are consistent throughout time.
The comparability requirement, on the other hand, requires that a company's financial
statements and other paperwork be comparable to those of other similar companies in the
same industry. Horizontal analysis is utilised in financial reporting to improve and strengthen
these constraints.

As a result, analysts and investors can identify elements that fuel a company's long-term
financial success. They can also spot patterns and trends in growth, such as seasonality. The
approach also allows for the examination of relative changes in various product lines as well as
future estimates.

HORIZONTAL ANALYSIS FORMULA

Horizontal Analysis (absolute) = Amount in Comparison Year – Amount

in Base Year

Horizontal Analysis (%) = [(Amount in Comparison Year – Amount in

Base Year) / Amount in Base Year] * 100

VERTICAL ANALYSIS
Vertical analysis simplifies the correlation between single items on a balance sheet and the
bottom line, as they are expressed in a percentage, because single items on a balance sheet and
the bottom line are expressed in percentages, vertical analysis makes the relationship between
them easier to understand. The percentages can be used by a company's management to
create goals and threshold limitations. For example, if earnings per unit falls below a certain
percentage, management may consider shutting down that unit.

It is a more powerful tool than horizontal analysis, which displays the equivalent changes in the
finances of a certain unit, account, or department over time.

It can also be used to compare a company's financial statement to industry average trends.
Using actual dollar amounts to analyse entire sectors would be futile. The use of common-size
percentages solves this problem and makes industry comparisons easier.

When comparing two or more companies in the same industry but of different sizes, it is also
quite useful. It can be difficult to compare a $1 billion company's balance sheet to one valued at
$500,000. Vertical analysis allows accountants to construct common-size measurements that
allow them to quickly compare and contrast sums of varying magnitudes.
VERTICAL ANALYSIS FORMULA

Vertical Analysis formula = Individual Item / Base Amount *100

Vertical analysis formula for the Income Statement and Balance Sheet are given below –

Vertical Analysis Formula(Income Statement) = Income Statement Item /

Total Sales * 100
Vertical Analysis Formula(Balance Sheet) = Balance Sheet Item / Total
Assets (Liabilities) * 100

OVERVIEW OF TREND , HORIZONTAL AND VERTICAL

ANALYSIS
LIQUIDITY RATIO
What is a liquidity ratio, exactly? A liquidity ratio is a financial indicator that can be used to
assess a company's capacity to pay its debts when they're due. To put it another way, it shows
us if a company's present assets are sufficient to meet its liabilities. Accounting liquidity ratios
are primarily used by creditors/lenders to determine whether to extend credit. While it is
always a good idea for business owners to have a thorough understanding of their company's
liquidity, they are primarily used by creditors/lenders to determine whether to extend credit.

WHAT DO YOU MEAN BY A GOOD LIQUIDITY RATIO

A greater liquidity ratio indicates that your company has a larger margin of safety when it
comes to paying down debt commitments. It's also vital to realise that a high liquidity ratio
could suggest that you're retaining too much cash on hand and aren't efficiently deploying your
resources. Instead, you might use that money toward expanding your business or making

investments that will pay you in the long run .

Furthermore, keep in mind that your accounting liquidity ratio, when viewed in isolation, may
not be telling you the complete storey. Instead, consider your liquidity ratio as part of a larger
trend. If a company's liquidity ratio is unusually fluctuating, it may suggest that the company
faces operational risk and is facing financial instability.