Module 3

Problems:

TREND ANALYSIS
Sometimes, it becomes necessary to known the trend changes in the financial position of the concern.
When a concern needs to know the profitability trend of the organization only profit and loss account
independently may not serve the purpose. In such case, it is necessary to prepare a statement of the profit
or loss or Balance sheet for many years and taking any previous year as base the trend or changes in the
financial position can be prepared. When the financial statements of a number of years are analyzed, the
analysis is called trend analysis.
It is also called as horizontal analysis since it is prepared for many years taking any previous year as
base year.
In other words, horizontal analysis is a type of analysis in which there is comparison of the trend of
each item in the financial statements over a number of years.
In the horizontal analysis, the figures of the financial statements are analyzed horizontally. The trend
of each item in the financial statements is compared over a number of years.
Note: The current year’s figures are compared with the figures of the or base year and the
changes in each of the elements or items from the base year is computed. Such changes are
denoted in terms of percentage.
It enables to find out the growth or decline percentage or the pattern of changes that are taking place
in an organization. It enables managers to take necessary measures to curb the unhealthy trends in the
organizations. It is also useful to Investors, Bankers and Creditors to make effective financial decisions on
the company.

TREND ANALYSIS AS A TOOL OF DECISION-MAKING

Statement of trend analysis helps in many managerial decisions. It enables to find out the growth or
decline percentage or the pattern of changes that are taking place in an organization. It enables managers
to take necessary measures to curb the unhealthy trends in the organizations. It is also useful to investors,
Bankers and creditors to make effective financial decisions on the company. Its uses is outlined below:
(i) Sales trend in the organization can reflect on the efficiency of the sales department.
(ii) Sales trend enables management to take necessary steps wherever required to improve the overall
operational efficiency.
(iii) Trend on cost of operation facilitates to take decisions on cost control and improving profitability.
(iv) Trend in the profitability reflects the overall efficiency of the organization in utilizing its resources and
optimizing the return on investments.

Some useful information:

1. Revenue from operations: (Cash sales + Credit sales) – (Sales Return +Excise duty)
2. Other income: All income excluding sales
3. Total Revenue: (Revenue from operations + Other Incomes)
4. Expenses
 Changes in inventory = (opening stock – closing stock)
 Purchases (purchase for stock in trade.
 Inventory of finished goods = WIP = Stock in trade
 Employees Benefit expenses = ( Salary/wages/ canteen/employee welfare, PF….)
 Finance Cost = Interest on borrowings
 Depreciation expenses = depreciation on fixed tangible assets
 Amortization expenses = Amortization on intangible assets
 Other Expenses = all revenue expenses & losses + (loss by theft/fire)
 Format of Comparative Income statement
1. Particulars 2. Base 3. Current 4. Base Current
year year year % Year %
amount Amount
I. Revenue/Income
from operations/
Sales
II. (Add)
Other Operating
Incomes
Dividends
Interest
(-) COGS
III. Total Revenue/
income (or) Gross
Profit
IV. (Less) Expenses
Operating &
Non Operating
Cost of Materials Consumed
Purchases of WIP
Changes in Inventory of
finished goods
WIP (Work in Progress) &
SIT (Stock in Trade)
Employees benefit expenses
Discount allowed
Finance costs
Salaries
Rent
Depreciation
Interest Paid
Amortisation Expenses
Selling Expenses
Other Expenses
Total
V. PBT (profit before
tax) (III – IV)
VI. (-) Tax
VII. Profit after tax
(PAT)
(V-VI)

NET PROFIT
 Calculation of COGS

Particulars Amount In Rupees

Base Year Current Year
Opening stock
(+) Purchases
(+) Wages
Total
(-) Closing stock
COGS

Net Profit Ratio :

 1. Prepare a Comparative Income Statement
Particulars 2020 2021
Sales 2150000 2500000
COGS 1300000 1450000
Operating Expenses
Administrative Expenses 210000 180000
Selling expenses 190000 250000
Non Operating expenses
Interest 140000 120000
Income Tax 170000 230000

2. Prepare a Comparative Income Statement

Year Net Sales COGS Operating Non Non Taxes
expenses Operating Operating
Expenses Incomes
2020 185400 78560 36450 12500 24000 12400
2021 194840 82640 38210 13800 32000 16500

Problem – 1

From the following data compute trend percentages taking 2016 as base.
Year Sales (`) Closing Stock (`) Profit Before Tax (`)
2016 2,58,680 1,20,580 55,750
2017 3,53,460 1,25,760 63,520
2018 3,68,550 1,32,540 65,120
2019 4,12,430 1,34,780 72,460
2020 4,87,560 1,45,730 87,290

Problem – 2
From the following information, interpret the results of operations of manufacturing
concern, using trend ratios.
Details 2017 2018 2019 2020
Sales (Net) 100 90 120 150
Less: Cost of goods sold 60 60 70 80
Gross profit 40 30 50 70
Less: Operating expenses 10 10 15 20
Operating profit 30 20 35 50
Less: Taxes 15 10 17.5 25
Profit after tax 15 10 17.5 25
Problem – 3
From the following information, compute trend ratios use 2017 as base amount in lakhs of
Rupees for the year ended.
Particulars 2017 2018 2019 2020
` ` ` `
Net sales 200 190 240 260
Cost of goods sold 120 117.8 139.2 145.6
Gross profit 80 72.2 100.8 114.4
Operating expenses 20 19.4 22 24
Net operating profit 60 52.8 78.8 90.4

Problem – 4
Following is the details of RGS Ltd. as on and 2018, 2019 and 2020. You are required to
prepare the Comparative income statement showing the trend of the financial position.
Particulars 2018 2019 2020
Sales 1,00,000 2,25,000 2,75,000
Less: Cost of Goods sold 75,000 1,50,000 1,50,000
Gross Profit 25,000 75,000 1,25,000
Less: Operating Expenses
Office expenses 5,000 27,500 35,000
Selling expenses 2,500 15,000 22,500
Distribution expenses 1,000 2,500 3,000
Less: Non-Operating Expenses
Interest on Debentures 3,000 7,000 15,000
Interest on loans 7,500 10,000 25,000
Net profits 6,000 13,000 24,500
Problem – 5
Following is the details of Hidalgos Ltd. as on 31-3-2018, 31-3-2019 and 31-3-2020. You
are required to prepare the Comparative Balance sheet showing the trend of the financial
position.
Particulars 31/03/2018 31/03/2019 31/03/2020
Share capital 15,00,000 18,00,000 20,00,000
Reserves and Surplus 1,50,000 3,00,000 1,75,000
8% Debentures 45,000 90,000 40,000
Long term Bank Borrowings 2,00,000 2,50,000 2,00,000
Creditors 1,25,000 1,50,000 10,000
Bills Payable 45,000 60,000 5,000
Bank Overdraft 12,500 15,000 2,500
Total Liabilities 20,77,500 26,65,000 24,32,500
Fixed Assets
Building 14,50,000 17,50,000 21,75,000
Furniture 2,00,000 4,40,000 40,000
Current Assets
Stock 1,00,000 1,85,000
1,10,000 Debtors 1,45,000 1,70,000
1,05,000 Cash 1,82,500
1,20,000 2,500 Total Assets
20,77,500 26,65,000 24,32,500
Problem – 6
Prepare comparative income statement with the help of the following information.
Details 2019 2020
Sales ` 10,00,000 ` 16,00,000
Cost of goods sold 75% of sale 80% of sales
Indirect expenses 40% of gross profit 30% of gross profit
Income tax 55% of profit before tax 50% of profit before tax

Problem – 7
The information given below was taken from the financial statements of Shakthi Corporation.
During 2020, the corporation has made the purchases from a new supplier,
Particulars 2019 (`) 2020 (`)
Gross profit on sales 1,50,000 2,40,000
Net income as a percentage on sales 10% 5%
Net income 60,000 40,000
Operating expenses 90,000 2,00,000
You are required to prepare a condensed comparative income statement showing as many details
as possible and point out the favorable and unfavorable trends.

Problem – 8
From the following profit and loss A/c for the years ended 31.12.2019 and 31.12.2020.
Prepare a comparative income statements:
Particulars 2019 2020 Particulars 2019 2020
To Cost of goods sold 72,000 78,000 By Sales 1,00,000 1,30,000
To Depreciation 5,000 6,000 By Dividend 20,000 10,000
To Selling and By Interest on
Distribution exp. 8,000 12,000 investments 10,000 -
To Interest on debt 15,000 14,000
To Provision for
taxation 15,000 15,000
To Net profit 15,000 15,000
1,30,000 1,40,000 1,30,000 1,40,000

Problem – 9
Prepare a Comparative Income Statement from the following:
Particulars As at 31-3-2019 As at 31-3-2020
` `
Sales 21,50,000 25,00,000
Cost of goods sold 13,00,000 14,50,000
Operating Expenses:
Administrative Expenses 2,10,000 1,80,000
Selling Expenses 1,90,000 2,50,000
Non-operating Expenses:
Interest 1,40,000 1,20,000
Income Tax 1,70,000 2,30,000
Problem – 10
From the following data prepare Comparative Income Statement and submit a report to the
General Manager, NSK Ltd., on your findings and suggestions.
Year Net Sales Cost of Goods Operating Non-Operating Non Taxes
(`) Sold (`) Expenses Expenses Operating (`)
(`) (`) Income (`)
2019 1,85,400 78,560 36,450 12,500 24,000 12,400
2020 1,94,840 82,640 38,210 13,800 32,000 16,500
Problem – 11
Following are income statements of Star Ltd. Mumbai for the years 2019-20. Prepare
comparative income statement and comment on the profitability of the company.
Trading and Profit & Loss Account
Particulars 31.3.19 31.3.20 Particulars 31.3.19 31.3.20
To Opening stock 85,000 2,00,000 By Sales 10,00,000 12,00,000
To Purchases 5,00,000 5,50,000 By Closing stock 2,00,000 2,25,000
To Wages 60,000 80,000 By Income from 12,000 15,000
To Salaries 42,000 64,000 investment
To Rent & taxes 35,000 40,000 By dividend received5,000 7,500
To Depreciation 40,000 60,000
To Selling expenses 12,000 12,000
To Discount allowed 5,000 7,000
To loss on sale of plant - 8,000
To Interest paid 12,000 14,000
To Net Profit 4,26,000 4,12,500
12,17,000 14,47,500 12,17,000 14,47,500
Common Size Balance sheet
Balance sheet as on
Particulars Absolute Amounts Percentage of balance sheet
total
Previous/base Current year Previous/base Current year
year amount year % %
I. Equity and Liability
1. Share holders’ funds
a) Share capital
b) Equity Share Capital
c) Preference Share
d) P/L A/c
e) Reserves and
Surplus
2. Non Current Liabilities
a) Long term Borrowings
b) Long term Provisions
3. Current Liabilities
a) Short-term borrowings
b) Trade payables
c) Creditors
d) Othercurrent liabilities
e) Short term provisions
f) Bank OD
TOTAL
II. Assets
1. Non-current Assets
a) Fixed assets
(tangible assets)
(intangible assets)
Building
Furniture
Machinery
b) Non-current investments
c) Long term loans and
advances
2. Current assets
a) Current investments
b) Inventories (Stock)
c) Debtors
d) Trade receivables
e) Cash and cash
equivalents (Cash in
Bank)
f) Short term loan and
advances
g) Other current assets
TOTAL