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Trend Analysis

hello and welcome to this video where we

will learn how to calculate the trend

percentages that we use as a form of

horizontal analysis we call that

horizontal means from side to side so

horizontal analysis looks at financial

data over two or more years comparing

similar items to see how they have

changed and what this might mean there

are two types of horizontal analysis in

another video we look at dollar and

percentage changes but a second form of

horizontal analysis is called trend

analysis which examines company trends

over a number of years we will practice

trend analysis in this video on your

screen you will see the data we will be

using for this exercise we have

comparative income statement numbers for

the last five years

notice that we have sales revenue and

cost of goods sold in this video we will

first calculate gross profit for each

year then compute the trend percentages

for the five years for all three

financial statement items finally we

will look at the numbers to see what

they tell us about the company so let's

get started

first how do we calculate gross profit

hopefully you remember that it is net

sales minus cost of goods sold here

we'll set up a simple formula and copy

it to all of the years for year five our

gross profit will be equal to the

450,000 minus the three hundred and

fifteen thousand or a hundred and thirty

five thousand is that good or bad

well given what we have to date it's

hard to tell let's see what happened to

gross profit over the last five years so

we're going to calculate the gross

profit over the last five years by doing

the same thing subtracting sales minus

cost of goods sold when we look at the

numbers we see that all those sales have

increased from two hundred and fifty

thousand to four hundred and fifty

thousand gross profit has only increased

by five thousand dollars it looks like

our cost of goods sold

has been going up faster than our sales

let's run some trend percentages to see

what they can tell us trend percentages

show how a number has changed from the

base year or the earliest year presented

in that case here in the our case here

it's going to be year one so for sales

revenue we will divide each number by

sales in year one or two hundred and

fifty thousand dollars so in year one

each of our numbers is going to be a

hundred percent because we're dividing

it by itself I'm going to make this an

absolute reference because then each

number will be divided by the 250,000 so

in the year - we're going to divide the

270,000 by the 250,000 year three again

divided by the 250 so we're going to

take the two hundred ninety five

thousand divided by the 250,000 so let's

drag this across and see what we have

okay so those are our trend percentages

so we can see we have a hundred and

eighty percent or our sales have gone up

eighty percent in year five over what

they were in year one

remember this is different from the

other kind of horizontal analysis where

we compare two years we're comparing

everything here back to year one okay so

I want to pause the video for a minute

and see if you can calculate the trend

percentages for cost of goods sold and

for gross profit remembering that

practice is always the best way to learn

okay so let's see what we have now

notice that any time a number is greater

than the base year the trend percentage

will be greater than a hundred percent

which is the case here since sales have

gone up each year so now let's take a

look at cost of goods sold each year we

will divide by the base year or one

hundred and twenty thousand dollars

again I'm gonna make the hundred and

twenty thousand in the denominator an

absolute reference because we're going

to divide each of these numbers each of

those gets divided back by one hundred

and twenty thousand okay so those are

the percentages that you should have had

it looks like our cost of goods sold has

been going up faster than our sales

which we suspected when we looked at the

numbers at the beginning

finally let's see what's happening to

gross profit okay so remember each

number will be a hundred percent in the

base year and now all of our gross

profit numbers are divided back by one

hundred and thirty thousand dollars

remember we said that anytime a number

is greater than the base year the trend

percentage will be greater than a

hundred percent well here we see what

happens when the number has decreased

from the base year will it be negative

nope it's not going to be negative it's

only going to be less than a hundred

percent as we see here in years two and

four in the end we note that for this

company though it has had good increases

in its sales the gross profit is almost

flat due to the increases in cost cost

of goods sold well that's about all we

have for this video on trend analysis I

hope you find it helpful in your studies