Trend Percentages - Online Tutor, Practice Problems & Exam Prep

Trend percentages are a form of horizontal analysis that help track the growth or decline of specific accounts over time. To calculate the trend percentage, select a base year, typically the oldest year, and use the formula: $\frac{\mathrm{Year\text{'}s\; Amount}}{\mathrm{Base\; Year\text{'}s\; Amount}}100$. For example, if the income from operations in the base year is $842,000, the trend percentage for subsequent years can indicate growth or decline, providing valuable insights into financial performance.

Trend Percentages

Now, let's discuss another tool for financial analysis, trend percentages. Trend percentages are a similar form of horizontal analysis. It's going to show us trends in certain accounts, so it's going to help us note whether this account has been growing over the years, whether income has been growing or falling since our base year. Okay, so what we're going to do is we're going to choose a base year, which is generally the oldest year that we're showing and then we're going to calculate our trend percentage just like we see here. We're going to take the year's amount that we're talking about and we'll divide it by the base year's amount and we'll multiply it by a 100 to make it into a percentage. Okay? So the easiest way to see this is through an example. So let's go ahead and do this example right here.

So, we're going to compute the trend percentages for income from operations and if they don't give you a base year, you can assume that the oldest year is the base year. Okay? Let's go ahead and calculate our trend percentages. So what we're going to do is we're going to take that year's amount, so in this case, it's the oldest year and the trend percentage is always going to be a 100% in the base year times a 100. So 842 divided by 842 is obviously 1 times a 100 is a 100%, right? It's going to be a 100% in the base year.

Now let's move on to 2015, the next year. So in this year, we need to take that year's amount which is 1,129,000 and divide it by the base year of 842,000 and then we multiply it by a 100 to turn it into a percentage, so 1,129,000842,000 and then we multiply by a 100, this comes out to, we'll just round it to the nearest percent, it's going to be a 134%, right? This tells us that our income from operations in 2015 was a 134% of what it was in 2014. Cool? So, this shows the trend of growth since that year.

Let's go on to the next one. So in 2016, same thing. We take that year's number, 1,406 and divide it by the base year, 842,000. We multiply by a 100 to get to our percentage, so 1,406842,000 comes out to, a 167% will round it to the nearest percentage there. A 167%. So that's a 167% of our base year.

Let's go on to 2017. Now we're at 862,000 divided by our base year of 842,000. So notice our denominator always stays the same and we multiply by a 100. This is pretty easy, right? 862842 times a 100, so this one comes out to a 102%. So notice, these trends kind of give us some information. It shows that we were growing and growing and then it started decreasing again, right? We were growing in 2015, 2016, and now we've had a sharp decrease in 2017 and now look what happens in 2018. We had 676,000 divided by our base year of 842,000, so clearly this is going to be under a 100 because we have less income than our base year. So 676,000842,000 times a 100, so that comes out to approximately 80%. So notice our income in 2018 has dropped, so this shows us the trend of our income from operations over the years. That's why these are called trend percentages. So, the calculation isn't that tough. Why don't you guys try practicing down below?

Show the trend percentages for Sales and Net Income. Use 2015 as the base year:

Alright, so let's practice here our trend percentages. So we're going to do sales and net income, and we're going to use 2015 as the base year. Okay? So our base year is always going to be 2015 in both cases, but let's go ahead and just do sales first. Let's do all of the answers for sales. And in the base year, it's always going to be 100%, because we're going to take that year's amount divided by the base year's amount which is the same number times 100. So we're going to get 100% in the base year, right? That should make sense. Now, let’s go on to the next year, 2016. So our numerator is going to be that year's number 8790 divided by our base year of 8410 and we multiply by 100. So 8790 ÷ 8410 × 100, so that comes out to we'll say well, I'll put a decimal here since it's right in the middle, 104.5%. Okay. Let's go on to the next one, 9260 ÷ 8410 × 100. Nothing too crazy here. There's not really a trick to this as long as you remember what you have to do, you should get this right. So this one's approximately 110%, 110.1% and then finally, 9960 ÷ 8410 × 100. So that comes out to 118.4%. So what does this tell us? Look at this trend. Our sales have been increasing year over year, right? We see this increasing trend, from our base year. So now let's do the same thing with net income right here. We're going to do the same thing, but we have our base now is 4.32. So what do you think is going to be our trend percentage in the base year? It's going to be 100%, right? 432 ÷ 432 × 100, it always comes out to 100%. So let's keep going here. 480 ÷ 432 × 100, get my calculator back out, 480 ÷ 432 × 100, that comes out to 111.1%. Cool. Let's keep going. 500 ÷ 432 × 100 and that comes out to 115.7% and finally, the last one, 670 ÷ 432 × 100. Alright? So you guys should definitely have your trend percentages down by now. It's just going to be 155.1% here. So again, we've seen trending increases in our net income. And something that's beneficial to note here as well, notice that our net income has been trending up but it's trending up even faster than our sales. So that means we're doing other efficiencies. Maybe our costs are also decreasing. Not only are our sales increasing, but our costs are decreasing to increase our trend in our net income. Cool? Alright. So let's go ahead and move on to the next one.

Here’s what students ask on this topic:

What are trend percentages in financial analysis?

Trend percentages are a form of horizontal analysis used in financial accounting to track the growth or decline of specific accounts over time. By selecting a base year, typically the oldest year, and using the formula $\frac{\mathrm{Year\text{'}s\; Amount}}{\mathrm{Base\; Year\text{'}s\; Amount}}\; 100$, you can calculate the trend percentage. This helps in understanding how an account, such as income from operations, has changed over the years, providing valuable insights into financial performance.

How do you calculate trend percentages?

To calculate trend percentages, follow these steps: 1) Choose a base year, usually the oldest year in your data set. 2) Use the formula $\frac{\mathrm{Year\text{'}s\; Amount}}{\mathrm{Base\; Year\text{'}s\; Amount}}\; 100$. For example, if the income from operations in the base year is $842,000, and in the next year it is $1,129,000, the trend percentage would be $\frac{\mathrm{1,129,000}}{\mathrm{842,000}}\; 100$ = 134%. This indicates that the income from operations has grown by 34% compared to the base year.

Why are trend percentages important in financial analysis?

Trend percentages are important in financial analysis because they provide a clear picture of how specific accounts have changed over time. By comparing each year's amount to a base year, you can easily identify trends in growth or decline. This information is crucial for making informed business decisions, assessing financial health, and planning for the future. For example, if a company's income from operations shows a consistent upward trend, it indicates strong financial performance, whereas a downward trend may signal potential issues that need to be addressed.

Can you provide an example of calculating trend percentages?

Sure! Let's calculate the trend percentages for income from operations over five years, with 2014 as the base year. If the income from operations is $842,000 in 2014, $1,129,000 in 2015, $1,406,000 in 2016, $862,000 in 2017, and $676,000 in 2018, the trend percentages are calculated as follows: 2014: $\frac{\mathrm{842,000}}{\mathrm{842,000}}\; 100$ = 100%, 2015: $\frac{\mathrm{1,129,000}}{\mathrm{842,000}}\; 100$ = 134%, 2016: $\frac{\mathrm{1,406,000}}{\mathrm{842,000}}\; 100$ = 167%, 2017: $\frac{\mathrm{862,000}}{\mathrm{842,000}}\; 100$ = 102%, 2018: $\frac{\mathrm{676,000}}{\mathrm{842,000}}\; 100$ = 80%. These percentages show the trend of income from operations over the years.

What is the base year in trend percentage analysis?

The base year in trend percentage analysis is typically the oldest year in the data set being analyzed. It serves as the reference point for calculating trend percentages. By comparing each subsequent year's amount to the base year's amount using the formula $\frac{\mathrm{Year\text{'}s\; Amount}}{\mathrm{Base\; Year\text{'}s\; Amount}}\; 100$, you can determine the growth or decline of specific accounts over time. The base year's trend percentage is always 100%, as it is the point of comparison for all other years.