Financial Reporting and Ethics - The Institute of Chartered ...

FINANCIAL REPORTING AND ETHICS4.8.2 Trend AnalysisAnalysis of financial statements can be enhanced further by the use oftrend analysis. This can be in respect of the absolute figures of key itemsof the balance sheet and income statement (such as the type shown inthe five year financial summary) or of the relevant ratios calculated. Atrend analysis or time series is a display of key figures for a period ofyears, usually between five and ten years, for the purpose of showingthe direction of changes in these figures. This is with a view to allowingthe analyst to appreciate the overall strength or weakness of the firm.The trend analysis of key ratios can be prepared for examination purposesto the extent that information is available for such computations. It isalso possible to have trend percentages for profit and loss account andbalance sheet items. This involves assigning 100% to the items of thebase year and calculating percentage changes in each of the items ofthe other years in relation to the base year.Trend analysis can be used as a basis for future forecasting in respectof a firm addition to usings it for interpretation of financial statements.It becomes essential to ensure that the underlying information used forthe analysis is free of all sorts of biases. Its measurement should be ona consistent basis.There is, therefore, the need to look out for the possible effects of changesin accounting policies during the year(s) under review and the impactof inflation on the trend. The latter is particularly important in respectof sales because it is only when the sales figure have been adjusted bya suitable index of general prices that the true trend of growth in salescan be deduced.It should be noted that CAMA 2004 (as amended) provides that eachcompany should include in its financial statements:(a) Five-Year financial summary(Section 334(2)); and(b) Corresponding figures for the immediately preceding year(Schedule 2, Section 9(1)).The above two requirements are examples of provisions made by thelaw and many accounting standards to encourage trend analysis. Theyare equally required for group accounts.4.8.3 Inter-Firm AnalysisAfter the in-depth analysis of the financial statements of a firm (verticaland horizontal as well as the trend), it becomes necessary to know theposition of the firm among the various firms in its industry. Thisnecessitates an inter-firm analysis, which involves comparing the firm’sratios with those of its competitors or with the industry average.84