Financial statement trend analysis is a business practice that helps a company's senior leadership gauge fluctuations in corporate operating data. It also indicates changes in the firm's financial position as well as variations in operating, investing and financing cash flows. A corporate accountant can perform financial statement trend analysis on a random basis or at a given point in time.
A financial statement is an accounting summary that helps an organization's department heads and senior leaders report operating data during a period or at the end of a quarter or year. A corporate accounting manager typically records operating information in ledgers (accounting records) via journal entries, or debits and credits into accounts. He performs financial statement trend analysis to gauge changes in a corporation's profitability measures, including profit margin (net income over sales), and its economic standing.
United States generally accepted accounting principles, or GAAP, and international financial reporting standards, or IFRS, require a firm to prepare and present financial statements that are fair and complete. Fair means accurate in accounting terminology. A complete set of accounting reports includes balance sheet (or statement of financial position), statement of profit and loss (or P&L, also known as statement of income), statement of cash flows and statement of retained earnings (also referred to as statement of equity).
Financial statement trend analysis, or financial analysis, helps an organization's accounting director review operating data for a period and detect changes in business performance. For example, a senior risk manager at an insurance company can review the firm's balance sheet to evaluate short-term cash availability and current assets such as accounts receivable, inventories and trading securities. Alternatively, she may evaluate sales revenue trends in the statement of profit and loss and compute the company's profit margin over a 10-month period.
Vertical analysis is a type of financial statement trend analysis. In vertical analysis, a corporate finance specialist calculates each accounting item as a percentage of a reference item. For instance, a corporate finance manager wants to perform vertical analysis on a firm's income statement. The reference item, or total, is the gross sales revenue. Vertical analysis may show that cost of goods sold and expenses for salaries are 40 percent and 10 percent of gross sales, respectively.
Horizontal analysis is another type of financial statement trend analysis. In horizontal analysis, a management accounting analyst compares current and historical operating data to evaluate periodic fluctuations. As an example, a management accounting specialist wants to perform horizontal analysis on a company's balance sheet. This analysis may indicate that the accounts receivable and inventory accounts have increased since the previous year by 12 percent and 22 percent, respectively.