A balance sheet is a snapshot of a company’s financial position at a certain point in time. The accounts listed help determine if the company is facing any type of financial stress. When trend analysis is performed, a company is able to see if its financial position is improving or declining based on the percentage change in the balance sheet accounts. To determine the change, a company will look at the dollar amount of balance sheet accounts over 2 or more years.
Review all balance sheet accounts that will be used for trend analysis. Some of the more common accounts on a balance sheet are cash, accounts receivable, inventory, supplies, marketable securities and prepaid insurance. A balance sheet also consists of all the debts or liabilities a company owes. The balance sheet is completed by adding stockholder’s equity or owner’s equity to the equation. Owners' equity represents the investment in the business by the owners.
Determine the years in which the trend analysis will be performed. Take a look at each account and determine the percentage change. For example, if cash is $25,000 in year one and increases to $35,000 in year two, you can determine the percentage change.
Subtract the first year cash of $25,000 from $35,000 and divide the difference by $25,000, ($35,000 - $25,000/$25,000). This represents an increase in cash of $10,000 and a percentage increase of 40 percent from the initial year.
Trend analysis is useful because it helps management determine if certain items are impacting the organization in a negative way if they are consistently decreasing over time.
According to the website Cliffs Notes, the dollar amount for the initial year cannot be zero or a negative amount; if this is the case, the trend analysis will be useless or have no meaning.