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Explain the Usefulness of Trend Percentages in Interpretation of Financial Performance of a Company. - Accountancy

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Answer in Brief

Explain the usefulness of trend percentages in interpretation of financial performance of a company.

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Solution

The Trend Analysis presents each financial item in percentage terms for each year. These Trend Analyses not only help the accounting users to assess the financial performance of the business but also assist them to form an opinion about various tendencies and predict the future trend of the business.

Usefulness and Importance of Trend Analysis

The following are the various importance of Trend Analysis:

1. Assists in forecasting

The trends provided by Trend Analysis help the accounting users to forecast the future trend of the business.

2. Percentage Terms

The trends are expressed in percentage terms. Analysing the percentage figures is easy and also less time consuming.

3. User Friendly

As the trends are expressed in percentage figures, so it is the most popular financial analysis to analyse the financial performance and operational efficiency of the company. In other words, one need not to have an in-depth and sophisticated knowledge of accounting in order to analyse these percentage trends.

4. Presents a Broader Picture

The trend analysis presents a broader picture about the financial performance, viability and operational efficiency of a business. Generally, companies prefer to present their financial data for a period of 5 or 10 years in forms of percentage trends, whereas the other techniques of Financial Analysis lack this popularity.

Concept: Tools of Analysis of Financial Statements
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APPEARS IN

NCERT Class 12 Accountancy - Company Accounts and Analysis of Financial Statements
Chapter 4 Analysis of Financial Statements
Long Answer Questions | Q 2 | Page 184
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