In: Accounting
Minor Project – Trend Analysis: Students will perform a financial trend analysis that is due in Week 5: For the Minor Project, each student will need to work on this independently and submit their work. Students should begin this project staring in Week 1.
1a)
Trend analysis is an analysis of the trend of the company by comparing its financial statements to analyze the trend of market or analysis of the future on the basis of results of past performance and it’s an attempt to make the best decisions on the basis of results of the analysis done.
Trend analysis involves collecting the information from multiple time periods and plotting the collected information on the horizontal line with the objective to find actionable patterns from the given information. In Finance, Trend Analysis is used for Technical analysis and Accounting analysis of stocks.
Stock chart is used to identify the current trend. A trend reflects the aver- age rate of change in a stock's price over time. Trends exist in all time frames and all markets. Day traders can establish the trend of their stocks to within minutes. Long term investors watch trends that persist for many years. A trend represents a consistent change in prices (i.e., a change in investor expectations). Prices can be rising, falling or moving sideways and give rise to three types of trend uptrend, downtrend and flat or neutral trend. in an uptrend, a stock rallies often with intermediate periods of consolida- tion or movement against the trend. In doing so, it draws a series of igher highs and higher lows on the stock chart. In an uptrend, there will De a positive rate of price change over time.
In a downtrend, a stock declines often with intermediate periods of consolidation or movements against the trend.in doing so,it draws a series of lower hights and lower lows on the stock chart.in downtrend,there will be a negative rate of price change over time.
On the other hand, in a flat or neutral or sideways trend,swings back and forth for long periods between easily seen upper and lower limits.There is no apparent direction to the price movement on the stock chart and there will be little or no rate price change.
A stock in an uptrend will continue to rise until some change in value or conditions occurs. Declining stocks will continue to fall until some chanes in value or conditions occurs. Chart renders try to locate TOPS and BOTTOMS, which are those points where a rally or a decline ends. Taking a position near a top or a bottom can be very profitable.
Reactions
Prices move in a zig-zag fashion with any rise or fall interrupted by a coun- termove is known as a reaction. In an uptrend, the reaction is downwards while in a downtrend, the reaction is upwards. Zig-zag movement gives rise to a series of tops and bottoms or highs and lows. The relative position of successive hights and lows determine the trend at any given point of time.
Trend Reversal
The change in the direction of trend is known as trend reversal. A trend no matter how powerful is vulnerable to change. This change in the direction of the trend from up to down or from down to up is called trend reversal. Often, after a large rise or fall, prices move sideways and this is also known as consolidation. Usually, after such consolidation, the previous trend resumes. Uptrend is characterised by higher highs and higher lows. this were to reverse into a downtrend, one would notice the formation of lower highs and lower lows.
Trend Lines
Trends can be measured using trend lines. Trend lines are straight lines drawn by connecting either the highs or the lows. In an uptrend, two or more rising lows are connected to denote an uptrend line. In a downtrend, two or more falling highs are connected to denote a downtrend line, A horizontal or flat trend line is drawn by connecting either the highs or the lows. The importance of a trend line lies in its ability to indicate the possibility of a trend reversal. Reversal of uptrend is signalled by the price falling below the uptrend line and the reversal of downtrend indicated by the price rising above the downtrend line. Penetration of a trend line does not necessarily imply a trend reversal but may indicate just a temporary pause in the trend. No fixed rule to judge whether such penetration signals a pause or a reversal. However, impor- tant clues are often available. Steeper a trend line, greater is the possibil- ity of its penetration signaling just a pause and not a reversal. As to dura- tion, the longer a trend has been in force, the more powerful is the viola- tion of the trend line. Similarly, the more the number of times a trend line is touched by the price,the stronger the trend line and more powerful is its penetration.finally ,trend line penetration accompanied by rising volumes or breakout from a reversal pattern very often signals a trend reversal.
Sales and cost information of the organization’s profit and loss statement can be arranged on a horizontal line for multiple time periods and examined the trends and data inconsistencies. For instance, take the example of a sudden spike in the expenses in a particular quarter followed by a sharp decline in the next period, is an indicator of expenses was booked twice in the first quarter. Thus the trend analysis in accounting is important for examining the financial statements for inaccuracies, to see whether the adjustment of the certain heads should be done before the conclusion is drawn from the financial statements.
Trend Analysis in accounting compares the overall growth of key financial statement line item over the years from the base case.
For example, in the case of ACP Ltd, we assume that 2007 is the base case and analyze the performance in Sales and Net profit over the years.
For forecasting, estimated financial statements trend analysis is used for the head where no major changes have happened. For example, if employee expense is taken 18 % of the revenue and major changes have not done in the employees then for estimated financial statements employee expense can be taken as 18 %.
Internal use of the trend analysis in accounting (the revenue and cost analysis) is one of the most useful management tools for the forecasting.
The trend is a friend, is a well-known quote in trader’s fraternity. The trader makes a good profit by following the trend. Trend analysis is a not an easy task it required eyes on details and understanding of the market dynamics.
The trend analysis in accounting can be used by management or the analyst to forecast the future financial statement. Following blindly trend can turn out to be dangerous if a proper analysis of the past event is not done.
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