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ACCA Applied Knowledge · Financial Accounting · Importance and purpose of analysis of financial statements

Kestrel Co's gross profit margin was 30% in the prior year and 25% in the current year. Which of the following bases of comparison is being used?

The comparison uses the entity's own results over time, known as trend analysis. Kestrel's current-year margin of 25% is set against its own prior-year margin of 30%. No budget, competitor or industry average is involved in the comparison.

  1. AComparison with another company in the same industry
  2. BComparison with the entity's own results over time (trend analysis)Correct
  3. CComparison with a budget set by management
  4. DComparison with an industry-wide average published by a trade body

Explanation

Comparing this year's margin with the same entity's margin last year is time-series (trend) analysis. No budget, competitor or industry data is mentioned, so the other bases do not apply.

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