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CMA Intermediate · Financial Management and Business Data Analytics · Comparative, Common-Size Financial Statements and Trend Analysis

Which is a recognised limitation of trend analysis using index numbers with a fixed base year?

An abnormal base year distorts every later trend percentage. Since each index is calculated relative to the base-year figure, an unusually low or high base exaggerates or hides real growth, which is a key limitation of trend analysis.

  1. AIt cannot be applied to more than two years of data
  2. BA distorted or abnormal base year makes all later trend percentages misleadingCorrect
  3. CIt always requires common-size statements to be prepared first
  4. DIt converts every item to a percentage of total assets

Explanation

Trend percentages are all measured against the base year, so an unusually high or low base gives misleading indices. Trend analysis works for many years and does not need common-size statements. Expressing items as a percentage of total assets is common-size analysis, not trend analysis.

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