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

Which of the following best describes trend analysis (horizontal analysis) of a company's financial statements?

Trend analysis compares the same items over several reporting periods to show the direction and rate of change. It is different from common-size analysis, which expresses items as a percentage of a total within one year, and from inter-firm comparison with competitors.

  1. AComparing each item in the statement of financial position with total assets for the same year
  2. BComparing the same items across several reporting periods to identify the direction and rate of changeCorrect
  3. CComparing the company's ratios with those of a competitor in the same year
  4. DComparing actual results with the budget for the period

Explanation

Trend (horizontal) analysis looks at the same line items over several periods to show how they are changing. Comparing items with a total in one year is vertical (common-size) analysis. Comparing with a competitor is inter-firm comparison, and comparing with budget is variance analysis.

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