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CS Executive · Corporate Accounting and Financial Management · Financial Statement Analysis

Which statement about the limitations of common size and trend analysis is correct?

Trend analysis is meaningful only if accounting policies and the grouping of items are consistent over the years compared. Otherwise the percentages reflect changes in method and not real performance. The base year choice also affects results, and common size works for both statements.

  1. ATrend percentages are unaffected by the choice of base year
  2. BCommon size statements show the absolute rupee change between two years
  3. CTrend analysis is meaningful only when accounting policies are consistent across the years comparedCorrect
  4. DCommon size analysis can be applied only to the balance sheet

Explanation

Changes in accounting policies or in the grouping of items make year-to-year percentages not comparable. The base year does affect trend percentages, common size shows proportions and not absolute change, and it is applied to both the balance sheet and the income statement.

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