What is Trend Analysis in Accounting?

When used strategically and internally, trend analysis can be one of the most useful management tools available for your business.

Wondering how exactly it might be used to benefit your business? Here are just a few examples:

• Examine revenue patterns to see if sales are declining for certain products, customers, or sales regions.
• For budgeting purposes expand revenue and expense line items into items for an effective estimation of results.
• Study expense line items to identify any possible unusual expenditures in reporting periods that might need additional investigation.

Before turning into specificities, let’s review some of the basic definitions and concepts regarding trend analysis, to better understand its essence and its further importance for your business.

What is trend analysis:

To put it short, trend analysis can be defined as the collection of information from multiple time periods for further review due to the plotting of that information on a horizontal line. The primary goal of this analysis is to identify actionable patterns in the presented information.

In various businesses trend analysis is primarily used in two ways:

• Revenue and cost analysis.
• Investment analysis.

Keep in mind that you can find useful AI audit software that is specifically designed to make the process easier and more detailed for you.

Revenue and cost analysis:

Cost and revenue information of a company’s income statement can be ordered on a trend line for various reporting periods, that will help to analyse trends and inconsistencies.

Let’s take an example. A drastic change in expense from one period followed by a noticeable decline in the next period might be an indicator that an expense was booked twice in the first month.

Hence, trend analysis is really useful for examining preliminary financial statements for inaccuracies, that will help to make required adjustments before the statements are available for general use.

Investment analysis:

Typically, in case of investment analysis, an investor can create a trend line of historical share prices, to be able to use the information for future predictions on changes in the price of a stock.

For such a scenario, the trend line can be as well related to other information for which a cause and effect chain might exist to identify if the causal relationship might be used in a prediction of future stock prices.

The primary logic of this analysis is that the use of a trend can make it more likely to generate profits for an investor. Keep in mind, that trend analysis can also be used for the entire stock market for effective discovery of impending changes in the general market.

Strategies

There are many trend analysis strategies available that can help extract profit from trends depending on various indicators. Let’s review some of them.

Moving Averages: In the case of using moving average strategy, typically long term positions are involved when a short-term moving average crosses above a long-term moving average, as well as when a short-term moving average crosses below a long-term moving average.

Momentum Indicators: These strategies involve entering into long positions when a security is trending with strong momentum. It also includes entering exiting long positions when security loses momentum. Usually, with these strategies, the relative strength index (RSI) is highly used.

Trendlines & Chart Patterns: In case of such strategies entering long positions when a security is trending higher and placing a stop-loss below key trendline support levels is highly present. In this strategy, if the stock starts to reverse, it means the position is excited for a profit.

Concluding Thoughts:

In short, trend analysis is based on the concept that whatever happened in the past gives us an idea of what will happen in the future. It’s an important part of your business strategy, that can help to make effective and intelligent decisions.