IMPORTANCE AND LIMITATIONS OF TREND ANALYSIS IN HINDI

22, Jan, 2023 0 Comments

IMPORTANCE AND LIMITATIONS OF TREND ANALYSIS IN HINDI

Explain importance and limitations of Trend Analysis

IMPORTANCE OF TREND ANALYSIS

Trend analysis occupies an important place in the financial analysis of the financial statements due to the following merits:

1. Comparative Study: The trend analysis is of immense help in comparative study of different variables of the financial statements for several years. Such analysis is very significant from the point of view of forecasting and budget.

2. Brevity and Readability: The method of trend analysis is useful for the management and also the common man since by substitution of percentage for large amounts the brevity and readability are achieved.

3. Direction of Changes: The trends clearly reflect the increase or decrease in the various facts of business from the past to the present or from the year to year. The direction of change can be even more clearly represented by graphs and diagrams, where the change can be noted even with glimpse.

4. Easy to Understand and easy to Calculate: The method of analysis and the results obtained can be easily understood by common man. Moreover, the calculations are not complex as trend percentage or ratios can be easily calculated by dividing the current years figure by the base years figure and multiplied by 100. This is a method which is most appropriate in calculating various index numbers.

5. Less Chances of Errors: There is less chances of errors under this method, because results obtained by percentage changes of data can be compared with absolute changes.

LIMITATIONS OF TRENDS ANALYSIS

While analysing the financial statements through trend percentages and trend ratios, the following limitations must be taken into consideration:

1. No Significance of Single Percentage or Ratio: The trend ratio or percentage of a single item has no significance in itself. We can arrive at some meaningful and useful conclusion only when the trend of one item is compared with the trend ratio of other related item. To illustrate an increasing trend in the value of stock is meaning-less unless it is compared with a trend in sales. Then it will show the favourable or unfavourable position. Similarly an upward trend in stock, bills receivable and sundry debtors compiled with downward trend in sales would usually reflect unfavourable situation. Thus, it is essential that ratios of logically related items should also be calculated and put side by side for easy comparison and for drawing some conclusions.

2. Illogical and Misleading Conclusions: The inferences drawn on the basis of simply trend ratios, without keeping in view the original absolute figures may be sometimes illogical and misleading. Hence, it is essential to study the original data along with trend ratios. For example, one expense may increase from Rs. 400 to Rs. 800 while the other expense may increase from Rs. 8.000 to 12.000. In the first case though the increase is 100% yet it is insignificant, yet in the second though the increase is 50% yet it is significant in real terms. Similarly unnecessary doubts may raise when the trend percentages show 100% increase in debt while only 50% increase in equity. This doubt can be removed when actual figures are also studied along with trend ratios.

3. Unscientific and Inconsistent : The comparison of trend ratio may be unscientific and if principles and practices followed were not kept uniform and consistent throughout the period of analysis. Hence it is necessary that the accounting policies and practices are not changed throughout the period. Then and then comparison can be realistic.

4. Undue Weightage: it may happen undue weightage is assigned to trend ratios. It is possible when the value in the base year is too small. A small change in the base year’s value will lead to more change in trend percentages. For example, once a news appeared in a daily newspaper that 33% of the lady lecturers of a college married 100% male lecturers of that college. The news was astonishing, but when the actual figures were looked into the actual position became evident. There were 6 lady lecturers and 2 male lecturers in that college. Hence it is always desirable to have information about relative and absolute figures.

5. Defective Selection of Base Year: The base year should be normal and be representative of the items shown in the balance sheet. If the base year is an abnormal year such year of war or of natural calamities, the comparison with such a year will be misleading and farce.

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IMPORTANCE AND LIMITATIONS OF TREND ANALYSIS IN HINDI

IMPORTANCE OF TREND ANALYSIS

LIMITATIONS OF TRENDS ANALYSIS

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