Trend Analysis helps to analyze the percentage change in the financial performance of a company over two or more years, compared to the base year. In the article, we will learn about trend analysis of income statement with two examples.
Firstly, trend analysis requires two or more years of data. Secondly, the earliest years are the base years which are always 100%. Lastly, the representation is always in percentage.
In Trend Analysis of Income Statements, one does not compare the financial performance of two years. One just evaluates the growth of each component of the income statement over a given period, which is two or more years with the base year.
Further, the formula for Trend Analysis= Each Year Amount/Base Year Amount*100.
Vertical Income Statement (General Format)
The Vertical Income Statement starts with Gross Sales. If there are any sales returns, deduct them from sales to arrive at Net Sales.
Further, to calculate COGS (Cost of Goods Sold) = Trading Account Debit Side items + Factory Expenses Trading Account Credit Side items.
Then, Net Sales – COGS gives Gross Profit or Loss. Moreover, by deducting Operating Expenses (admin, sales, and finance) and adding Operating Incomes to Gross Profit, one arrives at Operating Profit or Loss. Operating Profit/Loss= Gross Profit/Loss – Operating Expenses + Operating Incomes.
Further, on deducting NonOperating Expenses and adding NonOperating Incomes to Operating Profit or Loss, one arrives at Net Profit Before Tax (NPBT). NPBT= Operating Profit/Loss – Non operating Expenses + Nonoperating Incomes.
Then, deduct tax provisions from NPBT to arrive at Net Profit After Tax (NPAT). NPAT= NPBT tax provisions. Moreover, any profit or balance of last year gets added or deducted to NPAT, known as adjusted NPAT.
Lastly, deduct appropriations from NPAT to arrive at Retained Earnings.
Retained Earnings= NPAT/Adjusted NPAT – Appropriations.
Example 1: Trend Analysis of Income Statement
Particulars  2021  2020  2019  2018 
Sales  9,20,000  6,50,000  4,40,000  6,00,000 
Cost of sales  3,50,000  3,15,000  2,55,500  ,75,000 
Office expenses  67,500  77,500  75,000  95,000 
Selling expense  1,02,000  91,000  64,000  60,000 
Finance expense  20,000  20,000  20,000  20,000 
Tax provision  79,500  51,325  63,050  51,000 
PARTICULARS 
YEARS 
TREND PERCENTAGES 

2018 
2019  2020  2021  2018  2019  2020 
2021 

Net Sales  6,00,000  4,40,000  6,50,000  9,20,000  100.00%  73.33%  108.33%  153.33% 
() Cost of Sales  2,75,000  2,55,500  3,15,000  3,50,000  100.00%  92.91%  114.55%  127.27% 
GROSS
PROFIT 
3,25,000  1,84,500  3,35,000  5,70,000  100.00%  56.77%  103.08%  175.38% 
() Operating
Expenses: 

Administrative
Expenses 
95,000  75,000  77,500  67,500  100.00%  78.95%  81.58%  71.05% 
Selling
Expenses 
60,000  64,000  91,000  1,02,000  100.00%  106.67%  151.67%  170.00% 
Finance
Expenses 
20,000  20,000  20,000  20,000  100.00%  100.00%  100.00%  100.00% 
1,75,000  1,59,000  1,88,500  1,89,500  100.00%  90.86%  107.71%  108.29%  
OPERATING PROFIT  1,50,000  25,500  1,46,500  3,80,500  100.00%  17.00%  97.67%  253.67% 
() Provision for Tax  51,000  63,050  51,325  79,500  100.00%  123.63%  100.64%  155.88% 
NET PROFIT AFTER TAX  99,000  37,550  95,175  3,01,000  100.00%  37.93%  96.14%  304.04% 
 Firstly, the earliest year is 2018. Hence, it is the base year. Every component of 2018 has a trend percentage of 100.
 For example, if one wants to know the gross profit for 2020. The gross profit for 2018 (base year) is ₹3,25,000 and ₹3,35,000. Then, the trend growth= 3,35,000/3,25,000*100. Hence, the trend percentage is 103.38%.
 For trend analysis of the income statement, the same formula and method are applicable for all the components of the income statement.
 Another example is to check the trend growth of NPAT for 2019. The Net Profit for the base year is ₹ 99,000 and the operating loss is ₹ 37,550. Since there is a loss, the trend growth also reverses and become negative. The formula remains the same= 99,000/37,550*100. Hence, the trend percentage is 37.93%.
Example 1: Conclusion
For the above trend analysis of the income statement, we can conclude that:
 Firstly, Net Sales show a mixed trend. In 2019, it falls marginally but it increases in 2020 and 2021, compared to the base year.
 Secondly, the Cost of Sales also shows a mixed trend like net sales.
 Similarly, Gross Profit also shows a mixed trend as it depends on sales.
 Moreover, Net Profit After Tax becomes negative in 2019 due to less operating profits and more tax provision. But it increases drastically in 2021.
 Lastly, operating profits also has a mixed pattern, if decreased drastically in 2019 but again increases tremendously in 2021.
Example 2: Trend Analysis of Income Statement
Particulars  2011  2012  2013  2014 
Sales  50,000  62,000  70,000  86,500 
Cost of Sales  32,000  35,000  47,000  56,000 
Administrative Expenses  35,000  35,000  40,000  50,000 
Sales Expenses  50,000  60,000  72,500  90,000 
Finance Expenses  20,000  30,000  60,000  70,000 
Income tax  8,000  10,000  15,000  20,000 
PARTICULARS  YEARS  TREND PERCENTAGES  
2011  2012  2013  2014  2011  2012  2013  2014  
Net Sales  50,000  62,000  70,000  86,500  100.00%  124.00%  140.00%  173.00% 
() Cost of Sales  32,000  35,000  47,000  56,000  100.00%  109.38%  146.88%  175.00% 
GROSS PROFIT/ (GROSS LOSS)  18,000  27,000  23,000  30,500  100.00%  150.00%  127.78%  169.44% 
() Operating Expenses:  
Administrative Expenses  35,000  35,000  40,000  50,000  100.00%  100.00%  114.29%  142.86% 
Selling & Distribution Expenses  50,000  60,000  72,500  90,000  100.00%  120.00%  145.00%  180.00% 
Finance Expenses  20,000  30,000  60,000  70,000  100.00%  150.00%  300.00%  350.00% 
1,05,000  1,25,000  1,72,500  2,10,000  100.00%  119.05%  164.29%  200.00%  
OPERATING LOSS  87,000  98,000  1,49,500  1,79,500  100.00%  112.64%  171.84%  206.32% 
() Provision for Tax  8,000  10,000  15,000  20,000  100.00%  125.00%  187.50%  250.00% 
NET LOSS AFTER TAX  95,000  1,08,000  1,64,500  1,99,500  100.00%  113.68%  173.16%  210.00% 
 Firstly, the earliest year is 2011. Hence, it is the base year. Every component of 2011 has a trend percentage of 100.
 Secondly, in the above example, there is operating a net loss for all the years. In such a case, the base year is also negative. Hence, we ignore the negative sign when there is a loss in the base year as well as in all the following years. It depicts that the net loss is widening year after year.
 Therefore, a trend percentage less than 100 indicates a decrease when compared to the base year. Similarly, a trend percentage of more than 100 indicates an increase when compared to the base year.
 Lastly, negative trend percentages depict negative numbers/losses.
Example 2: Conclusion
 Firstly, Net Sales is showing an increasing trend.
 Secondly, the Cost of Sales also shows an increasing trend.
 Similarly, Gross Profit also shows an increasing trend as it is dependent on net sales.
 Moreover, Operating and Net Loss, due to a large number of operating expenses, are showing an increasing trend.