Trend analysis and basic assumptions
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Trend analysis is a form of technical analysis that forecasts stock movements based on historical data, relying on the assumption that past trends predict future outcomes. It is straightforward to calculate and interpret, yielding insights into potential audit investigations, yet it has limitations such as reliance on base year selection and accounting consistency. The analysis requires adjusting for price level changes and should be studied alongside absolute figures for meaningful insights.
Trend analysis and basic assumptions
- 2. DEFINITION: An aspect if technical analysis that tries to predict the future movement of a stock based on past data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future.
- 3. When one wants to use historical data to predict future. When one wants to compare the current values with the past values.
- 4. Trend shows the direction of the change. Trend are easy to calculate, interpret and understand. It is a quick method of analysis. It is more accurate. It reveals potentially fruitful areas of audit investigation. It is being readily accepted due to its widespread use.
- 5. Choice of base year. No. of years. Different accounting policies. It provides little insight into the root causes of variation. It is being heavily influenced by the choice of the base fiscal period.
- 6. It is calculated in percentage. Draw the format. Assign the particulars and amount respectively. Take 100% in base years % column. To find out the further years % value. Then apply the formula: current year X 100 Base year
- 7. The base year selected should be normal and be truly representative of all years involved in the analysis. The financial statements used for the analysis must have been prepared applying consistent accounting principles and practices.
- 8. The figures of the various accounting statements considered for the analysis should be adjusted for any price level changes, as compared in base year, before computing trend percentages. Trend percentages should be studied along with the absolute figures on which they are based. This will enable us to know whether the change is significant or not.