Trend Analysis Example

Horizontal Analysis (Trend Analysis) Horizontal analysis, also called trend analysis, is a technique for evaluating a series of financial statement data over a period of time. Its purpose is to determine the increase or decrease that has taken place. This change may be expressed as either an amount or a percentage. For example, Illustration 1 shows recent net sales figures of Macys Inc. If we assume that 2011 is the base year, we can measure all percentage increases or decreases from this base period amount as follows. Illustration 2 Change Since Base Period = Current Year Amount - Base Year Amount Base Year Amount For example, we can determine that net sales for Macys increased from 2011 to 2012 approximately 4.9% [($27,686 - $26,405) $26,405]. Similarly, we can determine that net sales increase from 2011 to 2013 approximately 5.8% [(27,931 26,405) $26,405]. Alternatively, we can express current year sales as a percentage of the base period. We do this by dividing the current year amount by the base year amount, as shown below. Illustration 3 Current Results in = Current Year Amount Relation to Base Period Base Year Amount Illustration 4 presents this analysis for Macys for a three-year period using 2011 as the base period. MACY'S INC. Illustration 4 Net Sales (in millions) in relation to base period 2011 2013 2012 2011 $27,931 $27,686 $26,405 105.8% 104.90% 100%

Question

Financial Reporting Problem: Apple Inc. Your parents are considering investing in Apple Inc. common stock. They ask you, as an accounting expert, to make an analysis of the company for them. Apples financial statements and 10-K file are provided. Instructions:

(a) Make a 3-year trend analysis, using 2011 as the base year, of (1) net sales and (2) net income. Comment on the significance of the trend results.

(b) Compute for 2013 and 2012 the (1) profit margin, (2) asset turnover, (3) return on assets, and (4) return on common stockholders equity. How would you evaluate Apples profitability? Total assets at September 24, 2011, were $116,371 and total stockholders equity at September 24, 2011, was $76,615.

(c) Compute for 2013 and 2012 the (1) debt to assets ratio and (2) times interest earned. How would you evaluate Apples long-term solvency? (Hint: Interest expenses were provided in the footnotes to consolidated financial statements in 2013 Apple 10-K file.)

(d) What information outside the annual report may also be useful to your parents in making a decision about Apple?