With regard to trend analysis over time, which of the following statements is TRUE?

A) We often look at the past five years of financial statements to establish trends and then predict future performance based on these trends.
B) To look at trends over time requires that we examine a financial statement at one point in time.
C) The net income last year was $20,000 and the past five years has shown an increase of 10% on average for each of these five years. The predicted net income for next year is still $20,000.
D) It is better to predict future performance by basing it solely on net income than on all the individual accounts.

Answer: A
Explanation: A) To look at trends over time requires that we examine A SERIES OF FINANCIAL STATEMENTS OVER A SPECIFIC TIME PERIOD.
The net income last year was $20,000 and the past five years has shown an increase of 10% on average for each of these five years. The predicted net income for next year is $20,000 + 0.10 × $20,000 = $22,000.
If we use more information than just the trend in net income, we will probably have a better comfort level with the predicted number.