Reviewing financial statements over different periods helps management to:

• A. Identify trends, strengths and weaknesses.
• B. Detect fraud with certainty.
• C. Predict future stock prices.
• D. Determine tax liability for the year.

Answer: (A)

Reviewing financial statements over different periods lets management see how performance is evolving, which is the essence of trend analysis. By comparing data across periods, they can spot patterns in revenue, costs, profitability, liquidity, and asset utilization. This reveals strengths that are improving and weaknesses that may be worsening, guiding decisions on budgeting, cost control, investments, and strategic priorities. It’s about understanding what’s changing and why, so action can be taken to sustain gains or address declines.

Fraud detection isn’t guaranteed by this practice, since patterns can be misleading or incomplete and require additional evidence and controls. Predicting future stock prices involves market factors beyond financial statements. Tax liability is determined by tax rules and filings, not by merely reviewing period-to-period financial trends.