Question

Compute the annual dollar changes and percent changes for each of the following items. Express the items from QS 17-5 in common-size percents.

Vertical analysis involves expressing each item in a financial statement as a percentage of a base item, typically total revenue or total assets. This allows for a comparison of each item's proportion relative to the base item. Common-size percentages are often used to analyze income statements and balance sheets.
Horizontal analysis, on the other hand, compares financial data over time, identifying the annual dollar changes and percent changes for specific items.

Answer 1

Index numbers standardize price levels by setting a base year's index to 100 and comparing other years' spending relative to it. The rate of inflation is calculated using the percentage change in index numbers. This method allows for clean comparison of relative price changes over time.

Step-by-step explanation:

Understanding Index Numbers and Inflation Calculation

Index numbers simplify the interpretation of price levels across different time periods by providing a standardized value relative to a base year, which is set to an index number of 100. This technique is vital in economics for measuring inflation and interpreting changes in the cost of a basket of goods over time. To compute the index number, divide the dollar amount spent in each year by the dollar amount in the base year and then multiply by 100. The base year's index number will always be 100 since you are essentially dividing it by itself.

To calculate the annual rate of inflation, you determine the percentage change in the cost of the basket of goods between different time periods. This percentage change is found by subtracting the index number of the previous year from the index number of the current year, dividing by the previous year's index number, and then multiplying by 100.

The use of index numbers converts complex and messy dollar amounts into a cleaner and more comparable set of figures, which allows for easier analysis of relative price changes over time without the distraction of actual currency values, making it an essential tool in economic analysis.