Answered: Determine whether or not this statement…

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter4: Profitability Analysis

Section: Chapter Questions

Problem 1ACIC

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Determine whether or not this statement makes sense and explain: "Gas prices jumped by 1% in January and 1% in February, so the increase in gas prices over the two months was 2%."

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Introduction

Compounding refers to the process of reinvesting the earnings generated by an investment, such as interest or dividends, back into the investment to generate further earnings. This results in exponential growth over time, as the earnings generated by the investment generate additional earnings.

This is applicable on gas prices also, the increase gets compounded and hence, the price at the end of the priod is the compounded value.

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