Showing posts with label value added statement. Show all posts
Showing posts with label value added statement. Show all posts

Friday 6 September 2019

Value Added Statement


VALUE ADDED STATEMENT

Value added is an effective means of both measuring company performance and identifying the way in which the various interest groups involved share in the resources generated.

It is easy to develop one based on the income statement.



Value added is the difference between sales revenue and the amounts paid to external suppliers of goods and services.

SALES REVENUE – PURCHASES AND SERVICES = VALUE ADDED

S – B  =  W + I + Dd + T + Dp + R

S = sales revenue
B = bought in materials and services
W = wages
I = interest
Dd = dividends
T = tax            
Dp = depreciation
R = retained earnings

If sales revenue is expressed as 100%, the proportion of revenue being allotted to each interest group can be shown:

Sales revenue        100

Supplies      50
Employees  20
Interest          5
Tax                5
Shareholders 5
Subtotal                   85

Retained profit        15


Presenting income and expenditure in this way is popular with many companies.  The value added statement has proved to be a useful and practical means of communicating financial information to employees who find the annual report somewhat impenetrable.

A value-added statement can be displayed as a bar char to pie chart.  A pie-chart can effectively represent $1 and show how each unit of income or sales revenue received by the company in the year was shared out:  how much went to suppliers, employees, shareholders and government, and how much was left as retained profit for reinvestment into the business at the end of the year.



DISPENSING WITH PROFIT

Indeed, the word “profit” need not appear in a value-added statement.  What is left after all interest groups have received their share of the value added (the retained profit of $15) may be referred to as “amount retained for investment.”

If a value-added statement is prepared for a number of companies operating in the same business sector, it may be used for comparison and the development of benchmarks.