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 = 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.
