Value Added Statements – Definition, Advantages and Disadvantages

Meaning and Definition of Value Added Statements

The main thrust of financial accounting development in the recent decades has been in the area of `how’ we measure income rather than `whose’ income we measure. The common belief of the traditional accountants that profit is a reward of the proprietors has been considered as a very narrow definition of income. This was so because previously the assets were assumed to be owned by the proprietor and liabilities were thought as proprietor’s obligations. This notion of proprietorship was accepted and practiced so as long as the nature of business did not experience revolutionary changes. However, with the emergence of corporate entities and the legal recognition of the existence of business entities separate from the personal affairs and interest of the owners led to the rejection of proprietary theory.

Value added is now reported in the financial statements of companies in the form of a statement. Value Added Statement (VAS) is aimed at supplementing a new dimension to the existing system of corporate financial accounting and reporting. This is called value added statement. This statement shows the value created; value added (value generated) and the distribution of it to interest groups viz. Employees, shareholders, promoters of capital and government. Since VAS represents how the value or wealth created or generated by an entity is shared among different stakeholders, it is significant from the national point of view. ICAI, 1985 has defined Value Added Statement as a statement that reveals the value added by an enterprise which it has been able to generate, and its distribution among those contributing to its generation known as stakeholders.… Read the rest

Value Added – Concept, Definition and Uses

Meaning and Definitions of Value Added

The traditional basic financial statements are balance sheet and Profit & Loss account. These statements generate and provide data related to financial performance only. They do not provide any information which shows the extent of the value or the wealth created by the company for a particular period. Hence, there arose a need to modify the existing accounting and financial reporting system so that the business unit is able to give importance to judge its performance by indicating the value or wealth created by it. To this direction inclusion of Value Added statement in financial reporting system is useful. The Value Added concept is now a recognized part of the accountant’s repertoire.

However, the concept of Value Added (VA) is not new. Value Added is a basic and broad measure of performance of an  enterprise. It is a basic measure because it indicates the net output produced or wealth created by an enterprise. The Value Added of an enterprise may be described as the difference between the revenues received from the sale of its output, and the costs which are incurred in producing the output after making necessary stock adjustments.

Some definitions of Value Added are following;

  • E.S.Hendriksen has defined Value-added as: “The market price of the output of an enterprise less the price of the goods and services acquired by transfer from other firms.”
  • Morely has defined Value-added as:”The value, which the entity has added in a period that equals its sales less bought-in-goods and services.” i.e.
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Capital Structure Theory – Modigliani Miller Proposition

Capital Structure Decision in Corporate Finance

The corporate finance is a specific area of finance dealing with the financial decisions corporations make and the tools as well as analysis used to make these decisions. The discipline as a whole may be divided among long-term and short-term decisions and techniques with the primary goal being maximizing corporate value while managing the firm’s financial risks. Capital investment decisions are long-term choices that investment with equity or debt, and the short-term decisions deals with the balance of current assets and current liabilities which is managing cash, inventories, and short-term borrowing and lending. Corporate finance can be defined as the theory, process and techniques that corporations use to make the investing, financing and dividend decisions that ultimately contribute to maximizing corporate value. Thus, a corporation will first decide in which projects to invest, then it will figure out how to finance them, and finally, it will decide how much money, if any, to give back to the owners. All these three dimensions which are investing, financing and distributing dividends are interrelated and mutually dependent.

The capital structure decision is one of the most fundamental issues in corporate finance. The capital structure of a company refers to a combination of debt, preferred stock, and common stock of finance that it uses to fund its long-term financing. Equity and debt capital are the two major sources of long-term funds for a firm. The theory of capital structure is closely related to the firm’s cost of capital. As the enterprises to obtain funds need to pay some costs, the cost of capital in the investment activities is also the main consideration of rate of return.… Read the rest

Market Value Added (MVA)

Economic Value Added (EVA) is aimed to be a measure of the wealth of shareholders. According to this theory, earning a return greater than the cost of capital increase value of company while earning less than the cost of capital decreases the value. For listed companies, Stewart defined another measure that assesses if the company has created shareholder value or not. If the total market value of a company is more than the amount of capital invested in it, the company has managed to create shareholder value. However, if market value is less than capital invested, the company has destroyed shareholder value. The difference between the company’s market value and book value is called Market Valued Added or MVA.

From an investor’s point of view, Market Value Added (MVA) is the best final measure of a Company’s performance. Stewart states that MVA is a cumulative measure of corporate performance and that it represents the stock market’s assessment from a particular time onwards of the net present value of all a Company’s past and projected capital projects. MVA is calculated at a given moment, but in order to assess performance over time, the difference or change in MVA from one date to the next can be determined to see whether value has been created or destroyed.

The Market Value Added (MVA) measure is based on the assumption that the total market value of a firm is the sum of the market value of its equity and the market value of its debt.… Read the rest

Economic Value Added (EVA) and Shareholders Value Maximization

Almost in all books on financial management, the very first chapter introduces the fact that the goal of financial decisions is to maximize shareholder’s value. But why only shareholder’s value and what about others stakeholders like employees, customers, creditors? If one focuses on the shareholder value creation other stakeholder’s interests will automatically become the sub-goals and achieving these sub goals becomes crucial to the achievement of the overall goal i.e. shareholder value maximization. For example, the firm’s profit depends a lot on how the employees perform and to motivate them the firm needs to satisfy their needs and constantly upgrade their knowledge and skills by proper training. Similarly the firm would be required to pay its creditors on time so that they keep providing them credit whenever needed in the future and the credit availability does not hamper the operations of the firm. So a firm’s goal to maximize wealth of the shareholders can be taken to be a reasonable overall goal.

In general, the shareholder value is the present value of the anticipated future stream of cash inflows from the business plus the terminal value of the company. The positive shareholder value is created when these cash inflows are greater than the investors’ risky investment over the same time frame. Shareholder’s value is measured by the returns they receive on their investments. A return are in two parts, first is in the form of dividends and second in the form of capital appreciation reflected in the market value of shares, of which market value is the dominant part.… Read the rest

Economic Value Added (EVA) – Definition, Calculation and Implementation

Economic Value Added (EVA) is a value based financial performance measure, an investment decision tool and it is also a performance measure reflecting the absolute amount of shareholder value created. It is computed as the product of the “excess return” made on an investment or investments and the capital invested in that investment or investments.

“Economic Value Added (EVA) is the net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise or project. It is an estimate of true economic profit, or amount by which earnings exceed or fall short of the required minimum rate of return investors could get by investing in other securities of comparable risk.”

Economic Value Added (EVA) is a variation of residual income with adjustments to how one calculates income and capital. Stern Stewart & Co., a consulting firm based in New York, introduced the concept on EVA as a measurement tool in 1989, and trade marked it. The EVA concept is often called Economic Profit (EP) to avoid problems caused by the trade marking.

Economic Value Added is the financial performance measure that comes closer than any other to capture the true economic profit of an enterprise; Economic Profit = Total revenues from capital – Cost of capital. The basic idea of this criterion is to find, in microeconomics, where it is said that the main goal of a company is maximization of profit. However it does not mean book profit (the difference between revenues and costs) but economical profit.… Read the rest