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  Methods of Financial Reporting

Introduction to Methods of Financial Reporting

THE VALUE ADDED STATEMENT

The value added statement (VAS) came into existence in the middle 1970s following publication of an influential discussion document that entitled The Corporate Report. The Corporate Report argued for the inclusion of the VAS under the annual report. It considered the VAS as a significant financial statement and went so far as to propose that the VAS might one day become more significant rather than the income statement. Subsequent publication of The Corporate Report, two government reports lent added support for the addition of the VAS under the annual reports of large businesses.

The VAS is identical to the income statement in so far that they are both referred with measuring wealth created through a business over time. The main dissimilarity among the two though is the way in which wealth is described and measured. The VAS (value added statement) measures value added in which the income statement measures profit earned.

What is value added?

Value added is a substitute measure of the wealth produced through a business over time. A business can be observed as buying in goods and/or services for which it then 'adds value'. The amount of value added is derived through computing the total output of the business and then subtracted the cost of total inputs.

This is displayed diagrammatically in diagram below.

1103_Value Added Statement Homework Help.jpg

Figure: calculating valve added by business

The complete output of the business will generally be the sales revenue for the period. The total inputs may be the bought-in materials and services like the purchase of inventories, rent, electricity, rates, telephone, and postage and so on. The variation among total output and total inputs that is the value added, presents the wealth produced from the collective attempt of those with a stake in the business - i.e. employees, suppliers of capital and government.

Value added is a main measure of wealth than profit. It identifies that several groups contribute to, and contain a stake in, the wealth produced through a business and it seeks out to measure how much wealth is attributable to these 'stakeholders'. This is in difference to the measure of profit that is referred only with the wealth attributable to the owners (i.e., the shareholders).

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