Value added statement notes Mr Alunga 23/02/2022
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Value Added Statements
Definition of Value-Added
Statements
Value added statement may be defined as a statement, which shows the
income of the company as an entity and how that is divided between the
people who have contributed to its creation.
Assumptions in Value Added Statements
1. VAS is a supplement, not a substitute to P&L account.
2. The same data which is recorded and processed by the conventional
accounting system is used in the preparation of VAS.
3. The basic accounting concepts and principals of accounting remain the
same in preparation of VAS.
Objectives of Value-Added Statements
1. To indicate the value or wealth created by an enterprise. In a way it
shows the wealth creating ability of the organization.
2. To show the manner in which the wealth created is distributed amongst
the employees, shareholders and the government. The pattern of
distribution of value added can be clearly understood.
3. To indicate the organizations contribution to national income.
4. To use it as a basis of making inter-firm and intra-firm analysis, for
preparation of financial plans and targets, for developing productivity
linked incentive schemes.
Advantages of Value Added
Statements
1. Reporting on VA improves the attitude of employees towards their
employing companies. This is because the VA statement reflects a
broader view of the companies objectives and responsibilities
2. VA statement makes it easier for the company to introduce a productivity
linked bonus scheme for employees based on VA. The employees may be
given productivity bonus on the basis of VA/payroll ratio
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3. VA based (e.g. VA/Payroll, taxation/VA, VA/sales, etc.) are useful
diagnostic and predictive tools. Trends in VA ratios comparisons with
other companies and international comparisons may be useful.
4. VA provides a very good measure of the size and importance of a
company. To use sales figures or capital employed figures as a basis for
company ranking can cause distortion. This is because sales may be
inflated by large bought-in expenses or a capital intensive company with
a few employees may appear to be more important than a highly skilled
labour intensive company
5. VA statement links a company’s financial accounts to national income. A
company’s VA indicates the company’s contribution to national income.
6. Finally VA statement is built on the basic conceptual foundation which is
currently accepted in balance sheet and income statements. Concepts
such as going concern, matching, consistency and substance over form
are equally applicable to the VA statement.
Limitations of Value Added
Statements
1. Preparation and presentation of value added statement may lead to
information overload and confusion, as an ordinary employee reading his
company’s corporate annual report may not be able to reconcile the
value added statement with the earnings statement.
2. Management may take the maximization of value added as their goal i.e.
the inclusion of the value added may wrongly lead management to
pursue maximization of firms value.
3. Another argument against a value added statement is that its inclusion in
the corporate annual report would involve extra work, therefore, extra
costs and delay and also a slight loss of confidentiality in view of the
additional disclosure involved.
4. The most severe limitation of value added data emerges from lack of any
uniformity and consistency amongst different companies in the
preparation and presentation of Value Added statements. VAS is
flagrantly standardized.
5. Since there are various methods of calculating VA, it is difficult to make
inter-firm comparisons. Even intra-firm comparison is not possible if the
treatment of these items is changed in the subsequent years.
6. Value Added statements may lead to confusion especially in the cases
where wealth or value added is increasing while earnings are decreasing.
In spite of these limitations, it may be said that the value added statement
brings about certain changes in emphasis rather than change in the content in
the traditional financial statement. Thus it is considered as a valuable means of
social disclosure.
Value Added Statement
A value added is the difference between sales revenue and cost of purchase price of the products and
services. Value added statement is prepared to determine the amount of value added and its distribution.
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Value added = Sales revenue & other Income - Cost of bought in materials and services.
Value added = Value of output – Value of input.
Preparation of Value added statement
i. Subtractive approach
ii. Additive approach
(Value added statement includes approaches)
a. Simple value added statement/ Value added statement without stock
b. Value added statement with stock
a. Simple value added statement/ Value added statement without stock
:- it’s format is as follows:
…. Co.Ltd
Value added statement
For the year ended…..
Particulars Amount(Rs.) Amount(Rs.)
Net sales revenue xxx
Less: cost of bought of material & services:
Purchase of raw material xxx
Less: purchase return xxx xxx
Direct material xxx
Fuel & power xxx
Supplies xxx
Carriage inward/ Carriage outward xxx
Auditor’s remuneration xxx
Office rent xxx
Add: outstanding rent xxx xxx
Consumable store
Insurance premium xxx
Less: Prepaid insurance xxx xxx
Advertisement xxx
Other Factory O.H. (except Depreciation) xxx
Other Office O.H./ selling O.H. xxx xxx
Value added generated xxx
Add: Income from Investment & other sources:
Interest received/ Interest on investment xxx
Rent received xxx
Royalty received xxx
Bad debt recovered xxx
Dividend received xxx
Commission received xxx
Other income xxx xxx
received xxx
Net value added
Applied as follows:
a. To pay employee
Wages & salary (Direct or indirect) xxx
Director’s remuneration xxx
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Provident fund / pension
Fringe benefit and allowance
b. To pay government
Income tax/wealth tax and other tax
Rates and taxes
c. To pay
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Value added statement notes Mr Alunga 23/02/2022
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Dividend received xxx
Commission received xxx
Other income received xxx xxx
Net value added xxx
Applied as follows:
a. To pay employee
Wages & salary (Direct or indirect)
Director’s remuneration
Provident fund / pension
Fringe benefit and allowance
b. To pay government
Income tax/wealth tax and other tax
Rates and taxes
c. To pay
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VAS helps the employees to perceive them as responsible
participators in a team effort with management and thus
may
