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The Value Added Statement Essay

1535 words - 7 pages

Introduction

Value added (VA) report is a statement of an entity wealth created and distributed in a financial year and intended to shift an organization away from the profit and loss account. It is simply an entity’s revenue for a given period less outside purchases or payment for supplier of services and materials. VA is a measures performance through the collective efforts of management, provider of capital and employees. According to Bao & Bao (1998, p252), VA statement shows “how the benefits of the effort of a firm were shared among its stakeholders including stockholders, creditors, management, employees, and government”. Morley (1979, p.620) expresses it as “the wealth creation ...view middle of the document...

622) this link “assist the inte- professional exchanges of data and expertise”

This paper therefore evaluates the usefulness of VA statement to shareholder and a wider stakeholder community and why it has not become mandatory. It also includes the preparation of a value added statement of Hythe plc for the year 20X6, with 20X5 from the financial information in its corporate report.

Preparation of Value Added Statement (VAS)

The Value Added statement of Hythe Plc. was prepared from the financial information obtained from the company’s account. The total wealth created by the company during the two comparative periods is computed as Sales less payment to suppliers of materials and services. This translated to £1.85million and £1.83million in the year 20X6 and 20X5 respectively. In 20x6, 44%, 22%, 26% and 8% of the wealth created were distributed to employee, government, provided of capital and retained respectively. While distribution in 20X5 was 43%, 21% and 24% to employees, government, provided of capital and 12 % reinvestment to maintain and develop operation. These measures provide useful information on the wealth created and available for the company team which can be used for predictive and planning purposes.

The value added ratios computation reveals that wealth created per employee was £46.23 and £43.67 in 20X6 and 20X5 respectively while the sales per employee ratios were £128 and £110 in the year 20X6 and 20X5 respectively. These ratios could provide a useful comparative and predictive tool to Hythe Plc in order to determine its performance in relation to other competitors and comparative period.

Meanwhile, the Value added statement has been prepared using the Gross VAS as against the Net VAS model. The Gross VAS requires that the depreciation amount be part of the distribution while it is included in VAS statement for the other model.. The Gross VA model was adopted because it is more objective than Net VAT as depreciation measurement is prone to subjective judgments and it lead to a closer link to national income (Morley,1979, p.626).

The detailed statement is highlighted below:

Hythe plc.
Value Added Statement for the year ended 31 December 20X6

20X6 % 20X5 %
£000s £000s

Sales 5,124 4,604

Paid to Suppliers for Material & Services
Materials consumed 2,934 2,482
Fuel consumed 290 242
Hire of plant and machinery 41 38
Auditors' remuneration 10 8.00
Total 3,275 2,770

TOTAL WEALTH CREATED 1,849 100% 1,834 100%

DISTRIBUTED AS FOLLOWS
Employee:
Wages 607 598
Salaries 203 198
810 44% 796 43%
Government:
Corporation tax provision 402 22% 393 21%

Providers of capital:
14% debentures 168 151
6% preference shares 24 24
Dividend 288 256
480 26% 431 24%

Reinvested to maintain and develop operations:
Depreciation 155 144
Retained Earning 2 70
157 8% 214 12%

TOTAL WEALTH DISTRIBUTED AND RETAINED 1,849 100% 1,834 100%

Value...

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