VALUE ADDED STATEMENTS

Value Added Statement is a financial statement that depicts wealth created by an organization
and how is that wealth distributed among various stakeholders. The various stakeholders
comprise of the employees, shareholders, government, creditors and the wealth that is retained in
the business.

As per the concept of Enterprise Theory, profit is calculated for various stakeholders by an
organization. Value Added is this profit generated by the collective efforts of management,
employees, capital and the utilization of its capacity that is distributed amongst its various
stakeholders.

Table of Contents
1. Example of Value Added Statement
2. Advantages of a Value Added Statement
3. Difference between Value Added and Profit
Consider a manufacturing firm. A typical firm would buy raw materials from the market. Process
the raw materials and assemble them to produce the finished goods. The finished goods are then
sold in the market. The additional work that the firm does to the raw materials in order for it to
be sold in the market is the value added by that firm. Value added can also be defined as the
difference between the value that the customers are willing to pay for the finished goods and the
cost of materials.

Example of Value Added Statement

Following is the format of the statement of Value Added explained with an example.

Sales Revenue 1000

Less: Cost of bought in goods and services 200

Gross Profit 800

Employee Salary 250

To capital providers interest 100

Taxes 100

Depreciation 200

650

Profit 150

Sales Revenue 1000

Less: Cost of bought in goods and services 200

Value Added 800

Application of Value Added

Employee Benefits 250

To capital providers (Creditors and Lenders) 100

Taxes 100

Value retained (depreciation and expansion of

350
business)
 Value Added 800

From the above illustration, the difference between sales and cost of bought-in materials and
services gives the value added by the organization.

The second part the statement gives the distribution of the value added by the organization.

Off the $800 added by the firm, $250 is utilized for employee benefits. $100 is given as interest
of loans and dividends to shareholders. Another $100 is contributed to the government in the
form of taxes. Whereas, $350 is retained for expansion of the current business and part of it is
kept aside for depreciation amount.

Thus, value added statement not only gives the value added by the organization but also the
distribution of it across various stakeholders.

Advantages of a Value Added Statement

 It is easy to calculate.
 Helps a company to apportion the value to various stakeholders. The company can use
this to analyze what proportion of value added is allocated to which stakeholder.
 Useful for doing a direct comparison with your competitors.
 Useful for internal comparison purposes and to devise employee incentive schemes.
 The various advantages of defining income in such a way are as follows:-
 1. Value Added Statement reflects a broader view of the companies ives and
responsibilities, so it improve the attitude of the employees towards the employing
company.
 2. Value Added Statement makes it easier for the company to introduce the productivity
linked bonus scheme for employees based on Value Added for this Value Added payroll
ratio is used as a basis.
 3. Value Added provides a very good measure of the size and importance of a company.
 4. Value Added Statement link a companies financial accounts to the National Income. A
companies Value Added Statement indicates the companies contribution to National
Income.
Difference between Value Added and Profit
Profit subtracts all the cost incurred in the process of generating revenues. The value added, on
the other hand only subtracts the cost of bought-in goods and services. Profits are meant for
shareholders whereas value added is meant for stakeholders who include shareholders also.
Therefore, value added is a wider term.