Economic Value Added - Essay Example

Thus it requires managers and employees to focus on how capital is utilized and how it generates cash an important idea for all investor analysis of a corporation. There is usually a common goal for all corporations which are to obtain capital and earn a return rate exceeding that of the capital. In order to achieve this goals EVA measure the amount of money left after deducting the capital thus providing a financial statement reporting. EVA can be used to determine whether an corporation is accountable for economic outlays whether they are on the balance sheet, income statement or in the financial statement.

This is because this tool creates a financial statement that consists of all the cost of being in the corporation while giving managers an account of every dollar used. There are two gains from focusing on the growth of EVA in a corporation. On one hand, the attention of the management is more focused towards its main responsibility which is to raise investor’s assets. Ion the other hand, deformation resulting from the utilization of historical cost accounting data is eliminated or decreased to ensure that managers spend their time finding means to raise EVA.

Therefore, the raised awareness of the effective use capital eventually creates additional shareholder value. This frees the corporation from spending more time in establishing ways to raise EVA but able to produce additional shareholder value according to Albrecht, Stice, Stice and Swain (2010). EVA creates a common language for decision making particularly long-term decisions which are important in improving the results and success of a corporation. For instance, it can be used in resolving budgeting problems and assessing the performance of organizational elements and directors in order to determine the end result .

EVA quantification of results in terms of finance also aids in strengthening other management programs such as customer development, TQM and quick response by demanding and getting constant financial improvement as stated by Reynolds and Cuthbertson (2004). Thus in order to make EVA useful in attaining improved financial statement reporting and success, managers and workers need to espouse long-term focus and start to think like owners of the business. This way they will make them feel responsible for and participate in the economic value of the corporation leading to improved results.

For improved success, EVA can be connected with an incentive award system. In such a way, EVA can provide a measure to calculate success and a medium for continued performance improvement. Since EVA is computed on an accounting period, it allows employees to plot progress during the year and this can help in improving on the end result thus a success. According to Shelo64 (2012), a transition to EVA measurements entails serious obligation of the board of directors and the senior management to utilize the measures in managing the business for an improved financial statement reporting, results and success.

In addition, every individual should buy into the plan in order to make it successful in such improvements. An extensive training and communication for everyone in the company is also required for using EVA to achieve such improvements. Problems of EVA One of the problems with EVA is that it does not provide an account for authentic options or growth opportunities intrinsic in the investment decisions as stated by Schon (2007). Additionally, it does not reflect the perception of the market on the value of growth