Managerial Accounting - Value Added - Essay Example

? Value added. Value added This is an accounting measure that assesses the net worth of a business or an activity. It often excludes suppliers’ wealth creation in a business hence it assesses the net rather than the gross output. It can be applied by companies, factories and also a country. The calculation the value added is quite similar irregardless of the size of the firm. The calculation in the records of an individual country’s government is similar to those of a small firm. The difference is usually seen in the quantity of the components included when calculating the value added. Two ways have been suggested when obtained the value added for an organisation. First, there is the subtraction method where purchases are deducted from sales figure. Secondly, the addition method that sums up the profits, interests, depreciation, payroll etc. The two methods are explained towards wealth creation in the additive method and distribution of wealth in the subtraction method. Either of the two methods, should give the same figure of the value added in a business (Haslam and Neale, 2000, 35) The value added is demonstrated below Gross output (A) (minus) Bought in items, services (B) -------------delivers----------Valued added--------distributed to----- wages, consumption, capital, profits In a country’s records, the gross output represents the gross income from different industries. All purchases that are made by the government are then deducted, to arrive at the value added. To understand this concept, accounting information from Walmart Company is adopted and illustrated below. Example: Walmart Company income statement has been reviewed for the years 2011 and 2010. Figures all in $million Year 2011 Year 2010 Sales revenue 421,849.0 408,085 Less :Purchases made 315,287.0 304,444.0 Value added 106,562.0 103,641.0 Expenses – wages, administration. general 81,020.0 79,379.0 Operating profits 25,542.0 24,002.0 Unusual items 0 260.0 Value added 106,562.0 103,641.0 The value created for this Company has increased for the two consecutive years under consideration. The wealth is distributed in the various expenses in the company as well in operating profits and unusual items. The exact expenditure overheads have not been broken down. The value added per employee is obtained by dividing the figure calculated by the overall number of employees in a Company. The real value for 2011 for Walmart, would then be 106,562.0/2,100,000= $0.05 million per employee (Haslam and Neale, 2000, 55). The extent to which value added, cashflow, and profit connected to Company’s sales performance, is determined by critically analysing the realisation of the Company’s goal i.e. shareholder’s wealth creation. The value added shows the net value which excludes dealings from suppliers. The wealth so created is distributed amongst the expenditure, profits and capital of the firm. The cashflow statement shows the amount of cash that comes in the organisation e.g. from sales and cash out i.e. for the various expenditures undertaken. Cash expenditure in a company is includes: cash for investments, dividends paid, cash for operations etc. Cash inflow includes turnover, gain on sale of assets, interest income etc. To balance the cashflow, the cash outflow is subtracted from the cash inflow to get a deficit or a surplus. The resulting figure is the liquid money in the firm. This is related to the value added as both look at the company’s performance. If the resulting figure is a deficit, then the company is making losses and the performance is poor. Vice Versa is also true. True cash representation is assessed by the cashflow in and out of the Company’s operations. Any activities that do not involve cash e.g. outstanding debts, suppliers and outstanding debts are not incorporated. The cashflow depicts the true worth of a business as it paves ways for a cash budget to be created for the following year laying emphasis on the previous year’s cash spending. The shareholders of an organisation have a value approach to analyse if their goal is being realised. The value measures created are deemed to assess and quantify the value of shareholders’ investments in the business. If an organisation has a deficit in its cash flow or a negative value added, then the organisation and the management team is not realising the shareholders’ values. An insight on the same helps the shareholders assess the interests of the management team. Researchers have demonstrated the use of residue income or the value added in accounting with the aim of assessing the true value from any investment. This research was done early in the twentieth century. The value added has been explained as an internal tool of use in organisations. The value for each employee is assessed towards the overall sales performance. It also analysis how effective the assets are used in an entity. The wealth in any entity is determined by assessing workers’ output, his pay and overall gain from making sales for the entity. The value added is compared to assets, turnover and wages to determine the effectiveness of the output. A value added to turnover analysis should be as low as possible depicting good performance. The cashflow statement depicts the actual amount of liquid money available for the company in order to make further investment. Cash residue to sales ratio should be calculated to depict the performance (Don & Maryanne, 2006, 438). In the example above of Walmart, the cashflow statement shows a deficit of $332.0 million in 2011 and a surplus of $707 million in 2010. The year 2011 has a negative ratio i.e. for every one unit of sales made; there are 0.7 losses in cash. But for the year 2010, for every unit sale, there is a gain of 0.5 in cash. Despite the fact that the value added shows a positive return per employee, further analysis needs to be done on items represented in the income statement and those in the cashflow statement. The International Financial Reporting Board does not provide for value statement publishing in the financial reports. They are only vital in an organisation’s performance in assessing the return from labor, assets, sales and such factors in order to improve on its operations (Stefan et al, 2006, 52). Profits of any entity represent the amount of gains realised from its operations. Profit figures usually include non-cash items that are not related to generation of cash flows in the entity. Depreciation is one of the items that is included and should be reported in financial statements. The sales performance of a company is analysed by assessing profits or losses realised at the end of the financial year. The value added encompasses the operating profits in the addition section because the non-cash items have not been included yet. Gross profits are obtained by deducting purchase and costs of goods sold from sales. This relates wholly to the value added since there is no difference in calculating the value. The purchases figure is deducted from the sales figure arriving at the value added. Gross profit is a direct measure of sales performance in that it shows a gain or loss from sales operations before incorporating other expenses. The value-added statement shows the same computations. In Walmart case study sales for 2011 are $421,849.0 and purchases are $315,287.0 giving a gross profit of $106,562.0. This figure represents the value added. In conclusion, value added, cash flow, and profits are all related in the sales performance of an entity. The cashflow statement shows a surplus or a deficit from operations. The value added statement shows revenue minus purchases made. The gross profit is obtained as turnover minus the purchase and cost of goods sold. All are measures of sales behavior i.e. an increase or decrease in the operations of an entity. Bibliography Don, R. H. & Maryanne M. M., (2006). Managerial Accounting. London, Cengage Learning. Haslam, C. and Neale, A. (2000) Economics in a Business Context, 3rd edition, London. Cengage. Stefan, S., Martin, D. B., Roger, B., (2006). Sustainability accounting and reporting. New York, Springer. Walmart financial statements http://walmartstores.com/sites/annualreport/2011/financials.aspx, Retrieved on 1/12/2011. 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