Value Added Statements for Dummies

This is a short presentation to demonstrate how value added statements are prepared and to explain how they differ from the accountant’s traditional profit or loss account. A single example will be used which will capture the essential differences.

Example

Below is shown a firm’s statement of profit or loss and value added statement. The two statements are shown side-by-side for ease of comparison.

During the period, the firm purchased plant and machinery for use within the business at a cost of £30m. Because this is capital expenditure, there is no entry in the statement of profit or loss to record this purchase. In the value added statement, the £30m cost appears against “bought-in materials, goods, and services” to obtain the “net value of output” figure. The firm’s investment activity is then shown by the investment adjustment to arrive at “net value added.”

VAS for dummies

Derivation of value produced figures

Bought-in materials, goods and services is equal to the purchases figure taken from the profit or loss statement (£80m) plus the capital expenditure (£30m).

The inventory adjustment is equal to the closing inventory minus the opening inventory. If this figure is positive then it represents additional investment in inventory. If negative then it represents disinvestment in inventory.

The depreciation adjustment is the total depreciation charged to the profit or loss account. This will usually be shown as a negative figure in the value added statement and represents consumption of capital in the period.

The investment adjustment is equal to the capital expenditure during the period. If this adjustment is positive then investment in new productive capacity has occurred. If negative, then disinvestment in productive capacity has occurred. The new productive capacity may consist of either tangible or intangible assets or some mixture.

Derivation of value distributed figures

To pay employees is the wages figure taken from the profit or loss account. The figure should include employer’s on costs, including employer’s National Insurance Contributions, and other employment taxes where they exist

To pay government is the sum of business rates and corporation tax charged to the profit or loss account. The figure represents the contribution the firm makes to the upkeep of the nation’s infrastructure and public services that enable firms to flourish.

To pay rentiers is the sum of property rents, licence fees, patent and copyright charges and the like. Payments to parties who derive income from ownership rather than from provision of a service or goods are recorded under this heading.

To pay financiers is the sum of interest charges in the profit and loss account plus dividends paid in the year. Payments of interest and dividends paid should be offset by interest and dividends received. Interest and dividends received are distributions of  value added produced by other firms. 

Undistributed value is equal to the retained profits shown in the profit or loss statement.

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