Value Added Essay Example | Topics and Well Written Essays - 1250 words

Value Added - Essay Example 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. ... 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 balanc e 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