Do you often get confused when analyzing your company's business performance? Financial statements are a "barometer" of a company's economic activities, which can visually show the company's profit and loss. One of the key indicators is value added. In a nutshell, value added is the net value created by a company in the production process, which can help you evaluate the efficiency and competitiveness of your business. In this article, we'll take a closer look at the three ways to calculate value added in your financial statements, so you can easily grasp how to calculate and understand this important metric.
Value added refers to the economic value created by an enterprise in the process of production and operation, which represents the increase in the value of raw materials and purchased services by the enterprise. Calculating value added in financial statements typically involves using data such as revenue, costs, and expenses to measure the net value created by the business. The calculation of value added can be carried out from the income statement, balance sheet and cash flow statement according to the following methods:
Income Statement Method: The steps are as follows:
Locate the company's income statement.
Find the sales revenue or total operating income from the income statement.
Deduct the cost of selling goods and providing labor services, which generally includes the cost of raw materials, labor costs, manufacturing expenses, etc.
Deduct other expenses directly related to the sale of products, such as sales expenses, administrative expenses, financial expenses, etc.
The net amount obtained in the end is the value added.
Production Accounts Method (Income Method):
The steps are as follows: Find the main business income or total operating income from the income statement.
plus other business income.
After deducting intermediate inputs, i.e., the actual purchase of raw materials, power, outsourcing service fees, etc.
The number obtained in this case is the value added.
Allocation Accounts Method (Expenditure Method):
The steps are as follows: Calculate the total amount of wages paid by the company to employees, including labor costs and welfare expenses found directly from the income statement.
Calculate the taxes paid by the business, such as business tax, VAT, etc.
Calculate the interest expense paid by the business.
Plus the company's net profit.
The sum is the added value of the enterprise.
These three methods correspond to different analytical perspectives, which can more comprehensively reflect the increase in economic value created by enterprises in a certain period of time. It should be noted that the composition of the financial statements of different enterprises may be slightly different, and the calculation formula needs to be adjusted according to specific items. In addition, the calculation of value added can be appropriately adjusted according to the characteristics of the specific industry of the enterprise to reflect the value creation process unique to the industry.
In conclusion, mastering how to calculate value added in financial statements is essential for analyzing a company's financial health and economic performance. Whether it's by calculating a firm's total output minus intermediate consumption, or using accounting information such as wages, profits, and depreciation, or assessing tax contributions, these methods provide a different perspective on financial analysis. Hopefully, the steps described in this article will be a useful addition to your financial analysis toolbox to help you understand and utilize your financial statements. If you find this article helpful, you may wish to continue to ***dive** more knowledge and skills of financial analysis!