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Economic Value Added (EVA) statements

How can Economic Value Added (EVA) statements be used to improve financial statement reporting, results, and success?

What are some problems found with EVA?

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How can Economic Value Added (EVA) statements be used to improve financial statement reporting, results, and success? What are some problems found with EVA?

First, EVA or Economic Value Added is the surplus produced by a business after setting aside a fair charge towards the providers of capital. After taxes are paid, the return on capital employed less the cost of capital employed is the Economic Value Added. In practice this means subtracting the cost of capital from the net operating profits after tax. In one sense this is the residual income that accrues to the shareholders after the cost of capital has been removed from the net operating profits after tax. In other words if there is a positive residue, it is good for the shareholders and if there is negative residue it is harmful to the interests of the shareholders.

The normal financial statements do not show this residue, only if the Economic Value Added is calculated can this residue be observed by the shareholders. This residue is also called economic profit. There are several implications of the Economic Value Added. If there is a positive EVA, the firm is performing well and is adding to ...

Solution Summary

This answer offers cogent arguments relating to Economic Value Added, including how it can improve financial statement reporting, results, and success, and problems found with EVA.

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