Economic Value Added (EVA) Statement - Research Paper Example

EVA is one such performance measurement tool that captures the financial profit and shareholders wealth. “EVA subtracts the cost of capital from the net operating profits after tax (NOPAT) generated in the business. It is a measure of the residual income from the income statement after accounting for the cost of the balance sheet” (Economic Value Added, 2007). How can Economic Value Added (EVA) Statements be used to improve financial statement reporting, results, and success? EVA statements are formed on the basis of two financial statements-the balance sheet and the income statement.

EVA Statements can be Used as a Valuable Tool to Improve the Financial Statements: With the correct prediction of economic profits every financial year, EVA statement shows how much value is additional to the capital. It helps to set the goals of business, incentives of management, and pay bonuses for better performances which cannot be obtained from the cash flows of financial statement. . It helps to analyze the capital budgeting and long term investment decisions of the firm. Since it helps in calculating the financial profits, it can be a very useful performance measure which supports the financial statement of the business.

It increases the average rate the of returns of shareholders. This helps to increase the rate of capital. EVA statement clearly specifies how much amount is given as tax, and therefore helps correct estimation of expenses in the financial statement. It also shows the economic value generated and distributed in the business. EVA can raise the firm’s investment, which is presently very low. The managers are thus paying attention on increasing earnings that they acquire on projects, for which the earnings do not validate the capital investments.

EVA statements are based on financial statements; it is helpful to find out any faults and make adjustments in the accounting principles that can improve the capital and operating profits. As financial statements are based on the generally accepted accounting principles, there will be mistakes, and therefore correct adjustments one needed, which can be possible through the EVA. EVA statements help in calculating the weighted average cost of capital; it is useful to estimate the risk and returns involved in the project of the business.

What are some of the problems found with EVA? Though EVA is a useful method to evaluate the performance of business; it has some limitations which are as follows: EVA is considered as a short term performance measurement tool. Companies focusing on long term investment decisions cannot use EVA as a performance measurement. The EVA for future investments can not be calculated independently with every performance calculation, as