The Theory of Economic Value Added

Paper Summary:

This paper investigates Economic Value Added, or EVA, invented and promoted by Stern Stewart & Co. The author points out that this theory is aimed at eliminating the problems that accounting faces today by incorporating the concept of a "true economic profit" into accounting and bookkeeping. The paper states that the EVA concept intends to align reported earnings, something which shareholders always take into consideration when investing in a company, with the actual capital that was loaned by the company.

Table of Contents
The Cost of Equity Capital
Operating vs. Financing Decisions
Pension Plan Accounting
Full Cost Accounting
Stock Options

From the Paper:

"One of the errors that accountants usually makes and that leads to distorted reporting on a company's earnings is the fact that equity capital is not taken into consideration as a cost. If debt is considered a cost and debt interest is noted as an expense, than why not see equity as a cost as well, seeing that it is not a free resource, but something invested by shareholders into the company and funds put into the company. As Bennett Stewart points out, "the cost of equity is not a cash cost, it is an opportunity cost". Indeed, it is the equivalent return that a shareholder would expect to earn by investing in other stocks from companies of comparable risk."

More papers on The Theory of Economic Value Added:

• Analytical Essay # 29757 : "Economic Value Added (EVA)"
• Essay # 52079 : "Economic Value Added"
• Analytical Essay # 141107 : "Value-Added Activity Based Costing"

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