Transcription of Economic value added versus profit-based …
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Economic value added versus profit-based …
RELEVANT TO ACCA QUALIFICATION PAPER P5 2011 ACCA Economic value added versus profit- based measures of performance A successful performance measure evaluates how well an organisation performs in relation to its objectives. Since the primary objective of commercial organisations is normally assumed to be the maximisation of the wealth of its shareholders, it follows that performance measures should evaluate this. In practice, many organisations use profit- based measures as the primary measure of their financial performance . Two problems relating to profit in this area are: Profit ignores the cost of equity capital. Companies only generate wealth when they generate a return in excess of the return required by providers of capital both equity and debt.
3 ECONOMIC VALUE ADDED VERSUS PROFIT-BASED MEASURES OF PERFORMANCE JULY 2011 © 2011 ACCA Accounting adjustments The major departure from residual income is the ...
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