Based on information from the conventional statement of financial performance of Inberg Ltd for the current year, prepare a value-added statement

Sales revenue $5000 Income tax $800

Materials used 1200 Electricity expense 300

Salaries and wages expenses 900 Interest expense 200

Depreciation expense 400 Dividends paid 300

Although not asked for, a conventional statement of financial performance is also prepared for purposes of comparison.

STATEMENT OF FINANCIAL PERFORMANCE (conventional)

Sales $5000

Less:

Materials used $1200

Electricity 300

Salaries and wages 900

Depreciation expense 400

Interest expense 200 3000

Profit before tax $2000

Income tax 800

Net profit $1200

Less dividends 300

Retained profits $900

VALUE-ADDED STATEMENT

Sales $5000

Less: materials, depreciation and services used

($1200 + $400 + $300) 1900

Value added $3100

Distribution of value added:

To employees $900

To providers of capital

Dividends $300

Interest 200 500

To government 800

To enterprise for expansion

Retained profits 900

$3100

9. (a) Triple bottom-line reports seek to detail the activities of an entity as they relate to society, the economy and environment. Is the annual report of an entity an

appropriate vehicle for such a broad base of information?

(b) List the type of information that you consider would be relevant to the triple bottom-line approach. What would be the ‘bottom line’ in such a statement?

(a) Annual reports initially began as legal documents, which reported financial position and performance and fulfilled legislative requirements such as names of key office holders and directors. In more recent times the annual report has been seen as a key device not only to summarise past performance, but also to signal the future activities and minimise political costs, and perhaps influence perceptions of firm value. With quarterly reporting and the requirement to report immediately on significant factors that can affect a firm’s value (under stock exchange listing requirements), information concerning financial

performance is more immediate and readily available. This means that the annual report is increasingly used as a signalling device to key lobby groups. Is it appropriate for this purpose? It represents a formal communication from the firm and therefore carries a basic authority. It provides a clear channel of communication and allows firms a platform in which to legitimise communications pertaining to their activities, both actual and proposed. However, it should be considered whether lobby groups and key stakeholders accept the information provided in good faith. The instructor might like to take some examples of annual reports to class and ask students to consider whether they are effective communication devices or simply political statements.

(b) Get students to classify the information according to categories such as social, employee, environmental, economic and community-based. In terms of an actual ‘bottom-line’, this does not exist because it is not about deriving a single outcome, such as profit, but about

identifying the positive and negative impacts of the entity’s activities on a broad range of stakeholders.

10. A company declares a 10% dividend. Discuss the nature of the dividend to the recipients from the point of view of the following theories:

(a) proprietary theory (d) fund theory (b) entity theory (e) investor theory (c) commander theory (f) enterprise theory.

(a) Under the proprietary theory, the firm is considered an instrument of the holders to achieve their objective of increasing their wealth. Holders’ equity belongs to the holders, and therefore a dividend, which is simply a redistribution from retained earnings to capital, is just another ‘piece of paper’ to represent the same dollar amount of ownership interest. The dividend is not income to the holders; they are not receiving anything beyond what they had before in the company.

(b) Under the entity theory (either traditional or ‘newer’ view), since the corporation is a separate ‘person’ from the holders, the dividend would be considered income to the recipients. The income of the company does not belong to the holders but to the company. Therefore, since the dividend comes out of retained income, the holders are receiving something they did not have before. The issuance of dividends is one entity transferring something of value to other entities (shareholders).

(c) The commander is a steward who has been entrusted with the funds of the company and given the right to operate the company. The issuance of a dividend is due to his or her influence and decision. But who has given the commander authority?

The commander acts on behalf of the entity, not the shareholders. Thus, the theory assumes that the commander receives authority from the entity. Because shareholders do not have economic control over the resources of the company, the theory implies that they do not have much power in the company. The theory also implies that the company on the one hand and the holders on the other, are distinct, separate entities. If so, then dividends are income to the shareholders, because they are receiving something that they had no control over before.

(d) The fund theory sees the firm as an impersonal fund. Owners’ equity is the restriction on the assets. In this sense, shareholders do not have any claims on the assets; their amount in the company is viewed as a sum that the company may have to pay in the future. A dividend does not change the sum that is ‘owing’

to the shareholders; it simply shifts an amount from one holder’s account to

another. It would seem that under the fund theory, dividends are just more ‘pieces of paper’ to represent the same amount of restriction on the assets. Thus,

dividends are not income to the recipients.

(e) The investor theory is an extension of the entity theory, except that accountability to shareholders is emphasised. The ‘separation’ of the firm from holders is taken for granted.

Similar to the entity theory, dividends would be considered income to shareholders, because they are receiving something they did not ‘own’ before.

(f) The enterprise theory sees shareholders as one group of participants to help generate income from the enterprise. In particular they provide funds, and dividends are the

compensation to shareholders for their contribution. Dividends constitute their share of the total value-added income. Since dividends reduce retained earnings (regarded as a

distribution of income to the enterprise for expansion purposes that benefit all

participants), they would be considered a distribution to shareholders. Thus, dividends are income to the recipients.

11. The point of view advocated depends on the particular user: the owner, manager, investor and provider of funds. Which perspective should take preference?

This is an opinion question. Conventional theory opts for the entity theory. The FASB and the AARF appear to accept this view, but with the inclusion of the entity’s responsibility for reporting information to users, mainly shareholders and creditors, which is the investor theory’s emphasis.

12. If an entity theory viewpoint is taken, which of the following do you believe is