The Magic in Value Added: Merits of Derived Accounting Indicator Numbers

The American Accounting Association (AAA) Committee on Accounting and Auditing Measurement (1991) had recommended that value added be considered for mandatory disclosure in the US in addition to the income and cash flow statements. This study examines empirically the relative merits of derived performance indicator numbers from value added reporting, accrual accounting and cash flow accounting. The results show that the derived performance indicator numbers based on net value added had lower variability and higher persistency than corresponding numbers based on either earnings or cash flows of 673 US firms for the 1981–1990 period. These results and other related considerations argue strongly in favor of the recommendation of the AAA Committee.