What is 'value added' in the context of financial accounting, and how is it calculated?

• A. The difference between net sales and the cost of goods and services purchased from other firms.
• B. The sum of all expenses incurred during the production process.
• C. The profit earned after deducting all operating expenses from net sales.
• D. The total amount of sales revenue before any deductions.

Answer: (A)

Verified step by step guidance

1. Understand the concept of 'value added' in financial accounting. It refers to the economic value created by a company during its production process, which is the difference between the value of outputs (sales revenue) and the value of inputs (costs of goods and services purchased from other firms).
2. Identify the formula for calculating 'value added': Value Added = Net Sales - Cost of Goods and Services Purchased from Other Firms.
3. Break down the components: Net Sales refers to the total revenue generated from sales after deducting returns, allowances, and discounts. Cost of Goods and Services Purchased from Other Firms includes all external costs incurred to produce goods or services.
4. Analyze the options provided in the problem: Compare each option to the definition and formula of 'value added' to determine which one aligns with the concept.
5. Conclude that the correct interpretation of 'value added' is the difference between net sales and the cost of goods and services purchased from other firms, as this matches the definition and calculation method.