What is value added and how is it calculated? Value added refers to:

• A. The sum of all expenses incurred in producing goods or services.
• B. The difference between a company's net sales and the cost of goods and services purchased from other firms.
• C. The total revenue earned from all sales before any deductions.
• D. The profit remaining after all operating expenses and taxes have been deducted.

Answer: (B)

Verified step by step guidance

1. Understand the concept of value added: Value added refers to the additional value created by a company through its production process. It is the difference between the revenue generated from selling goods or services and the cost of goods and services purchased from other firms (inputs).
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 of the formula: Net Sales refers to the total revenue from sales after deducting any returns, allowances, or discounts. Cost of Goods and Services Purchased from Other Firms includes the expenses incurred for raw materials, outsourced services, or other inputs not produced internally.
4. Apply the formula: Subtract the total cost of goods and services purchased from other firms from the net sales to determine the value added by the company.
5. Interpret the result: The calculated value added represents the economic value the company has created through its operations, which can be distributed to stakeholders such as employees (wages), shareholders (profits), and the government (taxes).