Which statement is an advantage of SVA?

• A. Adjustments to profit so looks at cashflow measures
• B. Higher accounting profits automatically imply value
• C. It ignores cash flows
• D. It requires no estimation

Answer: (A)

The main idea behind SVA is to measure value creation by converting accounting profit into a cash-based view and adjusting for the capital required to generate that profit. This cash-flow orientation shows whether the business truly generates enough cash to cover the cost of the capital it uses, which is what shareholders care about. By adjusting profits to reflect cash flows, SVA reduces distortions from non-cash accounting items and timing differences, giving a clearer signal of value creation.

That’s why the stated advantage is that profits are adjusted to look at cash flow measures. It aligns performance with the real cash that can be returned to shareholders after financing the required capital, rather than relying on accounting profits alone.

The other ideas don’t fit: higher accounting profits don’t automatically mean value created because they don’t account for the cost of capital or cash timing; SVA explicitly focuses on cash flows rather than ignoring them; and SVA requires estimation of future cash flows and the cost of capital, so it isn’t free from estimation.