Which of the following is an advantage of preparing a statement of cash flows?

• A. It eliminates the need for an income statement.
• B. It helps users assess a company's ability to generate future cash flows.
• C. It replaces the balance sheet as the primary financial statement.
• D. It records revenues and expenses on an accrual basis.

Answer: (B)

Verified step by step guidance

1. Understand the purpose of a statement of cash flows: It provides information about a company's cash inflows and outflows during a specific period, helping users assess liquidity, solvency, and financial flexibility.
2. Recognize that the statement of cash flows complements, rather than replaces, other financial statements like the income statement and balance sheet. It focuses on cash transactions rather than accrual-based accounting.
3. Identify the key advantage of the statement of cash flows: It helps users evaluate a company's ability to generate future cash flows by analyzing past cash flow patterns and trends.
4. Eliminate incorrect options: The statement of cash flows does not eliminate the need for an income statement, replace the balance sheet, or record revenues and expenses on an accrual basis.
5. Conclude that the correct answer is: 'It helps users assess a company's ability to generate future cash flows,' as this aligns with the primary purpose of the statement of cash flows.