How Is a Cash Flow Statement Different From an Income Statement? (2024)

The cash flow statement and the income statement are integral parts of a corporate balance sheet. The cash flow statement or statement of cash flows measures the sources of a company's cash and its uses of cash over a specific period of time.

The income statement measures a company's financial performance, such as revenues, expenses, profits, or losses over a specific period of time. This financial document is sometimes called a statement of financial performance. Anincome statementshows whether a company made a profit, and a cash flow statement shows whether a company generated cash.

Key Takeaways

  • The cash flow statement and the income statement, along with the balance sheet, are the three main financial statements. The cash flow statement and income statement integrate with the corporate balance sheet.
  • The cash flow statement is linked to the income statement by net profit or net loss, which is usually the first line item of a cash flow statement, used to calculate cash flow from operations.
  • A cash flow statement shows the exact amount of a company's cash inflows and outflows over a period of time.
  • The income statement is the most common financial statement and shows a company's revenues and total expenses, including noncash accounting, such as depreciation over a period of time.
  • The cash flow statement is linked to the income statement by net profit or net burn, which is the first line item of a cash flow statement, used to calculate cash flow from operations.

Cash Flow Statement

A cash flow statement shows the exact amount of a company's cash inflows and outflows, either monthly, quarterly, or annually. It captures the current operating results and changes on the balance sheet, such as increases or decreases in accounts receivable or accounts payable, and does not include non-cash accounting items such as depreciation and amortization.

The cash flow generally comes from revenue received as a result of business activity, but itmay be augmented by funds available as a result of credit. A cash flow statement is used to determine the short-term viability and liquidity of a company, specifically how well it is positioned to pay its bills to vendors.

A cash flow statement is generally divided into three main parts:

  1. Operating activities analyze a company’s cash flow from net income or losses by reconciling the net income to the actual cash the company received from or used in its operating activities.
  2. Investing activities show the cash flow from all investing activities, which generally include purchases or sales of long-term assets, such as property, plant, and equipment (PP&E), as well as investment securities.
  3. Financing activities show the cash flow from all financing activities, such as cash raised by selling stocks and bonds, or borrowing from banks.

The most common financial statement is the income statement, which shows a company's revenue and total expenses, including noncash accounting such as depreciation, traditionally either monthly, quarterly, or annually.

Income Statement

The most common financial statement is the income statement, which shows a company's revenue and total expenses, including noncash accounting such as depreciation, traditionally either monthly, quarterly, or annually. An income statement is used to determine the performance of a company, specifically how much revenue it generated, the expenses it incurred, and the resultingprofitor loss from the revenue and expenses.

The cash flow statement is linked to the income statement by net profit or net burn, which is the first line item of the cash flow statement. The profit or loss on the income statement is then used to calculate cash flow from operations. This is referred to as the indirect method. Another technique, called the direct method, can also be used to prepare the cash flow statement. In this case, the money received is subtracted from the money spent to calculate net cash flow.

The Bottom Line

The income statement and the cash flow statement are two out of the three components of a financial statement, the other being the balance sheet. Though they both differ in the types of information they show—the income statement reflecting a business's performance via its revenues, expenses, and profits, and the cash flow statement reflecting how that profit or loss flows throughout the company—they are both inextricably linked.

The cash flow statement cannot exist without the income statement, as it begins with the net income or loss derived from the income statement, and goes onto show how well a company manages its cash position.

How Is a Cash Flow Statement Different From an Income Statement? (2024)

FAQs

How Is a Cash Flow Statement Different From an Income Statement? ›

A cash flow statement shows the exact amount of a company's cash inflows and outflows over a period of time. The income statement is the most common financial statement and shows a company's revenues and total expenses, including noncash accounting, such as depreciation over a period of time.

What is the difference between a statement of cash flows and income statement quizlet? ›

A Statement of Cash Flows lists assets, liabilities and owner's equity; an Income Statement shows how much money is retained and reinvested in the company. e. A Statement of Cash Flows shows how much money is retained and reinvested in the company; an Income Statement lists assets, liabilities, and owners equity.

What is the difference between accounting income and cash flow? ›

The main difference between accounting income and cash flow is that accounting income is a measure of profitability, while cash flow is a measure of liquidity. Accounting income includes non-cash items such as depreciation, which reduces taxable income but does not affect cash flow.

Which statement best describes how the cash flow statement differs from the income statement? ›

Which statement best describes how the cash flow statement differs from the income statement? The income statement records sales and expenses when they happen, not when cash is actually exchanged. The cash flow statement records cash inflows and outflows when they actually occur.

What is the difference between funds flow statement and income statement? ›

The main difference between a fund flow statement and an income statement is that a fund flow statement shows the sources and uses of cash over a period of time, while an income statement shows the revenues, expenses, and profit or loss over a period of time.

What is the difference between accounting income and cash flow quizlet? ›

accounting income is not the same as cash flow b/c an income statement contains Non-cash Items. Non-cash items are expenses charged against revenues that do not directly affect cash flow, such as depreciation. 2.) The deduction or depreciation is just an accounting number, its not ACTUAL cash spent.

What is the key difference between a cash flow statement and a balance sheet? ›

A balance sheet shows what a company owns in the form of assets and what it owes in the form of liabilities. A balance sheet also shows the amount of money invested by shareholders listed under shareholders' equity. The cash flow statement shows the cash inflows and outflows for a company during a period.

Why cash flow is more important than income statement? ›

Cash flow statements are a good barometer of whether your debt levels are sustainable and whether your cost of debt is manageable or not based on your sustainable operating cash flows. Remember, you need real cash to pay your debts and book profits are not sufficient.

What is the main difference between net income and cash inflows? ›

Cash flow from operating activities is the absolute cash that an organisation gets, while the net income or net gain is income minus the costs, like the expense of undertaking the business, depreciation, taxes, compensations, interests, and other different costs.

What is the difference between cash flow and? ›

The Difference Between Cash Flow and Profit

The key difference between cash flow and profit is while profit indicates the amount of money left over after all expenses have been paid, cash flow indicates the net flow of cash into and out of a business.

Why are cash flow statements not the same as income statements? ›

A cash flow statement sets out a business's cash flows from its operating activities, its financing activities, and its investment activities. An income statement provides users with a business's revenues and gains, as well as expenses and losses, over a specific period of time.

What does a cash flow statement tell you that an income statement does not? ›

A cash flow statement is a regular financial statement telling you how much cash you have on hand for a specific period. While income statements are excellent for showing you how much money you've spent and earned, they don't necessarily tell you how much cash you have on hand for a specific period of time.

What is the purpose of the statement of cash flows? ›

The primary purpose of the statement is to provide relevant information about the agency's cash receipts and cash payments during a period.

Is a funds flow statement a better substitute for an income statement? ›

In summary, while both statements are important for financial analysis, they serve different purposes. Income statements are primarily used to evaluate profitability, while fund flow statements are used to understand the flow of funds within an organization and assess changes in financial position.

What are three main parts of a statement of cash flows? ›

The cash flow statement is typically broken into three sections:
  • Operating activities.
  • Investing activities.
  • Financing activities.
Apr 30, 2020

What is the most important number on a statement of cash flows? ›

Regardless of whether the direct or the indirect method is used, the operating section of the cash flow statement ends with net cash provided (used) by operating activities. This is the most important line item on the cash flow statement.

What is accounting income? ›

Accounting income is the increase in the resources of a business (or other) entity, which results from the operations of the enterprise. In other words, accounting income is the net increase in owner's equity resulting from the operations of a company.

What is the difference between cash and accounting? ›

The difference between cash and accrual accounting lies in the timing of when sales and purchases are recorded in your accounts. Cash accounting recognizes revenue and expenses only when money changes hands, but accrual accounting recognizes revenue when it's earned, and expenses when they're billed (but not paid).

Is operating cash flow the same as income? ›

Net Income is the result of revenues minus the expenses, taxes, and costs of goods sold (COGS). Operating cash flow is the cash generated from operations, or revenues, less operating expenses. Many investors and analysts prefer using operating cash flow as an indicator of a company's health.

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