Understand the cash flow statement versus the income statement

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The cash flow statement and the income statement are an integral part of a company’s balance sheet. The cash flow statement or statement of cash flows measures a business’s sources of cash and its uses of cash over a specific period of time.

The income statement measures the financial performance of a business, such as income, expense, profit or loss over a specific period of time. This financial document is sometimes referred to as a statement of financial performance. An income statement shows whether a business has made a profit and a cash flow statement shows whether a business has generated cash.

Key points to remember

  • The cash flow statement and income statement, as well as the balance sheet, are the three main financial statements. The cash flow statement and the income statement are integrated into the company’s balance sheet.
  • The cash flow statement is linked to the income statement through net income or loss, which is usually the first item in a cash flow statement, used to calculate operating cash flows.
  • A cash flow statement shows the exact amount of cash inflows and outflows of a business over a period of time.
  • The income statement is the most common financial statement and shows the total income and expenses of a business, including non-cash accounting, as depreciation over a period of time.
  • The cash flow statement is linked to the income statement through profit or loss or net consumption, which is the first item in a cash flow statement, used to calculate operating cash flows.

What is the difference between a cash flow statement and an income statement?

Statement of cash flows

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

Cash flow usually comes from income received from business activity, but it can be augmented by funds available through credit. A cash flow statement is used to determine the short-term viability and liquidity of a business, particularly how well positioned it is to pay its bills to suppliers.

A statement of cash flows is generally divided into three main parts:

  1. Operating activities Analyze a business’s cash flow from profit or loss by reconciling net profit to the actual cash the business has received or used in its operating activities.
  2. Investment activities show cash flows from all investing activities, which typically include purchases or sales of long-lived assets, such as property, plant and equipment (property, plant and equipment), as well as investment securities.
  3. Fundraising activities show cash flows 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 the total income and expenses of a business, including non-cash accounting such as depreciation, traditionally monthly, quarterly, or annually.

income statement

The most common financial statement is the income statement, which shows the total income and expenses of a business, including non-cash accounting such as depreciation, traditionally monthly, quarterly, or annually. An income statement is used to determine the performance of a business, specifically the amount of income it has generated, the expenses it has incurred, and the profit or loss resulting from the income and expenses.

The cash flow statement is linked to the income statement through profit or loss or net consumption, which is the first item in the cash flow statement. The profit or loss from the income statement is then used to calculate the operating cash flow. This is called 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 the net cash flow.

The bottom line

The income statement and the cash flow statement are two of the three components of a financial statement, the other being the balance sheet. Although they both differ in the types of information they show – the income statement reflecting a company’s performance through its income, expenses, and profit, and the cash flow statement reflecting how whose profit or loss flows through the business – they are both inextricably linked.

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


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