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:
- 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.
- 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.
- 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.
FAQs
The cash flow statement helps an organisation to record the total inflows as well as outflows of cash during a particular accounting period. The income statement is used by an organisation to record all items related to revenues, expenses, gains and losses during a particular accounting period.
What is the difference between a statement of cash flows and income statement quizlet? ›
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.
How is the statement of cash flows different from other financial statements? ›
For example, if you calculate cash flow for 2019, make sure you use 2018 and 2019 balance sheets. The CFS is distinct from the income statement and the balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded as revenues and expenses.
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 net income and cash flow statement? ›
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.
What is the difference between cash statement and income statement? ›
The cash flow statement follows the cash basis of accounting, which focuses on the actual cash payments and receipts. The income statement follows the accrual basis of accounting, which is based on income/payments that are either due or received in advance.
What is the difference between cash flow and cash flow statement? ›
Cash flow refers to the outflow and inflow of cash or cash equivalents in an organization in a specific period. Cash flow is recorded in the cash flow statement, which is one of the most important financial statements in accounting.
What is the difference between accounting income and cash flow? ›
Accounting income measures profitability over a specific period, while cash flow measures liquidity and the ability to pay bills on time. By managing accounting income and cash flow effectively, businesses can make informed decisions about their financial health and plan for future growth.
How is a cash flow statement different from a personal balance sheet? ›
The personal cash flow statement measures your cash inflows or money you earn and your cash outflows or money you spend. This determines if you have a positive or negative net cash flow. A personal balance sheet summarizes your assets and liabilities to calculate your net worth.
What is a cash flow statement in simple words? ›
A cash flow statement is a financial statement that shows how cash entered and exited a company during an accounting period. Cash coming in and out of a business is referred to as cash flows, and accountants use these statements to record, track, and report these transactions.
The main difference between a profit and loss statement and a cash flow statement is that a profit and loss statement measures the profitability of the business while a cash flow statement shows where your money is coming from, where it's going, and how much cash you actually have on hand at a given point in time.
What is the difference between income statement and statement? ›
Balance sheets and income statements are both financial statements that help you understand the financial health of an organization, but they have key differences. A balance sheet shows a company's immediate financial position, whereas an income statement measures performance over a period of time.
What is the purpose of the statement of cash flows? ›
The purpose of the statement of cash flows is to provide a summary of cash receipt and cash payment information for a period of time and to reconcile the difference between beginning and ending cash balances shown on the balance sheet.
What's the difference between cash flow and revenue? ›
Revenue is the money a company earns from the sale of its products and services. Cash flow is the net amount of cash being transferred into and out of a company. Revenue provides a measure of the effectiveness of a company's sales and marketing, whereas cash flow is more of a liquidity indicator.
What is the difference between operating income and operating cash flow? ›
Key Takeaways
Net operating income is a measure of profitability in real estate—the amount of cash flow a property generates after expenses. Operating cash flow is the money a business generates from its core operations.
What is the difference between a cash flow statement and a cash budget? ›
A cash flow statement shows the cash inflows and outflows which have already taken place during a past time period. On the other hand a cash budget shows cash inflows and outflows which are expected to take place during a future time period. In other words, a cash budget is a projected cash flow statement.
What is the difference between the statement of cash flows and the statement of profit or loss? ›
While the P&L provides the profitability picture, a cash flow statement depicts your company's liquidity (i.e. its availability of cash), and thus its ability to meet obligations as and when they fall due.
What is the most important way in which the cash flow statement differs from the income statement? ›
These terms sound similar, and they are related. But there are important differences in what they measure and how they're used. Your income statement measures how much money is coming in, and your cash flow statement measures how much money is coming in.
What is the key difference between a cash flow statement and a balance sheet? ›
A balance sheet is a summary of the financial balances of a company, while a cash flow statement shows how the changes in the balance sheet accounts–and income on the income statement–affect a company's cash position.
