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.
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 shows how much money is retained and reinvested in the company; an Income Statement lists assets, liabilities, and owners equity. How can money be brought into a company?
What is the difference between flow statement and cash flow statement? ›
Key Differences
The cash flow statement is best used to understand the liquidity position of a firm whereas the fund flow statement is best suited for long-term financial planning, which is why it is an important tool for investors.
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.
What are the two difference between income statement and fund flow 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 revenue and cash flow statement? ›
Key Takeaways. 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 income statement and statement? ›
Owning vs Performing: A balance sheet reports what a company owns at a specific date. An income statement reports how a company performed during a specific period. What's Reported: A balance sheet reports assets, liabilities and equity. An income statement reports revenue and expenses.
What's the difference between a cash flow statement and a profit and loss statement? ›
Both concepts are important parts of a successful financial planning. Cash flow is important because it shows how much money a business has available to meet its obligations. Profit and loss, on the other hand, is a measure of whether a business is making money or not.
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.
Cash Flow Statement helps in knowing the exact figure of cash inflows and outflows from various operations of the business. It helps in comparing the cash budgets of past assessments with the present to assess the future requirements of the cash.
What is the cash flow statement with an example? ›
A cash flow statement summarizes the amount of cash and cash equivalents entering and leaving a company. The CFS highlights a company's cash management, including how well it generates cash. This financial statement complements the balance sheet and the income statement.
What is financial statements and cash flow statement? ›
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.
Why is the cash flow statement more important than the income statement? ›
Cash can highlight operational issues better than income statements. You may have a sharp increase in client base but you may be offering longer credit periods. This could be positive for profits but negative for cash flows. These operational issues are immediately highlighted by the cash flow statement.
What is the difference between operating income and cash flow? ›
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 net income and cash flow statement? ›
Namely, your net income represents the profitability of your business, while the cash flow will reveal how much cash you actually have on hand at a given time.
What is the difference between cash flow and net income? ›
Namely, your net income represents the profitability of your business, while the cash flow will reveal how much cash you actually have on hand at a given time.
What does a cash flow statement tell you that an income statement does not? ›
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.
