Difference between Cash Flow and Income Statement

Cash Flow Statement

The cash flow statement helps to summarise the total inflow as well as the outflow of cash and cash equivalents of an organisation. The main purpose of this financial statement is to reveal the liquidity and solvency position of an enterprise. It helps to assess the capability of a firm to generate sufficient cash that will help it to clear debts and take care of the operating expenses. Every company prepares their cash flow statement at the end of the financial year. There are three main elements in this statement which we will discuss below:

  • Cash Flow from Operating Activities – The operating activities are related to transporting the products and services of a firm to the marketplace for the purpose of selling them. The Cash Flow that comes from these activities indicates the net income of an organisation from selling its products. The items that are included under the operating activities include interest returns, rent payments, salary and wage payments, revenues, etc. There are two methods for calculating the cash flow from operating activities – the direct method and the indirect method.
  • Cash Flow from Investing Activities – This method helps to calculate the cash flow resulting from activities like selling or buying assets and investments along with receipt of interest, dividend or rent.
  • Cash Flow from Financing Activities – The cash flow from financing activities helps to look at the total proceeds that a company gets from shares, debentures and other borrowings while deducting the outflows resulting from interest and dividend payments, repayment of previous debts and repurchase of stocks.

Income Statement

The income statement of a company is one of its most important financial statements. It is an indicator of the overall profit or loss of an organisation for a particular accounting year. This profit or loss is calculated by first determining the total revenue and then subtracting the total expenses incurred from both operating and non-operating activities. Several firms around the world consider the income statement as one of the most significant financial documents that give the stakeholders a wider grasp on its current position. The income statement includes items like gross profit, net profit, taxes paid, revenue, costs, selling and administrative expenses, etc. It is the foundation stone on which the firm prepares its financial report for the simple reason that most of the information is available in this statement.

Difference between Cash Flow and Income Statement

Both the cash flow and income statements allow the stakeholders to get a better picture of a company’s finances and understand how it has performed over the past year. It can also help to ascertain the corrective measures a firm must take to succeed in the long run. These statements are also used during internal as well as tax audits. However, there are a number of points of difference between cash flow and income statement, and we will discuss those in the below table:

Cash Flow Statement

Income Statement

Definition

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.

Basis

The cash flow statement follows the cash basis of accounting that works on the actual payments and receipts of cash.

The income statement follows the accrual basis of accounting that works on the basis of income/payments that are either due or received in advance.

Division

The cash flow statement is classified into three activities which are as follows:

  • Operating
  • Investing
  • Financing

The income statement is classified into two activities which are as follows:

  • Operating
  • Non-operating

Usage

The cash flow statement helps to know the solvency and liquidity of a business, which will help to determine the present as well as future cash flows.

The income statement helps to determine the profitability of a company during a particular financial year.

Preparation

The cash flow statement is prepared on the basis of both the income statement and the balance sheet of a company.

The income statement is prepared on the basis of various ledger accounts and records of a company.

Depreciation

The cash flow statement does not record depreciation since it is a non-cash item.

The income statement records depreciation.

Conclusion

It is important to understand that in spite of several points of difference between cash flow and income statement, both of them are extremely important for any business organisation. It is mandatory for a firm to prepare these two financial statements to showcase their position as well as economic activities during a financial year.

Frequently Asked Questions

What is the indirect method of preparing the cash flow statement?

The indirect method of preparing the cash flow statement considers the net income, non-cash incomes, non-cash expenses, as well as net cash adjustments between the current assets and current liabilities in order to ascertain the actual net cash flow for a firm during a financial year.

What is the direct method of preparing the cash flow statement?

The direct method of preparing the cash flow statement considers only the cash transactions (total cash receipts and cash expenditure) in order to calculate the actual net cash flow from the operating activities for a firm during a financial year.

What is the formula used for calculating gross profit under the income statement?

The formula used for calculating gross profit under the income statement for a particular financial year is as follows:
Gross profit = Revenues – Cost of goods sold

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