The Statement of Cash Flow vs. the Income Statement

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The Statement of Cash Flow vs. the Income Statement

Companies generate both cash flow statements and income statements, which, on first thought, may seem the same. But there are some very important differences.

It boils down to when income and expenses actually happen

The income statement recognizes revenue when earned and expenses when incurred. This does not mean that cash has traded hands. For example, firms will often sell their goods on credit. At this point, they will recognize this sale as revenue, although they have not yet received cash for it. The statement of cash flow only records inflows and outflows of cash, regardless of when income was earned or expenses incurred.

To calculate the cash flow from operating activities section, a firm will take its net income from the income statement and adjust it to reflect those accounts that have recognized revenue but have not yet generated cash. The result of these adjustments is the actual amount of cash either generated or used by a firm’s operating activities.