Understanding Cash Flow Statement vs. Income Statement

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. An income statement shows whether a company made a profit, and a cash flow statement shows whether a company generated cash.

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 noncash accounting items such as depreciation and amortization.

The cash flow generally comes from revenue received as a result of business activity, but it may 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:

1. Operating activities: Analyzes 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.
2. Investing activities: Shows 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.
3. Financing activities: Shows the cash flow from all financing activities, such as cash raised by selling stocks and bonds, or borrowing from banks. 

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 money it made, how much money it paid out, and the resulting profit or 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 burn 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.