6 Major Differences between a Cash Flow Statement and Income Statement

Are you still figuring out what differentiates a cash flow statement from an income statement? Here’s a detailed guide outlining the major differences between them.

Each quarter and every year, your accountant gives you a set of financial statements. Similarly, companies have been presenting their financial statements as they approach the end of the year. All types of financial statements have a purpose. Among these statements lie an income statement and a cash flow statement. These statements provide relevant information to facilitate important business decisions.

Which Statement Do You Need for Specific Decision-making?

The purpose of a financial statement depends upon the concerned business decision.

The information provided by the cash flow statement differs from what is presented in an income statement, though both are important.

A cash flow statement maintains a record of all-around fluctuations in a business’s cash and cash equivalents during a specific financial year. In contrast, an income statement indicates the net profit or loss for a specific accounting period. Financial statements show a record of financial activities and the all-around position of the business. The accounting process’s ultimate goal includes the cash flow statement, income statement, and balance sheet.

Comparison Chart

What is a Cash Flow Statement?

The cash flow statement is also a significant component of the financial statement of a business. It is employed to denote the cash inflows and outflows from operating, investing and financing activities during a year. The statement evaluates the position of cash and cash equivalents at the outset and end of the accounting year. It exhibits the movement of cash during that period.

As per the Accounting Standards (AS) 3, operating activities include:

• Manufacturing of goods and services.
• Selling of goods and services.
• Distribution of goods and services.
• Purchase of goods and services.

On the other hand, investing activities comprise the purchase and sale of investments and assets.

The financing activities encompass the issue and redemption of shares or debentures and those associated with the dividend and interest.

What is an Income Statement?

The income statement is an essential element of the financial statement. It is also called a Profit and Loss statement, or simply P&L. It is used to depict the revenues, gains, expenses and losses from operating and non-operating activities of a business.

When the total revenues (involving gains) surpass the total expenses, it results in the net income. But if the total expenses (involving losses) surpass total revenues, the result is the net loss.

Note that operating activities include the activities associated with everyday business such as manufacturing, purchasing, distribution, and selling of goods and services. In contrast, non-operating activities indicate the activities concerned with:

• The purchase or sale of investments and assets.
• Payment of dividends, taxes, and interest.
• Foreign exchange gains or losses.

Cash Flow Statement vs Income Statement

The characteristics mentioned below are notable when a comparison between the cash flow statement and the income statement is talked about:

• The cash is the primary difference between a cash flow statement and an income statement. The cash flow statement is established on the actual receipt and payment of cash. On the contrary, the income statement is based on an accrual basis (both due and received).
• The cash flow statement is distributed into three activities: operating, investing, and financing, while the income statement is categorised into two major activities: operating and non-operating.
• The cash flow statement is beneficial in understanding the liquidity and solvency of a business, which defines the present and future cash flows. Still, the income statement assists in understanding the profitability of the business.
• A cash flow statement is made based on a cash system of account, which only contemplates actual money inflows and outflows in a specific financial year. On the other hand, an income statement is made based on an accrual system of accounting, in which incomes and expenses of a financial year are contemplated.
• The income statement and balance sheet are considered when a cash flow statement is made. Contrary to this, various records and ledger accounts are considered when an income statement is made.
• Being a non-cash item, depreciation is not considered while making a cash flow statement. As opposed to this, depreciation is included in an income statement.

Important: Cash Flow ≠ Profit

It’s important to understand that the cash flow depicted by your cash flow statement is not always equal to the profit depicted by your income statement.

Certain transactions such as loans and owner distributions affect cash flow, whereas these transactions do not impact profit.

So, while the income statement (P&L) will indicate your profit, the cash flow statement will explain why your profit is not the same as the change in cash in your business’s bank account.

Which Statement Should You Use?

Suppose you have to decide the amount of debt your business can comfortably take on without any harm. In that case, you will learn that the cash flow statement is more effective; however, If you have to make a decision related to the profitability of your business, such as checking whether you are making profits or losses, you will have to rely on your business’s income statement.

The Bottomline

The preparation of the cash flow statement and the income statement is compulsory for all businesses. The two statements are utilised by the readers (stakeholders, like creditors, investors, suppliers, market rivals, employees, among others) of financial statements to understand the business’s performance, stability and solvency position. These statements are also employed for internal and tax audits.