Income Statement and Cash Flow Statement

Many clients find it difficult to distinguish between the income statement and cash flow statement.  In this article, you will learn the definition of the income statement and cash flow statement.  Also, you will learn the components of the income statement and cash flow statement.  Next, you will discover the accounts that appear on the income statement but not on the cash flow statement and vice versa.  Finally, we end our discussion by identifying several articles relating to the income statement and cash flow statement.

The income statement and cash flow statement are financial statements with different purposes.  The income statement shows the net income or net earnings of a business within a given time frame.  The cash flow statement, on the other hand, is a financial statement used to demonstrate the movement of cash into a business and the movement of cash out of a business.

The components of the income statement and cash flow statement consist of the following.  The income statement consists of various Types of Revenue, Cost of Goods Sold and Operating Expenses.  When you subtract the cost of goods sold and operating expenses from revenues, you arrive at an accounting term known as Operating Income.  Operating Income is also referred to as earnings before tax. 

As a result, the income statement formula is as follows:

Revenues – Cost of Goods Sold – Operating Expenses = Operating Income.

The cash flow statement, on the other hand, consists of Cash Inflows, Cash Outflows, Excess of Cash or Deficiency of Cash, Beginning Cash Balance and Ending Cash Balance.  The cash flow statement formula is as follows:

Cash Inflows - Cash Outflows = Excess of Cash or Deficiency of Cash + Beginning Cash Balance = Ending Cash Balance. 

Please Note: the ending cash balance of one period becomes the beginning cash balance of the following period.  For example, if you were preparing a cash flow statement on a monthly basis, then January’s ending cash balance becomes February’s beginning cash balance and so on.

The income statement and cash flow statement share many of the same accounts. Moreover, all revenues, cost of goods sold, most operating expenses, and income taxes appear on both the income statement and cash flow statement.  Notice “most operating expenses” appear on the income statement and cash flow statement.  The operating expenses not appearing on the cash flow statement include all depreciation expense accounts.  The reason depreciation expenses do not appear on the cash flow statement is because depreciation is a non cash expense. 

The income statement and cash flow statement have other differing accounts as well.  Furthermore, assets, liabilities, and equity which appear on the balance sheet do not appear on the income statement.  They do, however, appear on the cash flow statement only when the assets are purchased, when liabilities are paid, when investments are made, when owner’s drawings are paid, and when other reductions in equities occur. 

Principal paid on loans is another account which appears on the cash flow statement but does not appear on the income statement.  Instead, the principal paid on a loan appears on the balance sheet as a reduction in the actual loan or liability.  The interest paid on the loan, however, appears on both the income statement and cash flow statement.

For more detailed information on the Income Statement and Cash Flow Statement, follow the associated links.

Related Articles:

Income Statement
Types of Revenues
Cost of Goods Sold
Operating Expenses
Operating Income
Depreciation Expense
Cash Flow Statement
Cash Inflows
Cash Outflows
Excess of Cash or Deficiency of Cash
Ending Cash Balance
Balance Sheet