Income Statement and Cash Flow Statement are two prominent parts of the financial statement as they are very helpful for the users of the financial statement. Only Balance Sheet is not capable of reflecting the true picture of the firm’s liquidity and solvency and therefore these statements are used. Most people get confused between the two major statements. So have a look at the differences between an Income Statement and Cash Flow Statement.
Content: Income Statement Vs Cash Flow Statement
|Basis for Comparison||Income Statement||Cash Flow Statement|
|Meaning||The income statement is a part of financial statement which is used to show the revenues, gains, expenses and losses for a particular accounting period.||The cash flow statement is a part of financial statement which is used to reflect the inflows and outflows of cash for a particular accounting period.|
|Divided into||Two activities||Three activities|
|Objective||To know the profitability and owner's equity.||To ascertain the liquidity and solvency of business.|
|Preparation||On the basis of various records and ledger accounts.||On the basis of income statement and balance sheet.|
Definition of Income Statement
The income statement is one of the major parts of the financial statement. It is used to represent the revenues, gains, expenses and losses from operating and non-operating activities of the company. When the total revenues (including gains) exceed the total expenses, then the result would be the net income while if the total expenses (including losses) exceed total revenues, then the result would be the net loss.
Here operating activities state the activities which are related to the day-to-day business of the company like manufacturing, purchasing, selling and distribution of goods and services. Non- operating activities means the activities which are related to purchase or sale of investments, assets, payment of dividend; taxes; interest and foreign exchange gains or losses.
Definition of Cash Flow Statement
The cash flow statement is also an important part of the financial statement of a company. It is used to represent the cash inflows and outflows during the year from operating, investing and financing activities. The statement reflects the position of cash and cash equivalents at the beginning and end of the accounting year. It shows the movement of cash during the period.
Here operating activities include the basic activities of the company like manufacturing, purchasing, selling and distribution of goods and services. Investing activities include the purchase and sale of investments and assets. Financing activities include the issue and redemption of shares or debentures and other financing activities related to the dividend, interest, etc.
Key Differences Between Income Statement and Cash Flow Statement
The points given below are noteworthy, so far as the difference between cash flow and income statement is concerned:
- The major difference between an income statement and cash flow statement is cash, i.e. the income statement is based on an accrual basis (due or received) while the cash flow statement is based on the actual receipt and payment of cash.
- The income statement is classified into two main activities operating and non-operating, whereas the cash flow statement is divided into three activities operating, investing and financing.
- The income statement is helpful in knowing the profitability of the company, but the cash flow statement is useful in knowing the liquidity and solvency of business which determines the present and future cash flows.
- Incomes statement is based on accrual system of accounting, wherein incomes and expenses of a financial year are considered. On the other hand, cash flow statement is based on cash system of account, which only considers actual money inflows and outflows in a particular financial year.
- The income statement by to taking into account various records and ledger accounts. As against this, cash flow statement is prepared considering the income statement and balance sheet.
- Depreciation is considered in the income statement, but the same is excluded from cash flow statement because it is a non-cash item.
The preparation of the income statement and the cash flow statement is mandatory for all business organisations. The two statements are used by the readers (stakeholders, i.e. creditors, investors, suppliers, competitors, employees, etc.) of financial statement to know about the company’s performance, stability and solvency position. These statements are also used for the purpose of internal and tax audit.