Difference between income statement and statement of cash flows

Definitions and meanings

Income statement:

The income statement reflects a company’s revenue and total expenses. These include non-cash items such as depreciation and amortization over a given accounting period. The income statement, which is made up of operating and non-operating activities, determines the performance of a company i.e. profits generated and owner’s equity. The entries are made into the statement from ledgers and records on the basis of accrual. The income statement is an integral part of the balance sheet as it is used to make the statement of cash flows as well.

Statement of cash flows:

The statement of cash flows reflects a company’s cash inflows and outflows over a given accounting period. It records the current operating results and changes on the balance sheet, namely increase or decrease in accounts receivable or payable. It does not include non-cash accounting items such as depreciation and amortization. The statement of cash flows generally takes into account revenue generated as a result of business activity, but may also be influenced by funds available by means of credit. It is divided into operating, investing and financing activities. The statement of cash flows is used to determine the short-term solvency and liquidity of a company to understand its capability to payoff its vendors.

Key difference between income statement and statement of cash flows:

The main points of difference between income statement and statement of cash flows are given below:

  1. The income statement operates on the accrual system of accounting whereas statement of cash flows records actual receipt and payment of cash and cash equivalents in a given financial year.
  2. Non-Cash items like depreciation are taken into account in income statement but not included in the statement of cash flows.
  3. While income statement uses ledgers and other records, the statement of cash flows uses the income statement and balance sheet of a company.
  4. The Income Statement is divided into operating and non-operating income, whereas the statement of cash flows is divided into operating, investing and financing activities.
  5. While the income statement is made to understand the owner’s equity and profitability for a given financial year, the statement of cash flows determines the solvency and liquidity of the company which can be used to predict future cash flows.

Income statement versus statement of cash flows – tabular comparison:

A tabular comparison of income statement and statement of cash flows is given below:

Income statement vs Statement of Cash flows
1. Objective
To ascertain the profitability and equity of owners. To determine the liquidity and solvency of a business organisation.
2. Basis of preparation
Ledgers and other records. Income statement and balance sheet.
3. Basis of entry
Accrual. Cash inflow/outflow
4. Divided into
2 activities. 3 activities.
5. Consideration of depreciation
Yes No

Conclusion:

While the income statement and statement of cash flows are both important aspects of a balance sheet, they both serve different purposes for the company. An income statement shows whether or not a company has made a profit and the statement of cash flows shows the amount of cash a business has generated and how it has been used.

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