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.
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 non-cash 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:
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.
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 revenue it generated, the expenses it incurred, 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 loss 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 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.
Securities and Exchange Commission. "Beginners' Guide to Financial Statement."
CFA Institute. "Understanding Cash Flow Statements."
Jacksonville State University. "Financial Statement Tutorial," Page 2.
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