Difference Between Income Statement and Cash Flow Statement

Income Statement vs Cash Flow Statement
 

The key difference between income statement and cash flow statement is the basis that is used to prepare these statements; for the income statement it is the accrual basis whereas for cash flow concept it is mere cash basis. Income statement and cash flow statement are two types of financial statements, prepared for the purpose of conveying information about the financial performance, position and changes of a particular business entity to a wide range of stakeholders. Income statement basically produces information about the financial performance of an enterprise for a specific period, in terms of profitability. Thus, income statement basically deals with two accounting elements, i.e. income and expenses. On the other hand, cash flow statement presents the movements in financial position of a business. Therefore, it considers the changes occurred in cash and bank balances of a business during a particular period. Both of these statements need to be prepared in a manner obeying the accounting concepts and standards of a particular economy that the businesses are operating in.

What is Income Statement?

This is alternatively known as profit and loss statement, earnings report, operating statement, etc. This statement basically enumerates incomes and expenses occurred in the past and depict resultant profit or loss of an organization over a particular period. Income statement is prepared based on the fundamental accounting equation (i.e. Income = Revenue – Expenses) and the ultimate result of this report determines the owners’ equity rate for that given period.

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What is Cash Flow Statement?

Cash flow statement is also an important financial statement that presents the movements in cash flows (inflows and outflows) of an entity over a period. It summarizes and then exhibits how the cash and bank balances of an organization move between different types of activities that generate and use cash. These activities are identified as operating, investing and financing activities.

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Similarities between Income Statement and Cash Flow Statement

There exist some similarities between income statement and cash flow statement.

• Information that both income and cash flow statements contain are equally useful for investment decision making.

• Information of both statements can be used to measure the effectiveness of operational performance of an organization.

• Both the statements consider inflows and outflows, for the income statement it is revenue and for cash flow statement it is cash and bank balances.

What is the difference between Income Statement and Cash Flow Statement?

• Income Statement is prepared based on the accrual basis (Income and expenses of a particular period are considered). Cash Flow Statement is prepared based on the cash basis (Actual money flows are considered).

• Income Statement provides information about profitability and owners’ equity. Cash Flow Statement provides information about liquidity and solvency of a business.

• Income Statement is an application of accounting policies, and standards and concepts are comparatively higher. Cash Flow Statement has a less number of standards, policies and concepts to follow. Hence, its objectivity is high.

• Income Statement is prepared referring to various records and ledger accounts. Cash Flow Statement is prepared using income statement and balance sheet details.

Income statement and cash flow statement are two important financial statements used by different stakeholders to make their economic decisions. Income statement records income and expenses of a business whereas cash flow statement records movements in cash and bank balances during a specific period.