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Difference between income statement and cash flow statement

enero 15, 2020

Profit and loss account reflects the net profit or loss of business activities for a particular accounting period. On the other hand, the financial statement keeps track of the overall changes in the cash and cash equivalents of the company organization during a particular financial year.

The financial account refers to the official registration of financial activities and to the overall position of the commercial entity. the final destination of the entire accounting process, which includes the income statement, the financial balance sheet and the cash flow statement. useful for interested parties to know the profitability, liquidity, performance and position of the company. Check the article that was provided to you, as it analyzes all the important differences between the income statement and the cash flow statement.

Comparative chart

Basis for comparison Income statement Cash flow statement
SenseThe income statement is a part of the cash flow statement that is used to show revenue, gains, expenses and losses for a particular accounting period.The cash flow statement is a part of the balance sheet that is used to reflect cash inflows and outflows for a particular accounting period.
Divided intoTwo activitiesThree activities
basematurationCash
ObjectiveTo know the profitability and equity of the owner.To ascertain the liquidity and solvency of the business.
PreparationBased on various ledgers and general ledger accounts.Based on the income statement and balance sheet.
DepreciationConsideredUnconsidered

Definition of the income statement

The income statement is one of the main parts of the financial statement. used to represent the revenues, gains, expenses and losses deriving from the company's operational and non-operating activities. When total revenues (including earnings) exceed total expenses, the result would be net income while if total expenses (including losses) exceed total revenues, the result would be net loss.

Here the operational activities indicate the activities that are related to the daily business of the company such as the production, purchase, sale and distribution of goods and services. Non-operating activities are activities related to the purchase or sale of investments, activities, payment of dividends; taxes; interest and exchange losses and interest.

Financial statement definition

The cash flow statement is also an important part of a company's cash flow statement. used to represent cash inflows and outflows during the year deriving from operating, investment and financing activities. The account reflects the position of cash and cash equivalents at the beginning and end of the accounting year. Shows the cash flow during the period.

Here the operational activities include the basic activities of the company such as production, purchase, sale and distribution of goods and services. Investment activities include the purchase and sale of investments and activities. Financing activities include the issue and redemption of shares or bonds and other financing activities relating to dividends, interest, etc.

Key differences between the income statement and the cash flow statement

The points indicated below are noteworthy, as regards the difference between the cash flow and the income statement:

  1. The main difference between an income statement and a cash flow statement is liquidity, i.e. the income statement based on an accrual basis (due or received) while the cash flow statement based on the actual receipt and payment of money.
  2. The income statement classified into two main operating and non-operating activities, while the cash flow statement divided into three operating, investment and financing activities.
  3. The income statement useful for knowing the profitability of the company, but the cash flow statement useful for knowing the liquidity and solvency of the activities that determine the current and future cash flows.
  4. The tax return is based on the accrual accounting system, in which the income and expenses of a financial year are considered. On the other hand, the cash flow statement based on the current account system, which only considers the actual incoming and outgoing cash flows in a given financial year.
  5. The income statement to consider various records and general ledger accounts. On the contrary, the cash flow statement has been prepared considering the income statement and the balance sheet.
  6. Depreciation considered in the income statement, but the same excluded from the cash flow statement because it is a non-monetary element.

Conclusion

The preparation of the income statement and the mandatory cash flow statement for all business organizations. The two statements are used by readers (stakeholders, ie creditors, investors, suppliers, competitors, employees, etc.) of the financial statements to find out the company's position, stability and solvency. These declarations are also used for internal and tax verification purposes.

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