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Cash Flow vs Net Income

By Pranjal Jain
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Fundamentals » Cash Flow vs Net Income

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Difference Between Cash Flow

vs Net Income

Cash flow can be defined as the cash movement

i.e. either inflow of the cash and cash equivalents

held by a business in the form of revenue, capital

funding related transactionsor outflow in the

form of expenses incurred, debt servicing

transactions undertaken during an accounting

period.

Whereas

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Net income, also known as net profit/

loss(bottom line item of the income statement) is

the amount of net profits/ lossearned by an

organization calculated as sum total of all

revenue generated reduced by the cost of goods

sold, selling and administrative expenses,

amortization, depreciation, the interest cost, any

other extraordinary item, taxes and any other

expenses incurred.

Cash Flow
Cash flow is an important statement forming

part of financial statements, which provides

gross data for all cash inflows and outflows of an

organisation which they either receives and pays

for the ongoing business operations, for other

investment sourcesor for financing transactions

during a particular period. Financial statement of

the company provides an investor and analysts

with the helicopter view of all the transactions

undertaken by the organisation. Among all

financial statements, cash flow statement

presents cash movement and is considered as

most instinctive part of F/s. Cash Flow statement

provides categorizes all transactions in three

major classification –

Cash Flow from Operating Activity: It is

the most important part of cashflow

statement which presents cash flows

related with all operating activities of a

business. While presenting using indirect

method, it starts with the net income of the

business, makes adjustments for non-cash

transactions like depreciation. After

adjusting for non-cash transactions, it

adds/ subtracts cash flow from related with

various operating activities like cashflows

related debtors, sales, vendors, purchases

etc.These includes transactions like buying

and selling of materials, inventory, etc,

payment of expenses like salaries, wages

etc. Positive cash flow from operating

activities indicates good operating

efficiency whereas a negative cashflow

represents company poor operating

performance.

Cash Flow from Investing Activity: This

part represents cash flow from investment

activities like cash expenditure on purchase

or sale of assets like plant, property,

equipment, furniture etc. in this cash flow

investors take a look at the capital

expenditure of the company. When the

capital expenditure of the company

increases the reduction in cash flow is

observed and as a result, it symbolises that

the organisation is making investments for

future operations. Growing companies

usually have high CAPEX cashflows.

Cash Flow from Financing Activity: This

part of cashflow statement represents cash

transactions in relation with capital funding

i.e. business financing. It checks the flow of

cash between the organisation and its

shareholders (owners), debenture holders,

and other financing organizations like

banks. Cash flow from financing activity is

useful for the investors and analyst in order

to ascertain return (dividend, share buy-

back) generating capacity for their

individual investment. It helps banks to

analyse risk of defaults and debt servicing

capacity of organization.

Total Cash Flow = Cash Flow from Operating

Activities + Investing Activities + Financing

Activities

Net Income
Net Income is the amount of surplus revenue

generated by an organization after recording/

paying off all expenses incurred during an

accounting period. This figure is calculated in

company’s Profit and Loss A/c as a difference of

total earned revenue (received in cash or not)

and expenses incurred(cost of goods sold,

operating expenses, non-operating expenses,

interest expenses, tax expenses and any other

expenses) whether paid in cash or not. It is

important for each stakeholder to gather and

understand amount of net profit generated by

entity. With the help of net income, net earning

per share can be determined. It is also termed as

bottom line as it is the last line item of the

income statement

Net Income = Total Revenue – COGS –

Operating Expenses – Interest Expenses – Tax

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Head to Head
Comparison between
Cash Flow vs Net
Income (Infographics)
Below are the top 6 differences between cash

flow vs net income:

CashFlowvsNetIncome

#1.Components

CashFlow NetIncome

Thala thila
Dealswithonlycashitems. Dealswithallrevenueandall
expenseswhethercashornon-cash.

#2.Division

CashFlow NetIncome

Dividedinthreemaincategories:
•OperatingActivities
•Investingactivities Operatingactivities
•FinancingActivities
Non-Operatingactivities

#3.AccountingMethod
CashFlow NetIncome

Cash. Accrual.

#4.Motive

CashFlow NetIncome

Todeterminethecashpositionand Todeterminetheprofitsand
Snanagementerticianital
earningpershare.

#5.Preparation

CashFlow NetIncome

Withthehelpofbalancesheetand WiththehelpofTrialBalanceand
booksoraccountsledgers.
incomestatement

#6.Manipulation

CashFlow NetIncome

Itsbitdifficulttomanipulate NetProfitscanbemanipulatedin
Cashflows. easeascomparedtoCashflows.

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Key Differences
between Cash Flow vs
Net Income
The key differences between the cash flow vs

net income are as follows:

Net profit and cash flow are an important

financial metric of an organisation and are

always confusing for the people who are new in

finance and accounting. Net profit and cash flow

are not the same tools and it is important to

understand the differences between the two in

order to make and process key financial

decisions. Being an investor interpreting the

difference between cash flow and net profit

makes it easier to ascertain whether company is

a good investment or not on the basis of its

ability to remain solvent at the time of Crysis.

Difference in between cash flow and net profits

get generated as a result of accrual method of

accounting. In cash method of accounting, both

cash flow profit and net profits are same. There

are time gaps between sales and actual

payments but accrual concept of accounting

requires an entity to provide for all incurred

expenses and record all accrued income. This is

the main reason for difference between cash

flow and net income figures. This situation is

neutralised if the cash is paid by the customer

during the coming period but if the payments are

not received for larger gaps there is a huge

difference between cash flow and net income. If

the situation is not changed annual reports will

show low cash flow and net income. Generally,

fast-growing companies present low income

because they invest huge amount in expansion

and growth. After some time high operating cash

flows makes steady net income growth but in

some cases, it may even show a downfall trend

also. Cash flow is always a better measuring tool

for the organisation’s financial health.

Cash flow is the sum of money that flows

in and out of a business due to various

business activities, while net income is the

income generated as a result of surplus

revenue over cost (vise versa).

Cash flow manipulation is a bit difficult as

per US GAAP as cash balance needs to get

tallied with bank/ physical cash while net

profit can be manipulated by increasing

revenue or decreasing revenue/ costs.

Cash flow is used to determine the

company’s cash generation capacity, its

enigmas concerning liquidity and to

appraise the income generated by the

accrual system of accounting. While net

income is used to determine the

profitability of the organisation for a given

period and to ascertain the earnings for the

shareholders.

Cash flow statement projects the sources

of cash and where it is utilized. Whereas,

net projects result of various business

operations considering both cash/ non cash

transactions

Cash flow is classified in three activities-

operating, investing and financing on the

other hand net profit comprises of mainly

two major headings: – operating activity

and non-operating activity.

Cash flow does not consider non-cash

transactions in its calculation while net

profits considers both cash/ non-cash

transactions.

Cash Flow vs Net

Income Comparison
Table
Let us look at the comparison table of cash flow

vs net income.

Basis Cash Flow Net Income

Comp Deals with only Deals with all

onent cash items revenue and all

s expenses

whether cash or

non-cash

Divisi Divided in three Net Profits is

on main categories: single figure

which can be
Operating
said as derived
Activities
from two major
Investing
categories:
activities

Financing Operating

Activities activities

Non-

Operating

activities

Accou Cash Accrual

nting

Metho

Motiv To determine the To determine

e cash position the profits and

and solvency, earning per

working capital, share

management

efficiency

Prepa With the help of With the help

ration balance sheet of Trial Balance

and income and books of

statement. accounts
ledgers

Manip Its bit difficult to Net Profits can

ulatio manipulate be manipulated

n Cashflows in ease as

compared to

Cash flows

Conclusion
Both cash flows and net profits are important

components of financial statement and serves

different purposes. While the cash flows depict

cash movements under different categories, net

profits shows results of business operations. It is

important for an organization to have adequate

net profits as per the desired rate of return along

with which it should also hold strong cash

position. Weak cashflows may lead to liquidity

crunch situation which in turn may affect

business profitability. Therefore, both cashflows

and net profits are interdependent and important

for stakeholders.

Recommended Articles
This is a guide to Cash Flow vs Net Income. Here

we also discuss the Cash Flow vs Net Income

key differences with infographics and

comparison table. You may also have a look at

the following articles to learn more –

1. Funds from Operations

2. For Profit vs Non Profit

3. Cash Management

4. Statement of Cash Flows

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