Income statements and cash flow statements are two common types of financial documents. You can use them to gain a better understanding of your business’s finances. While income statements and cash flow statements consist of similar information, though, they aren’t the same. What’s the difference between income statements and cash flow statements exactly?
What Is an Income Statement?
An income statement is a financial document that summarizes a business’s revenues and expenses over a specific period of time — typically a month or a year. The purpose of an income statement is to show a company’s profitability for a specific period of time by revealing how much money it generated and how much money it spend during that period.
What Is a Cash Flow Statement?
Also known as a statement of cash flows, a cash flow statement is a financial document that shows the inflow and outflow of money over a specific period of time. Like with income statements, cash flow statements typically cover periods of one month or one year. The purpose of a cash flow statement is to provide insight into a business’s ability to generate and manage its cash.
Differences Between Income Statements and Cash Flow Statements
Income statements and cash flow statements are structured differently. Income statements consist of the following parts: revenue, cost of goods sold (COGS), operating expenses, operating income, gross profit and net income. They may include other revenue- and expense-related information, but these are the basic parts of a typical income statement.
Cash flow statements, on the other hand, are structured into three parts: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.
Aside from being structured differently, income statements and cash flow statements are used for different purposes. Income statements are designed to reveal how profitable a business is during a specific period of time. Cash flow statements, conversely, are designed to reveal how a business generates and manages its cash during a specific period of time.
Cash flow statements provide insight into liquidity. By generating a cash flow statement, you can see how your business spent money during the reporting period. Income statements are different in the sense that they provide insight into profitability. You can generate a cash flow statement for an overview of your business’s revenues and expenses during the reporting period.
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