Difference between Income Statement and Cash Flow Statement

Running Head: Introduction to Accounting
Problem 2.2
Part 3
The income statement and cash flow statement of the company depicts different but somehow related
information. Income statements shows the net profit earned or loss occurred by the company in its
business, as a final result, during a particular period of time. However, the cash flow statement shows
the net cash flows of the business in particular period of time. Income statements are generally
prepared on the accrual basis and hence it covers information relating to all the transactions such as
revenues, expenses, income or losses, taken place during the particular period, usually one year,
irrespective of the cash receipts and payments for such transactions. However, cash flow statement
bifurcate cash flows that take place in that particular period, majorly in three categories. They are:
operating activities, investing activities and financing activities. If any event or transaction has not
resulted in any cash inflow or outflow, then the same will not be reported by the cash flow statement.
Therefore, it can be said that cash flows provides information for the short-terms while income
statements offers the bigger picture of the business. They account for the financial aspects such as non-
cash expenses (depreciation) beyond the mere cash flows of business and hence they allow the users to
observe long-term trends of earnings as well as spending.
Thus, it can be said that income statements conveys the true picture of company’s financial situation,
particularly, its profitability state whereas cash flow statements does not shows the clear picture of
entity’s financial status.
Chapter 3
Discussion 6
a) Increase in asset and increase in liability
Purchase of an equipment of $15000 by using loan financing. This transaction will amount to increase in
fixed asset (Equipment) and increase in its liability (Loan).
b) Decrease in asset but no change in total assets
Payment received from the customer for $ 5000 for the trade credit given previously. It will amount to
decrease in the trade receivables of the company and the cash will also be increase by the same amount
of $ 5000. As cash is also an asset, this transaction will ultimately result in no changes in the overall
value of total assets.
c) Increase in one asset and increase in equity