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Income Statements and Cash Flow Statements Explained

Income statement and cash flow statement explanation

Income Statements

An income statement is a financial statement that reports a company’s financial performance over a specific accounting period. It shows the company’s revenue, expenses, gains, losses, and net income. Net income is calculated by subtracting total expenses and losses from total revenue and gains1. An income statement helps investors and creditors evaluate how well the company is generating profits from its operations.

Cash Flow Statements

A cash flow statement is a financial statement that summarizes the movement of cash and cash equivalents that come in and go out of a company. It shows the company’s cash flows from operating activities, investing activities, and financing activities. Operating activities are the principal revenue-producing activities of the entity; investing activities are the acquisition and disposal of long-term assets; financing activities are the changes in equity and borrowings of the entity. A cash flow statement helps investors and creditors assess how well the company is managing its liquidity and solvency.

Both income statements and cash flow statements are important to learn about because they provide different perspectives on a company’s financial health. An income statement shows how profitable a company is based on accrual accounting principles; a cash flow statement shows how much cash a company has generated or consumed based on cash accounting principles. By comparing these two statements, one can gain insights into how efficiently a company is using its resources to create value for its stakeholders.