- Income statement and cash statement affect the balance sheet.balance sheet image by Darko Draskovic from Fotolia.com
The income statement and cash flow statement are two of the ways a company has to communicate its financial health to investors. Both are found in a company's financial statement. They differ primarily because an income statement often contains non-cash charges and the statement of cash flows deals only with cash, according to Greg Forsyth, a financial analyst at Schwab.com.
By way of example, imagine a company has a fiscal year that ends in December. It sells a product on December 23. The year ends and the company still hasn't received payment. The company can book the sale as revenue on the income statement. It didn't collect any money, but the company can tell investors that it made a sale and thus generated revenue. That sale doesn't show up on the statement of cash flows for that fiscal year. When the company receives the cash in the next year, it affects the statement of cash flows, but not the income statement. - Sometimes there are red flags.red flags image by Stepanov from Fotolia.com
In the long run, revenue on the income statement and statement of cash flows must converge, Forsythe wrote. There can be problems when a company's cash flows and income don't do so. He noted that investors should be wary of companies that report growth on the income statement but negative cash flow. Investors should also be wary of firms whose reported earnings on the income statement exceed cash flow. These could be signs that a firm is not translating its revenue growth into cash. - The sum of the parts equals the whole.melon parts image by Bram J. Meijer from Fotolia.com
The cash flow statement is organized into three parts, according to AccountingCoach.com. Cash from operating activities is cash from the major functions of the business, such as buying and selling. Cash from investments reports the purchase and sale of major assets. Financing activities report the effect of stock issuance and stock buybacks. A fourth section details additional information, including taxes paid. - Cash flow analysis can tell you if a company is bankrupt.Bankrupt. Businessman with empty pockets (with clipping paths) . image by Vitaliy Pakhnyushchyy from Fotolia.com
Investors often use cash flows in conjunction with other financial data to evaluate a company's prospects. Typically, this is done through ratio analyses. Writing in the Journal of Accountancy in 1998, John R. Mills and Jeanne H. Yamamura note that cash flow ratios can help determine if a company is headed for bankruptcy.
Mills and Yamamura suggest using the operating cash flow ratio as a test of solvency. This calculation tests whether a company has cash to meet its immediate expenses. - In the end, it all comes down to profit.profit image by Jaroslaw Grudzinski from Fotolia.com
A company can have decent cash flow, but may not necessarily be profitable. According to Dun and Bradstreet, cash flow is simply money flowing into and out of a business. Selling items below cost improves cash flow, but it isn't profitable. In such scenarios, the income statement may be a better source of information.
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