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Income Statement vs Cashflow Statement

In: Business and Management

Submitted By rlsheets1
Words 428
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Question #6

A. Briefly state how the Income Statement is different from the Cash Flow Statement. Give examples of decisions that can be made from the information provided by each of these statements?

-The income statement shows how much revenue a company has earned over a period of time, which is usually for a year. The income statement also reports the costs and expenses associated with earning the revenue. At the bottom of the income statement it shows the net inome, which shows the actual earnings after expenses, taxes, etc are taken out. This can be a net profit or net loss, depending on how the company performed that year. The cash flow statement reports a company’s inflows and outflows of cash. The income statement tells whether or not the company made a profit and the statement of cash flows tells you whether the company generated cash. The statement of cash flows is the more important of the two because with negative cash flows it makes it nearly impossible to pay off your debt. It is possible to have a positive net income, with negative cash flows.

-A manager can use the income statement to analyze how much revenue is being lost due to expenses. Expenses are necessary in every business, but there are ways to manage them to save money. It also allows management and investors to decide if the company wants to expand into different markets or create new products. If they see sales are consistently increasing year over year, then it may be a good time to see if it would be beneficial to expand.

-A manager can use the statement of cash flows to provide information about the ability to pay debt owed. The survival of every organization depends on its ability to generate and acquire cash. Companies survive because they have cash, they fail when they don’t. We must therefore be interested in a company’s ability to generate cash for itself, and...

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