The statement you are referring to explains why the amount of revenue shown on the income statement may differ from the amount of cash inflow from operating activities shown on the statement of cash flows.
Explanation
- The income statement reports revenues and expenses based on the accrual accounting method , which recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash is actually received or paid.
- The statement of cash flows , specifically the cash flows from operating activities section, reports the actual cash inflows and outflows related to the core business operations during the period.
Because of this difference in accounting methods:
- Revenue may be recorded on the income statement before cash is received (e.g., sales on credit).
- Conversely, cash may be received before revenue is recognized (e.g., customer prepayments).
- Non-cash items like depreciation reduce net income but do not affect cash flow.
- Changes in working capital accounts (accounts receivable, accounts payable, inventory) also cause differences between net income and cash from operations.
Summary
The income statement uses accrual accounting to measure performance, while the statement of cash flows shows actual cash movements. Therefore, the revenue reported on the income statement often differs from the cash inflow from operating activities reported on the statement of cash flows. If you want, I can provide an example or further details on how these differences arise.
