State why cash flow statement is not a substitute for income statement
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Cash flow statement is not a substitute for income statement because:
Cash flow statement is not a substitute for income statement because:
- Cash flow statement includes only cash transactions. Whereas income statement includes both cash as well as non-cash transactions.
- Income statement calculates the net profit earned or net loss incurred by the business. Cash flow statement does not calculate net profit or loss, it just shows the cash expenditure of a business in a particular year.
- Cash flow statement only shows the liquidity position of the company, it is used to find out the cash flow from different type of activities undertaken by business. Whereas income statement is used to calculate the profit earned by business in a particular year as it takes into account the non cash expenditure of the business as well .
- A Cash flow statement is used as a conjunction with the income statement. It just provide that information which enables a user to evaluate the changes in the enterprise.
- A cash flow statement is based on cash accounting concept where as an income statement is based on accrual accounting concept.
- It is easy to understand cash flow statement as compare to income statement. As income statement can be a bit confusing for a common user who doesn't know much about accountancy.