Explain the difference between net income and cash flow.

• A. Net income is accounting profit; cash flow measures actual cash movements; they can diverge due to non-cash items and timing.
• B. Net income equals cash flow in all cases.
• C. Cash flow is the same as revenue.
• D. Net income is a measure of cash receipts from customers.

Answer: (A)

Net income and cash flow measure different things: net income is accounting profit, the bottom-line result on the income statement, while cash flow shows the actual movement of cash in and out of the business. They can diverge because some things that affect profit don’t involve cash right away, and because the timing of when revenue and expenses are recognized isn’t always the same as when cash is received or paid.

Non-cash items are a big part of the difference. Depreciation and amortization reduce net income but don’t require cash outlays in the period they’re charged, so they lower profit without shrinking cash. Conversely, cash might be spent on buying equipment or paying down debt, which hits cash flow but may not immediately hit net income in the same way.

Timing differences also matter. Revenue is recognized when earned, and expenses when incurred, under accrual accounting. But cash receipts and payments happen when money actually changes hands. For example, you might record revenue when you ship a product, but the customer pays later; that boosts net income but not cash flow right away. Or you might pay a supplier now for goods you won’t recognize as an expense until later periods, affecting cash flow without an immediate impact on net income.

Because of these factors, the cash flow statement is about how cash moves across operating, investing, and financing activities, while net income is about profitability under accrual rules. It’s common to have positive net income but negative cash flow, or vice versa, depending on the business’s operations and investment activities.