What is net income and how does it relate to cash flow?

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Net income is the profit left after all revenues and expenses are recorded, calculated under accrual accounting. Cash flow is the actual cash that enters and leaves the business during the period. Because accrual accounting records transactions when they are earned or incurred, not when cash changes hands, the two can diverge. Non-cash items like depreciation reduce net income but don’t consume cash, so cash flow from operations can be higher than net income. At the same time, changes in working capital—such as more money tied up in inventory or more receivables—use cash and can lower cash flow even if net income rose. So net income measures profitability, while cash flow measures liquidity, and their difference comes from non-cash charges and the timing of cash movements.