What is the difference between net cash flow and net income?

Under the accrual method of accounting, net income is calculated as follows: revenues earned minus the expenses incurred in order to earn those revenues. If a company earns revenues in December 2008 but allows those customers to pay in 30 days, the cash from the December revenues will likely be received in January 2009. In this situation the December 2008 revenues will increase the December 2008 net income, but
will not increase the company’s December 2008 net cash flow.

Under accrual accounting, expenses are matched to the accounting period when the related revenues occur or when the costs have expired. For example, a retailer may have purchased and paid for merchandise in October 2008. However, the merchandise remained in inventory until it was sold in December 2008. The company’s net cash flow decreases in October when the company pays for the merchandise. However, net income decreases in December when the cost of the goods sold is matched with the December sales.

There are many other examples of expenses occurring in one accounting period but the payments occur in a different accounting period.

In short, the statement of cash flows is a needed financial statement because the income statement does not report cash flows.