Another explanation involves accrual accounting. A corporation must report its expenses as they are incurred and that is often before the corporation pays the invoice. For example, a corporation with an accounting year ending December 31 might have a huge expense at the end of 2012, but the invoice is not due until January 2013. The 2012 net income was reduced, but the corporation's cash is not reduced until 2013.
Here's one more example. A corporation might receive a deposit from one of its customers in December 2012, but will not earn the revenues until 2013. In that case, the corporation's cash increased in 2012, but the corporation's revenues and net income will not increase until 2013.
It is a good idea to get comfortable reading the statement of cash flows. It should be included with a corporation's income statement and balance sheet.
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