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. However, the merchandise remained in inventory until it was sold in December. 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.
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