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

Definition of Net Cash Flow

Net cash flow is the combination of the cash received and the cash disbursed. In other words, it is the combination of the debit amounts coming into a company's Cash account and the credit amounts going out of the Cash account.

Examples of Net Cash Flows

The net cash flows include the cash inflows such as the money received from customers who purchased products on credit in an earlier accounting period, cash sales occurring in the current accounting period, money received from a bank loan, money received from disposing of an old asset, etc.

The net cash flows also include the cash outflows such as paying for new equipment, paying for goods and services from the last accounting period, repaying bank loans, making a temporary investment, etc.

Definition of Net Income

Under the accrual method of accounting, net income is based on the following: revenues earned during the accounting period (not in the period when the money is received) minus the expenses incurred in the accounting period (not in the period when the money is disbursed).

Example of Net Income

Assume ABCO Consulting Company earns $100,000 in mid-December but allows the customer to pay in January. ABCO's net income is increased in December, but its Cash account will not increase until January.

Next assume that ABCO acquires extensive electronic equipment in December for a cash payment of $40,000 and depreciates the equipment's cost over 5 years. In December, ABCO will have very little depreciation expense, which means a small reduction in its December's net income. However, ABCO's Cash account will be reduced by $40,000 in December.

Reconciling Net Cash Flow vs. Net Income

As a result of the difference between a company's net income and the change in a company's cash balance, the statement of cash flows is required to be issued along with the income statement and the other required financial statements.

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