Accounting Basics: Reporting Cash Flows and Profit and Loss
When examining the financial statements for a business, the statement of cash flows and the income statement (also called the profit and loss statement) differ from the balance sheet in one important respect: They summarize the flows of activities over the period.
An example of a flow number is the total attendance at Colorado Rockies baseball games over its entire 82 home game regular season; the cumulative count of spectators passing through the turnstiles over the season is the flow.
Accountants prepare two types of financial flow reports for a business:
The income statement summarizes the inflow from sales revenue and income, which is offset by the outflows for the expense during the period. Deducting expenses from revenue and income leads down to the well-known bottom line, which is the final net profit or loss for the period and is called net income or net loss (or some variation of these terms).
Alternative titles for this financial statement are the statement of operations and the statement of earnings. Inside a business, but not in its external financial reports, the income statement is commonly called the profit and loss statement, or P&L report.
The statement of cash flows summarizes the business’s cash inflows and outflows during the period. The accounting profession has adopted a three-way classification of cash flows for external financial reporting:
Cash flows from making sales and incurring expenses
Cash flows from investing in assets and selling assets
Cash flows from raising capital from debt and equity sources, returning capital to these sources, and making distributions from profit to owners.
The three primary financial statements (balance sheet, income statement, and statement of cash flows) constitute the hard core of a financial report to those persons outside a business who need to stay informed about the business’s financial affairs. The managers of a business also use these three key financial statements. They are absolutely essential in helping managers control the performance of a business, identify problems as they come up, and plan the future course of a business.