What distinguishes the income statement from the cash flow statement?

The income statement and the cash flow statement serve different purposes in financial reporting, and understanding their distinctions is crucial for analyzing a company’s performance.

The income statement focuses on profitability, detailing revenues and expenses over a specific period, which ultimately leads to net income. It indicates how well a company is generating profit from its operations, regardless of cash movements during that time. This means that the income statement can include revenues that are earned but not yet received in cash and expenses incurred but not yet paid.

On the other hand, the cash flow statement outlines the actual cash movements within a business. It accounts for cash inflows and outflows from operating, investing, and financing activities, providing insight into a company’s liquidity and its ability to meet obligations and fund operations.

Thus, the distinction lies in the income statement measuring profitability through accrual accounting (recognizing revenues and expenses when they occur) while the cash flow statement tracks real-time cash transactions, giving a clearer picture of the company's cash position.