Cash Flow vs Net Income | Key Differences & Top Examples

Amazon's Net Income is $2.37 billion, and its Cash Flow from Operations is $16.44 billion. Why is there a difference between the two? Cash Flow and Net Income are two key factors in judging whether a company has been doing well or not. But how can we relate to each other?

In this article, we will have a look at both cash flow and net Income to make sense of how they work.

In this article, we will talk about the following –

The cash flow statement is completely different from the income statement. Let’s take an example to understand this.

A company made revenue of $200 in 2016, and the expenses they have incurred were $110. That means, the net profit is $(200 – 110) = $90.

But from the point of view of the cash flow statement, we need to consider the cash inflow and cash outflow. The company's cash inflow was $170 (we didn't collect the whole amount in 2016), and the cash outflow was $90 (the rest of the amount would be paid in 2017). So the net cash inflow is $(170 – 90) = $80.

So it has been proven that even if the company made a profit of $90, its net cash inflow was $80.

And there lies the importance of a cash flow statement. The cash flow statement helps an investor recognize the cash inflow and cash outflow of the company so that they don’t get allured by the hefty profits/ revenue).

It has often been seen that net cash flow is negative for a company even after earning a whopping profit. So, without looking at the cash flow statement, an investor cannot conclude about the performance of a company year by year.

Profit or net income is the "bottom line" of the company's income statement.

To ascertain the profit or net income, a company needs to set up an income statement and determine the net balance of income and expenses.

These income and expenses are reported because the transactions have been done whether or not the cash has been a pair or received.

In the next section below, we will see how to set up a cash flow statement (direct & indirect method both) and income statements to ascertain the net income.

First, we will only look at the format of the indirect method of cash flow statements along with an example as it is directly related to the net income. And then, we will look at the format of net income and the example of the same.

Computation of Cash Flow from Operating Activities

• Here lies the importance of net income in the cash flow statement. To start the computation of cash flow from operating activities, you need to start with the net income (we will learn how to find out net income in the next section).
• Then, you need to add back all the non-cash items like depreciation and amortization. We will add them because they are not expensed in cash (only in the record).
• You need to do the same for the sales of assets. If the company has incurred any loss on the sale of assets (which is not a loss in cash), we will add back, and if the company has made any profit on the sale of assets (which is not profit in cash), we will deduct the amount.
• Next, we need to consider any changes that took place during the year regarding non-current assets.
• Finally, we will add back or deduct any current liability and assets. Please note that in current liabilities, we will not include notes payable and dividends payable in current liabilities.

Now, let’s have a look at the example of the computation of cash flow from the operating activities of Amazon–

source: Amazon SEC Filings

You can see that in the example, we started with the net income and made all the adjustments mentioned above. Non-cash items like Depreciation and amortization, stock-based compensations are added back. Likewise, changes in operating assets and liabilities like Inventories, accounts receivables, accounts payables, etc.

You can learn Cash Flow Statements comprehensively from the following -

• Cash Flow from Operations
• Cash flow from Financing Activities
• Cash Flow from Investing Activities
• Cash Flow Analysis

As you can see, to calculate the net cash flow, we need to refer to the net income (profit). After taking the net income into account, we can add back or deduct the respective adjustments and will ascertain the net cash flow from operating activities under the indirect cash flow method.

So, let’s look at the format and the example so we can understand how to find out the net income in the first place.

Format

Please look at the basic format so we can understand what it is all about in the first place. And then, we will take an example to illustrate it.

Below is the snapshot of the Income Statement of Amazon.

source: Amazon SEC Filings

Now, if, as an investor, you need to set up a cash flow statement under the indirect method, you will be able to start with the net income.

You can also learn about Income Statement from the following comprehensive articles.

• Income Statement
• Income Statement vs Balance Sheet
• Profit Margin Types

Positive Cash Flows and Postive Net Income

See below Apple’s Cash Flow from Operations and Net Income. Both its Net Income and Cash Flows have been positive.

source: ycharts

Which companies have positive cash flows and positive net income?

There can be various reasons that can lead to positive cash flows and net income. Some of these are listed below –

• The company should have Strong Product Lines.
• Should be profitable with strong and consistent Profit Margin
• Writeoffs, Asset Sale, and impairments should be insignificant relative to its Revenue.

Below are some examples of top companies with Positive cash flows and positive net income.

Negative cash flows vs Negative net income

See below Snap's Cash Flow from Operations and Net Income. Both its Net Income and Cash Flows are Negative.

source: ycharts

Which companies have Negative cash flows and Negative net income?

• Mostly, these companies do not generate enough revenue compared to their expenses and investments.
• They work on a very thin margin or are loss-making.·      
• Most Tech companies are funded by external private equity investment and go for an IPO who such characteristics.

Below are some examples of top companies with negative cash flows and net income.

Positive Cash Flow and Negative Net Income

Pearsons Net Income is negative. However, its Cash Flow is positive. Why? See below Pearsons Cash Flow from Operations and Net Income.

source: ycharts

The real reason is the Impairment of Intangible Assets. We note that Pearson's impairment of intangible assets of $2,505 million has led to huge losses in 2016.

source: Persons SEC Filings

Which companies have Postive cash flows and Negative net income?

Some of the companies that may have the above traits are as follows -

• Negative Net income can be because the company is loss-making.
• Mostly, Strong companies report losses due to Bad Debts write-offs, impairments, or business restructuring.
• Net Income can be negative also because of Loss on Sale of Assets.

Below are some examples of top companies with Postive cash flows and Negative net income.

Negative Cash Flows and Postive Net Income

Please See below Netflix Cash Flow from Operations and Net Income. Netflix Net Income is Postive, however, its Cash Flows is Negative. Why?

source: ycharts

Let us have a look at Netflix Cashflow from Operating Activities.

We note that additions to streaming content assets in Netflix is an operating expense ($8,653 million in 2016) and has led to Negative Cash Flow from Operating Activities.

Below are some examples of top companies with Negative cash flows and Positive net income.

The basic difference between net income and the net cash flow is following –

• First of all, in the case of net income, it doesn’t matter whether the transactions are in cash or not. That means when the net income and revenues are reported on the income statement when they are earned. But in the cash flow statement, we only deal with the cash and cash equivalents (how much cash comes in and how much cash goes out during a period).
• Second, some expenses considered in the income statement (like depreciation or amortization expenses) are not cash expenses. But still, they are deducted from the revenue. The cash flow statement, should be added back to the net income not to affect the cash flow.
•  Third, in the case of net income, even the profits and losses of other sources (consolidated income statement) are considered. But in the cash flow statement, they don't add or reduce the cash.

This has been a guide to Cash flow vs. Net Income. Here we discuss key differences between cash flow and net income with top examples like Apple, Snap Inc, Netflix, and Pearsons. You may also have a look at the following articles –

• Calculate Net Cash Flow
• Present Value Example
• Compare - Operating Income vs Net Income
• What is Net Income Formula?