How Do Net Income and Operating Cash Flow Differ? (2024)

Net income is the profit a company has earned for a period, while cash flow from operating activities measures, in part, the cash going in and out during a company's day-to-day operations.Net income is the starting point in calculating cash flow fromoperating activities. However, both are important in determining the financial health of a company.

Key Takeaways

  • Net income is a key metric of profitability and is a major driver of stock prices and bond valuations.
  • Cash flows from operating activities makes adjustments to net income and excludes non-cash items like depreciation and amortization, which can misrepresent a company's actual financial position.
  • A company with strong operating cash flows has more cash coming in than going out.
  • Still, the net income is the bottom line profit that a company makes and even if a company has positive operating cash flows, it can still lose money when all is said and done.

Net Income

Net income is calculated by subtracting the cost of sales, operational expenses, depreciation, interest, amortization, and taxes from total revenue. Also called accounting profit, net income is included in the income statement along with all revenues and expenses.

Below is the income statement for Exxon Mobil Corporation (XOM) from the company's 2017 10-K statement:

  • Revenue or totalsales= $237billion (blue).
  • Total costs and other deductions= $225.68billion (in red).Total costsincludemanufacturing expenses of $34 billion, expenses of $10.9 billion,and$19.893 billion in depreciation costs spread out over years for the purchaseof assets like property, plant, and equipment.
  • Profit or net income= $19.8 billion (green) after subtracting costs, deductions, and taxes.

How Do Net Income and Operating Cash Flow Differ? (1)

Cash Flow From Operations

Cash flow from operationsis part of the statement of cash flows. Thecash flow statementis a financial statement that summarizes the amount ofcash and cash equivalentsentering and leaving a company.

The cash flow statement (CFS)measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses.

Cash flow from operations includes day-to-day,core activities within a business that generate cash inflows and outflows. They include:

  • Receipts from sales of goods and services,collected during a period
  • Payments made to suppliers of goods and services used in production
  • Payments to employees or otherexpensesmade during a period
  • Rent payments
  • Income tax payments

Cash flow from operating activitiesalso reflects changes to certain current assets and liabilities from the balance sheet. Increases incurrent assets, such as inventories, accounts receivable,and deferred revenue, are considered uses of cash, while reductions in these assets are sources of cash. Similarly, decreases in current liabilities, such as accounts payable, tax liabilities, and accrued expenses, are considered uses of cash (cash outflowto pay off debt), while increases in these liabilities are sources of cash (cash inflow from the new borrowed capital).

Cash flow from operating activities excludes theuse of cash for purchases ofcapital expendituresandlong-term investments, as well as any cash inflows from the sale oflong-term assets. Cash paid out as dividends to stockholders and cash received from a bond andstockissuance are also excluded.

Cash FlowFrom Operationsvs.Net Income

Net incomeis carried over from the income statement and isthe first item of the cash flow statement.Net cash flow from operating activities is calculated as the sum of net income, adjustments for non-cash expenses, and changes in working capital.

However, certain items are treated differently on the cash flow statement than on the income statement. Non-cash expenses,such as depreciation, amortization, and share-based compensation,must be included in net income,but thosecosts do not reduce the amount of cash a company generates in a given period. As a result, these expenses are added back into the cash flow statement.

Below is the cash flowstatement for Exxon Mobil Corporation from the 2017 10K statement:

  • The net income figure of $19.8 billion (green) is the top line of the cash flow statement.
  • The depreciation amount of $19.8 billion (blue) wasadded back into cash flow. If you recall earlier, it was a deduction on the income statement.
  • Net cash from operations was $30 billion (red) for the year for Exxon.

How Do Net Income and Operating Cash Flow Differ? (2)

Cash Flow Increase FromOperating Activities

Companies can increase cash flow from operations by improving the efficiency with which they manage their current assets and liabilities.Rising inventory turnover indicates improving inventory management since it shows low inventory relative to sales and, as a result, becomes a source of cash.

  • Improved account receivable collection practices drive down days sales outstanding, decreasing accounts receivable. If accounts receivable decreases, this implies that more cash has entered the company from customers paying off their credit accounts—the amount by which AR has decreased is then added to net sales. If accounts receivable increases from one accounting period to the next, the amount of the increase must be deducted from net sales because, although the amount represented in AR is revenue, it is not cash. In short, lower days sales outstanding indicates that a company is collecting receivables more quickly, which is a source of cash.
  • Growing days payable outstanding is considered a positive development, from a cash standpoint, assuming the company is not incurring borrowing costs or straining supplier relationships. As days payable outstanding grows, cash flows from operations increases.

The Bottom Line

Financial statements, like the income statement and cash flow statement,provide an ongoing record of a company's financial condition and are used by creditors, market analysts, and investors to evaluate a company's financial soundness and growth potential.Both net income and cashflowshould be compared with other companiesin the industry to obtain performance benchmarks and to understand any potential market-wide trends.

How Do Net Income and Operating Cash Flow Differ? (2024)


How Do Net Income and Operating Cash Flow Differ? ›

Net income is the profit a company has earned for a period, while cash flow from operating activities measures, in part, the cash going in and out during a company's day-to-day operations.

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

Net Income is the result of revenues minus the expenses, taxes, and costs of goods sold (COGS). Operating cash flow is the cash generated from operations, or revenues, less operating expenses. Many investors and analysts prefer using operating cash flow as an indicator of a company's health.

How is net income different from operating income? ›

Operating income is revenue less any operating expenses, while net income is operating income less any other non-operating expenses, such as interest and taxes.

What is the difference between income statement and cash flow from operating? ›

A cash flow statement shows the exact amount of a company's cash inflows and outflows over a period of time. The income statement is the most common financial statement and shows a company's revenues and total expenses, including noncash accounting, such as depreciation over a period of time.

Why a difference exists between net income and net cash flow from operating activities? ›

Thus, differences between the two arises because the net cash from operating activities does not taken into account the non-cash expenses that are considered while computing the net income. In addition, prepaid expenses, deferred revenues, credit sales, etc. may also create the differences between the two.

Why is operating cash flow better than net income? ›

Alternatively, net income is easier to manipulate, and companies can do this by increasing revenues or decreasing business costs. Since it's harder to manipulate, cash flow is typically a better metric with which to gauge a company's financial health.

What is the difference between operating income and net income quizlet? ›

Net income= operating income plus nonoperating revenues (such as interest revenue) minus nonoperating costs (such as interest cost) minus income taxes. DIFFERENCE IS TAXES: Operating income does NOT include taxes and net income does include taxes!!!!!

What is included in operating cash flow? ›

Because most companies report the net income on an accrual basis, it includes various non-cash items, such as depreciation and amortization. Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital.

Is net income and operating loss the same? ›

An operating loss does not consider the effects of interest income, interest expense, extraordinary gains or losses, or income or losses from equity investments or taxes. These items are "below the line," meaning they are added or subtracted after the operating loss (or income, if positive) to arrive at net income.

What is the difference between NOI and MM approach? ›

There is no significant difference between the net operating income approach and the Modigliani-Miller approach to capital structure. Both are similar in concept and state that the value of a levered firm and the unlevered firm remains the same irrespective of the capital structure in the absence of taxes.

What is the formula for net income? ›

Key Takeaways. Net income (NI) is calculated as revenues minus expenses, interest, and taxes. Earnings per share are calculated using NI. Investors should review the numbers used to calculate NI because expenses can be hidden in accounting methods, or revenues can be inflated.

What is the primary purpose of the cash flow statement? ›

The primary purpose of the statement is to provide relevant information about the agency's cash receipts and cash payments during a period.

Is operating cash flow higher or lower than net income? ›

Sometimes, OCF is higher than net income (as with Amazon), and sometimes it's the opposite.

What is the key difference between net income and free cash flow? ›

Are Net Income And Cash Flow The Same? Net income and free cash flow are related but are not the same measure. Net income represents a company's accounting profit, whereas cash flow presents whether a company's cash balance increased or decreased.

Can operating cash flow be greater than net income? ›

There are several circ*mstances in which a company's free cash flow (FCF) could be consistently much higher than its net income. Some reasons include: Non-Cash Expenses: Net income includes non-cash expenses such as depreciation and amortization, which reduce profitability but do not impact cash flow.

Is net income part of operating cash flow? ›

The OCF calculation will always include the following three components: 1) net income, 2) plus non-cash expenses, and 3) minus the net increase in net working capital.

Is net cash flow the same as Noi? ›

Net cash flow can be determined using the formula net operating income (NOI) less debt service payments, tenant improvements, leasing commissions and capital expenditures. Simply put, net cash flow is the difference between all company cash inflows and outflows over a given time period.

How do you reconcile net income and cash flow from operations? ›

Start your reconciliation with net income at the top. Add back the total value of noncash expenses to your operating cash flow. Next, subtract the period change for each category of current assets. Then, add the period change in each category of current liabilities.

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