The income statement displays the financial result of a company’s operations over the course of its financial year or a given interim period. The cash flow statement starts with cash from operations then moves on to enlist those from investing operations and financing operations. Net income is used by most companies as the starting point to determine cash flows from operations. To that end, adjustments have to be made to net income by adding noncash expenses (such as depreciation and amortization), subtracting noncash gains, and adding or subtracting changes in current accounts.
The following hypothetical example illustrates the shift from net income to cash flow from operations:
| Net income | $25,000 |
| + depreciation and amortization | 4,000 |
| – increases in accounts receivable | (1,000) |
| + decreases in inventory | 700 |
| + increases in accounts payable | 500 |
| = cash flow from operations | $29,200 |
There are cases when cash flows from operations are positive whilst net income is negative. For example, if net income in the above example is negative $3000 (net loss), the cash flows would be: 4200- 3000 = $1,200.
