Question

What is the difference between net income and cash flow? From the investors' point of view, which one is more important, and why? Please briefly explain your answer.

Answer 1

Even though most of the investors see Income statement as the benchmark to make the investing decisions, the cash flow statement is a much better way of showing financial strength of a company.

One of the main reasons for the above statement is because there are less chances of manipulation in Cash flow statement as per Generally Accepeted Accounting Policies.

The income statement also contains certain non cash expenditures like Depreciation, Amortization which are already relaed to an outflow already occured.

An investor should always remeber "cash is king".

Therefore, operating cash flow depicts a better picture of financial health of a company than the Income Statement.