Which statement differentiates the income statement from the cash flow statement?

• A. The income statement records sales and expenses; the cash flow statement records actual cash inflows and outflows
• B. The income statement records cash inflows; the cash flow statement records profits
• C. The income statement includes equity transactions; the cash flow statement does not
• D. The income statement shows assets and liabilities; the cash flow statement shows revenue

Answer: (A)

The main idea here is the difference between profitability under accrual accounting and actual cash movement. The income statement measures performance by recognizing revenues when earned and expenses when incurred, regardless of when cash is received or paid. The cash flow statement, on the other hand, tracks the actual cash that comes in and goes out, categorized into operating, investing, and financing activities.

That’s why the best description is that the income statement records sales and expenses, while the cash flow statement records actual cash inflows and outflows. It’s common for non-cash items (like depreciation) to affect the income statement without moving cash, which is another clue that profitability isn’t the same as cash flow.

The other options mix up these ideas: cash inflows and profits aren’t the same (profits come from the income statement under accrual accounting, not from cash flow alone); equity transactions aren’t part of the income statement (they appear in financing activities or the equity section of the balance sheet); and assets/liabilities belong on the balance sheet, while revenue is an income statement item.