How do net income and cash flow statements link together?

Net income from the income statement serves as the starting point for the cash flow statement, making it the top line of this financial statement. This connection is critical because it demonstrates how the company’s profitability, represented by net income, is adjusted for non-cash items and changes in working capital to arrive at the cash generated from operating activities.

When preparing the cash flow statement using the indirect method, net income is adjusted by adding back non-cash expenses such as depreciation and adjusting for changes in working capital accounts (like accounts receivable and accounts payable). Therefore, net income is not merely an end number; it plays a fundamental role in illustrating how actual cash flow figures fluctuate based on various operating activities, investments, and financing activities.

This linkage provides insight into how well a company utilizes its income to manage cash flow and how operational performance translates into cash earnings and financial stability.