Accounting Profits vs. Firm Cash Flow

by Tanya Robertson

When it comes to accounting, there are two main methods of determining a firm's financial health and profitability. One method is to calculate the firm's accounting profits, otherwise known as net income. Another method is to calculate the firm's cash flow. The primary difference between these two methods lies in the selection of figures used in the calculations.

Definition of Accounting Profit

Accounting profit, or net income, is a figure that represents a company's total earnings. In order for a business to calculate their accounting profit, they must take their total revenues and adjust them according to their costs of doing business. These adjustments typically include items such as depreciation, interest and taxes, so in accounting profit, non-cash items such as depreciation are included.

Definition of Cash Flow

Cash flow, on the other hand, represents a company's overall financial health. In order for a business to calculate their cash flow, they must total their cash receipts and subtract any cash payments over a specified period of time. For example, the difference between the cash available at the beginning of an accounting period and the cash available at the end of the accounting period represents that company's cash flow. In essence, cash flow represents a revenue and expense stream.


One advantage of firms using their accounting profits over their cash flows is that it's possible to legally manipulate the figures for accounting profits. This means a firm whose cash flows look poor on paper can make themselves appear to be doing better with their accounting profits. The primary advantage to using cash flows over accounting profits is that the time value of money is taken into consideration with cash flows and ignored when calculating accounting profits.


A major disadvantage of using the accounting profit method of calculation is that it's more time consuming and complex. For calculating cash flows, there's only one method of calculation to use, but several different methods exist for calculating accounting profits. One disadvantage to using cash flows over accounting profits is that non-cash items such as depreciation and amortization aren't taken into consideration when calculating cash flows. Depending on the firm's finances, this could result in the books showing lower profitability than had the accounting profit method been used.

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