The key difference between the income statement and the operating cash inflow/outflow of the statement of cash flows is accrual accounting. The income statement uses accrual accounting while the cash flow statement uses the cash accounting.

Accrual accounting recognises income and expenses when they are realised. In other words revenue and expenses should be recognised in the income statement when they can be reliably measured and economic benefits have or will likely be transferred to the buyer. This means that revenue, for example, will be recognised even though the benefits (which are normally cash) may occur at different times.

On the other hand, cash accounting recognises revenue and expenses only when the cash is actually paid or received.    

What causes the difference between the net profit on the income statement and the operating cash flows on the statement of cash flows?

1. The income statement uses accrual accounting while the cash flow statement uses cash accounting. Differences between the net profit on the income statement and the operating cash flows on the statement of cash flows can arise when revenue/expenses occur in different periods to the subsequent cash transaction. i.e. selling cash on credit.
2. The income statement also includes non-cash expenses such as depreciation and Amortization. Depreciation and amortization are a non-cash transaction however because they are non cash they are not found on the statement of cash flows. 

 Examples:

For more exercises and an explanation of the strengths and weaknesses of cash flow and accrual accounting buy my E-Book.

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