Net income is a line item in the operating activities section of the cash flow statement. Net income is calculated by subtracting cost of sales, operational expenses, depreciation, amortization, interest, and taxes from total revenue. Also called accounting profit, net income is included on the income statement along with all revenues and expenses. Net income from the income statement is usually the first item of the cash flow statement.
Net cash flow from operating activities is calculated as the sum of net income, adjustments for noncash expenses and changes in working capital.
Cash flows from operations include certain items that are treated differently in the income statement. Noncash expenses such as depreciation, amortization and share-based compensation must be included to calculate net profit, but such costs do not reduce the amount of cash a company generates in a given period. These expenses are added back to net income on the cash flow statement.
Cash flow from operations also reflects changes to certain current assets and liabilities from the balance sheet. Increases of current assets such as inventories, accounts receivable and deferred revenue are considered uses of cash, while reductions in these assets are sources of cash. Similarly, decreases in current liabilities such as accounts payable, tax liabilities and accrued expenses are considered use of cash, while increases in these liabilities are sources of cash.
Consider Google's (GOOG) 2016 10-K filing. The cash flow from the operation's operating activities section demonstrates the adjustments made to net income. Noncash expenses such as depreciation, amortization and share-based compensation are added back, and several noncash income items are subtracted. Changes in assets and liabilities such as accounts receivable; prepaid revenue; accounts payable; accrued revenue and expenses; and deferred taxes are treated as sources and uses of cash.