The key takeaway here is that the income statement and cash flow statement can tell different stories about a business because they’re constructed using different sets of rules. The income statement strives to match revenues and expenses as closely as possible—that’s why we had to deduct the $1 in depreciation from Mike’s profits, and that’s why Mike gets to record the $7 in sales that he made on credit. But the cash flow statement cares only about the dollar bills that go in and out the door, regardless of the timing of the actions that generated those dollar bills.
