This is why the cash flow statement is importantHow the income statement relates to the balance sheetOperating activities• Cash generated from the daily operations of the business .• Income statement shows profit generated but not cash generated • Adjust net income for non-cash expenses • For example, depreciation of assets • Actual cost of asset included in the Investing activities section • Adjust net income for changes in working capital • Net income should be adjusted for changes in current assets and current liabilities affected by operations. during the year.• Increases in current assets use cash while increases in current liabilities free cash.• Calculation: Subtract the opening CA and CL balances from the ending item balances. Investing Activities• Reflects cash used and generated by changes in long-term assets. on the balance sheet.Financing activities• Two ways for the company to finance itself:• Borrowing: reflected in the Long-term liabilities section• Raising money from investors: reflected in changes in the equity accounts• Another factor in owners' equity is retained earnings