Net income is an accrual measure: revenue is recognized when earned and expenses when incurred, regardless of cash movement. This creates timing gaps that explain why a profitable company can still run out of cash.

Key mechanics to watch:

Revenue recognition — a signed contract may book revenue before the customer pays.
Matching principle — costs are expensed in the period they help generate revenue, not when the invoice is paid.
Non-cash charges — depreciation and amortization reduce net income but never touch the bank account.

Item	Hits Net Income?	Hits Cash?
Credit sale	Yes	No (until collected)
Depreciation	Yes	No
Inventory purchase	No (until sold)	Yes
Deferred revenue	No (until earned)	Yes