accounting question

The basis for preparation of these two statement are different. Cash basis is used to prepare cash flow statement while accural basis is used to prepare income statement.

Under cash basis, transaction would only be recorded when there are cash flow in or out to the entity.

Under accural basis, transaction would be recorded when the income/expense incurrs.
i.e. all relevant expenses and income should be recorded in their appropriate period of time.

Cash statement is used to reflect the entity's ability to generate and manage cash. Even some capital in nature would be included which is excluded in the income statement. And income statement reflects the financial performance of the entity.

The different arise is due to above reason that I mentioned (capital income or expenditure). Also the difference arises becoz there are some non-cash transaction included in the income statement while they are excluded in the cash flow statement. The best example is the proviosion for the depreciation.

I think why the question ask u to use GST to consider is becoz the timing of incurring and payment would be normally different. Liablility to pay GST arises when goods are sold, say in 2006. So the amount of GST is included included in the income statement. However, normally the timing of payment of GST would be in the next year. So in the 2006 cash flow statement, this item would be excluded. Yet, during 2007, u might already paid the tax. So the amount of payment would be included in the 2007 cash flow statement while it is not included in 2007 income statement.