Balance Sheet, Cash Flow Statement and Income Statement
The Balance Sheet and the Cash Flow Statement are two different financial terms that are used by the companies in order to prepare their financial books at the end of the year. Both these statements help in judging the financial status of an organization or even an individual. In this section, we will study what is a balance sheet, cash flow statement, and income statement. While our main focus will be on balance sheet Vs. Cash Flow. Also, for the benefit of the students, we have added income statements vs balance sheets vs cash flow.
Balance Sheet Vs. Cash Flow Statement
The difference constructed between the balance sheet and the cash flow statement is that a balance sheet is generally prepared while calculating the balances for a year which depicts the long-term performance of an organization or of an individual. The Cash Flow Statement is usually being calculated for three months and thereby it always reveals the current performance of that entity.
Well, this is a brief discussion in the upcoming sections, we will discuss vividly – balance sheet vs cash flow, income statement vs balance sheet vs cash flow.
What is a Balance Sheet?
A Balance sheet provides a clear presentation of the assets, equity, and liabilities of the entity. This statement is outlined by every organization, partnership enterprise, or sole proprietorship firm. The balance sheet reveals the financial security of the enterprise.
In a balance sheet, we will find two headings, namely – assets (including inventory, accounts receivable), equity (including share capital, capital surplus), and liability (with accounts payable, bank loans). The liabilities section will cover the shareholder’s equity. Under the liabilities column - current and non-current liabilities and all the current assets and the non-current assets of the enterprise are also covered.
What is a Cash Flow Statement?
A cash flow statement is a financial statement that presents the total data which concerns the complete cash inflows of a business gains from its continuing progress and with external financing sources, as well as all the cash outflows which pay for the trading activities and the finances which are being delivered on delivered time. While, in other words, a cash flow statement is a financial statement which estimates the cash produced by a firm in a certain time frame.
Balance Sheet Vs Statement of Cash Flows
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Now, We will see the difference between the Balance Sheet and Cash Flow Statement
Cash Flow Vs. Balance Sheet Vs. Income Statement
In this section, we will learn the difference between balance sheets, income statements, and cash flow. We will learn moreover in a paragraph mode to understand and analyze the different financial books required by the company or an organization.
Income Statement
‘Income statement’ is self-explanatory. This is the statement where one can find the details about a company's income. The company’s net sales which are known as revenue are depicted in this statement. After subtracting various costs, we arrive at four different income metrics. Those four different income metrics are as follows:
Gross Income: This is equal to sales subtracted out from the costs of goods and the amount of depreciation. Gross income will signify how well the company is producing their products.
Operating Income: After we get the gross income, fixed expenses get subtracted (rent, administrative expenses, and research & development) in order to arrive at the Operating Income.
Pre-Tax Income: Accounts for the expenses like interest income and interest paid on debt, as well as the charges and credits, these expenses have nothing to do with the company's core business operations or core functions of the business.
Net Income: Net Income is nothing but the pre-tax income after subtracting all income taxes (including current and deferred) that a company pays on its earnings of the same. Net income is considered to be the best indicator of a company's overall profitability during a period of time.
So, we see Income statement provides the outsiders with an outlook about the profit margin of the company, which will help them to assess how efficiently a company is running and to compare the company to its peers.
Also, from the income statement, you can estimate the company's earnings per share by dividing the company's net income by the total number of shares present, which is listed on the bottom of the income statement.
Balance Sheet
A Balance Sheet is a picture that gives a snapshot of the company depicting where it stands in terms of financial position. This is separated into three main sections — assets, liabilities, and equity. The company's assets are equal to (or this is the "balance" out) of its liabilities plus the equity.
Assets are particularly being listed in the order of liquidity, or with the ease in which they can be sold or otherwise be disposed of. Assets are here divided into two subcategories:
Current
Long-term
Current Assets are those Items that can be converted into Cash within One Year or less than a Year.
Examples of Current are:
Cash and equivalents
Securities that have a liquid market
Accounts Receivable
Inventory
Prepaid expenses
While Long-Term Assets include Everything else which cannot be readily Liquidated.
Some Examples of Long-Term Assets Include:
Securities without a liquid market
Land
Equipment
Buildings
Intellectual property
Intangible Assets
Thus, in a balance sheet we see will find the assets and liabilities position. The shareholders' equity portion of the balance sheet is also shown, it also shows how much of the company's value is attributable to the shareholders, and this is sometimes referred to as "net equity."
Cash Flow Statement
A cash flow statement represents the overall flow of the money into and out of the company. The cash flow statement is divided into these sections—
Operations
Investing
Financing
The operations section shows the cash flow from the company's core or main business operations.
The investing section contains the company's expenses which are related to the purchasing of new equipment or buildings. It also includes buying securities and other investments.
The financing section also shows the changes in a company's debt, loans, or dividends.
Hence, the cash flow of a company will tell whether the company is cash-flow positive or cash flow negative.
Combining Income statement, balance sheet, and cash flow to get the full image of the company’s financials - When all three of the company's financial statements are combined, we can get a clear picture of how well the company is performing and deriving its useful metrics to use while analyzing the stock. For example, by taking the net income figure which is represented in the income statement, and the shareholders' equity represented in the balance sheet, you can determine the company's return on equity, which proves to be the best metrics to assess the profitability of the company.
FAQs on Balance Sheet Vs Cash Flow Statement
1. What is the main difference between a Balance Sheet and a Cash Flow Statement?
The primary difference is what they represent. A Balance Sheet provides a snapshot in time, showing a company's financial position (assets, liabilities, and equity) on a specific date. In contrast, a Cash Flow Statement covers a period of time (like a quarter or year) and explains how cash has moved in and out of the company during that period.
2. What is the purpose of a Balance Sheet compared to a Cash Flow Statement?
The purpose of a Balance Sheet is to show a company's overall financial health and net worth at a single point in time. It helps assess solvency and financial structure. The purpose of a Cash Flow Statement is to show a company's liquidity, detailing exactly where cash came from (inflows) and where it went (outflows) through its operating, investing, and financing activities.
3. What does a Balance Sheet tell you that a Cash Flow Statement doesn't?
A Balance Sheet shows the value of all a company's assets (like inventory and equipment) and liabilities (like loans and accounts payable), regardless of whether cash was involved in their transaction. The Cash Flow Statement only focuses on transactions that affect cash, so it won't show non-cash items like depreciation or sales made on credit.
4. How are the Balance Sheet and Cash Flow Statement connected?
They are directly linked. The Cash Flow Statement explains the change in the cash account between two Balance Sheet dates. The starting cash balance on the Cash Flow Statement is taken from the prior period's Balance Sheet, and the ending cash balance calculated in the statement must match the cash balance shown on the current period's Balance Sheet.
5. If a company is profitable, why is its Cash Flow Statement still important?
A company can be profitable on paper but still face a cash shortage. This happens because profit is calculated on an accrual basis (recording sales when made, not when paid), while the Cash Flow Statement operates on a cash basis. The statement reveals if the company is generating enough actual cash to pay its bills, employees, and debts, which is essential for survival.
6. How do the Balance Sheet, Income Statement, and Cash Flow Statement work together?
These three statements provide a complete financial picture of a company:
- The Income Statement shows profitability over a period, and its net income is added to the equity on the Balance Sheet.
- The Balance Sheet shows the company's assets, liabilities, and equity at the end of that period.
- The Cash Flow Statement reconciles the cash balance from the beginning to the end of the period, explaining the changes seen on the Balance Sheet.
7. Is a Balance Sheet or a Cash Flow Statement more important for an investor?
Both are equally important as they provide different insights. An investor uses the Balance Sheet to understand a company's net worth and risk level (how much debt it has). They use the Cash Flow Statement to judge the company's ability to generate cash and fund its operations without needing external financing. A thorough analysis always requires looking at both statements together.
