Companies produce three major financial statements that reflect their business activities and profitability for each accounting period. These statements are the balance sheet, income statement, and statement of cash flows. The cash flow statement shows how well a company manages cash to fund operations and any expansion efforts. In this article, well examine the balance sheet and income statement and their differences.
Financial statements and balance sheets are two of the most important financial documents for businesses, but what exactly is the difference between them? Many people use the terms interchangeably, but they are actually distinct reports that serve different purposes.
In this comprehensive guide, we’ll break down the key differences between financial statements and balance sheets, providing an in-depth look at what each one entails and their importance for business finances.
What are Financial Statements?
Financial statements provide a detailed overview of a company’s financial performance over a specific period of time They give stakeholders, investors, and management insight into the financial health and operations of the business.
There are three main types of financial statements:
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Income Statement (also called profit and loss statement or P&L) Provides information on company revenues expenses and profit or loss over a period of time.
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Balance Sheet: Shows a company’s assets, liabilities, and shareholder equity at a specific point in time.
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Cash Flow Statement: Details the company’s cash inflows and outflows over a period of time.
Financial statements are prepared periodically, usually quarterly and annually. Together, the income statement, balance sheet, and cash flow statement provide a comprehensive look at a company’s profitability, financial position, and cash situation.
Public companies are required to issue financial statements regularly per accounting regulations. Even private companies should generate financial statements frequently for internal financial planning and analysis. Reviewing financial statements allows companies to track performance over time and compare against projections or industry benchmarks.
What is a Balance Sheet?
The balance sheet is one of the key components of a company’s financial statements. As mentioned above, the balance sheet provides a snapshot of a company’s financial position at a specific point in time.
The balance sheet outlines a company’s assets, liabilities, and shareholders’ equity. Assets represent the resources owned or controlled by the company that hold future economic value. This includes current assets like cash, accounts receivable, inventory, and long-term assets like property, plants, and equipment.
Liabilities represent the company’s financial obligations or debts owed. This includes both current liabilities like accounts payable and long-term liabilities like bonds or leases.
Finally, shareholder’s equity is claims held by shareholders of the company. Also known as net assets or net worth, shareholder’s equity is calculated as:
Assets – Liabilities = Shareholder’s Equity
The balance sheet provides an overview of the company’s financial strength since assets must balance against claims from liabilities and shareholder’s equity per the accounting equation. Analyzing the balance sheet helps determine the company’s ability to meet financial obligations, borrowing capacity, and capital structure.
Public companies are required to issue balance sheets quarterly and annually as part of their mandated financial statement reporting. Private companies should also prepare periodic balance sheets to assess their financial standing.
Key Differences Between Financial Statements and Balance Sheets
Now that we’ve defined financial statements and balance sheets independently, let’s recap the key differences between the two:
Purpose
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Financial statements aim to provide a comprehensive overview of financial performance and health. The balance sheet is just one component of financial statements.
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The balance sheet specifically focuses only on financial position at a point in time.
Scope
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Financial statements evaluate financial results and position across multiple reports for a period of time.
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The balance sheet looks narrowly at assets, liabilities, and equity at a single point in time.
Frequency
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Financial statements are prepared quarterly and annually.
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Balance sheets may be prepared more frequently, even monthly, to complement the financial statements.
Contents
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Financial statements include the income statement, balance sheet, and cash flow statement.
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The balance sheet is a singular report.
Analysis
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Financial statement analysis examines earnings, profitability, cash flows, and financial position over time.
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Balance sheet analysis focuses specifically on liquidity, leverage, capital structure, and other measurements of financial standing.
Why Financial Statements and Balance Sheets Matter
Both financial statements and balance sheets are vital for effective financial management and providing transparency into company finances.
Here’s why financial statements and balance sheets are so important:
Track Performance: Financial statements allow you to monitor trends in revenue, profitability, and cash flows over periods of time. This helps identify successes or issues and inform strategic decisions.
Assess Health: The balance sheet helps determine liquidity, leverage, efficiency, and stability to assess overall financial health. Financial statement analysis also examines profitability, solvency, and cash flows.
Secure Funding: Lenders and investors often require financial statements and balance sheets to evaluate risk, capacity, and return before providing financing.
Meet Compliance: Public companies must issue financial statements quarterly and annually to meet regulatory compliance. Other entities may have compliance requirements for financial reporting as well.
Manage Operations: Financial reporting informs decisions on budgets, forecasts, resource allocation, and goals across business units and functional areas.
Drive Strategy: Understanding financial performance and position allows businesses to identify opportunities for growth and optimization to drive strategy.
Enhance Visibility: Financial reporting provides transparency for stakeholders, regulators, and management on the financial state of the company.
Clearly, financial statements and balance sheets serve a vital role in planning, operations, compliance, and strategy. Every business should prioritize regular financial statement reporting and balance sheet preparation.
Best Practices for Financial Statements and Balance Sheets
Here are some top tips to leverage financial statements and balance sheets successfully:
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Generate regularly – Financial reporting should occur at least quarterly for timely insights. Include prior period comparisons.
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Use standardized formats – Follow accounting regulations and principles for accurate, consistent reporting.
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Integrate systems – Automate reporting from accounting, ERP, and other systems when possible.
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Provide context – Supplement reports with commentary, ratios, and trend explanations.
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Review continuously – Don’t just generate reports. Actively analyze and monitor results.
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Enhance visibility – Share reports across leadership and teams. Consider a dashboard portal.
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Utilize for decisions – Incorporate financial data into planning budgets, forecasts, goals and more.
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Compare benchmarks – Evaluate results relative to projections, prior periods, and industry standards.
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Act on insights – Use reporting to identify issues early and inform solutions.
With robust financial statement and balance sheet processes, companies can fully leverage these vital reports for strategic and operational success.
Financial statements and balance sheets serve unique but complementary purposes for businesses. Financial statements provide a comprehensive overview of financial performance and health, while the balance sheet focuses specifically on financial position.
Together, these reports offer invaluable insights into all aspects of company finances. Regular financial reporting and diligent analysis are critical for effective financial management, compliance, securing investment, driving strategy, and optimizing operations.
By understanding the key differences between financial statements and balance sheets, companies can maximize the value of both reports. Instituting best practices ensures these vital documents are leveraged to their full strategic potential.
Current Assets
The top section contains current assets, which are short-term assets typically used up in one year or less.
- Total current assets were $128.6 billion (highlighted in blue).
- Cash came to roughly $20.3 billion.
- Marketable securities (short-term investments) approached $54 billion.
- Accounts receivable is money owed to Apple for selling its products and services and came to $17.8 billion. A receivable could be due in 30, 60, or 90 days depending on the agreed terms. Investors want to see receivables increase over time, as this indicates rising sales. But we dont want to see aging receivables.
- Inventories of $4.8 billion might be raw materials or supplies used in making products or finished goods waiting to be sold or shipped.
Example: Apple Inc.
Below is the balance sheet for Apple (AAPL) at the end of its 2017 fiscal year.
FINANCIAL STATEMENTS: all the basics in 8 MINS!
What is the difference between a balance sheet and a financial statement?
Balance sheet includes assets, liabilities, and equity, whereas a financial statement records the financial activities of an entity.
What is a balance sheet in accounting?
A balance sheet, or statement of financial position, is a part of a financial statement outlining what a company owns and owes. In relation to the financial statement, a balance sheet’s information reflects activity over a set financial period. Businesses use balance sheets to assess their spending, resources and liabilities.
What is the difference between a balance sheet and a cash flow statement?
The balance sheet provides a snapshot of the company’s financial position, while the income statement, cash flow statement, and changes in equity offer insights into its financial performance over time.
What is a balance sheet used for?
Balance sheets can be used with other important financial statements to conduct fundamental analysis or calculate financial ratios. A balance sheet is a financial statement that reports a company’s assets, liabilities, and shareholder equity.
