All publicly-traded companies are required to release three main financial statements — the income statement, balance sheet, and cash flow statement. Heres an overview of what you can find on each one.
As the name implies, this is where you can find details about a companys income. Starting with the companys net sales (revenue), various costs are subtracted to arrive at four different income metrics.
From this information, there are a few things you can determine. For starters, you can determine the companys profit margins by dividing any of the income metrics by the revenue, which can be a great way to assess how efficiently a company is running and to compare it to peers.
Also, the income statement contains the calculation for a companys earnings per share. This is done by dividing the companys net income by the total number of shares, which is listed on the bottom of the income statement.
The balance sheet can tell you where a company stands financially, and is separated into three main sections — assets, liabilities, and equity. A companys assets must be equal to (or “balance” out) its liabilities plus equity.
Assets are generally listed in order of liquidity, or the ease in which they can be sold or otherwise disposed. Assets are divided into two subcategories: current and long-term.
Current assets include those items that can be converted to cash within one year or less. Just to mention a few examples, current assets include such things as:
Long-term assets include everything else, and cannot be readily liquidated. Some examples of long-term assets you may find on a companys balance sheet include:
Liabilities are organized in a similar manner, with current (within one year) liabilities such as rent, tax, utilities, interest payable, and any long-term debts due within the next year. Long-term liabilities generally include the companys long-term debt and any other liabilities that arent due in the near future, such as pension fund liability.
Finally, the shareholders equity portion of the balance sheet shows how much of the companys value is attributable to shareholders, and is sometimes referred to as “net equity.” This includes any retained earnings, shares held in the companys treasury, and preferred shares, in addition to equity held by common shareholders.
A cash flow statement tells you about the overall flow of money into and out of a company. The statement is divided into three sections — operations, investing, and financing.
First, the operations section shows the cash flow from the companys core business operations. Unlike the figures on the income statement, the cash flow statement ignores non-cash “income” such as depreciation.
Second, the investing section contains a companys expenses related to purchasing new equipment or buildings, as well as buying securities and other types of investments that involve cash leaving the companys accounts.
Third, the financing section shows changes in a companys debt, loans, or dividends. For example, when a company receives cash as a result from issuing debt, this adds to the cash coming in. Later, when the company makes payments to debtholders, cash is reduced.
The overall cash flow of a company can tell you whether the company is cash-flow positive or negative. Keep in mind that a negative cash flow isnt automatically a bad thing. For example, if a company invests a lot of money to expand its factories, that can be a positive long-term development. However, several consecutive time periods of negative cash flow are good cause for further investigation.
As a business owner having a solid grasp of your company’s key financial statements – the income statement balance sheet, and cash flow statement – is absolutely vital. These documents provide critical insights into the financial health and performance of your business. However, with so much financial terminology being thrown around, it can be easy to get confused about what each statement shows and how they differ from each other.
In this comprehensive guide, we’ll break down exactly what these three key financial statements are, the key differences between them, and why each one matters for effectively managing your small business finances.
What is an Income Statement?
First up, let’s take a look at the income statement. This financial statement provides a summary of a company’s revenue and expenses over a specified period of time – usually quarterly or annually. Some common names for the income statement include the profit and loss statement, statement of operations, and statement of earnings.
The income statement typically contains the following key components:
-
Revenue – This refers to the total amount of money generated from sales of products and services before any expenses are deducted. It is often broken down into different revenue streams.
-
Cost of Goods Sold – This is the direct costs associated with producing or purchasing the goods or services sold by the company.
-
Gross Profit – Revenue minus cost of goods sold This shows the profitability of the actual core business operations
-
Operating Expenses – These are the day-to-day expenses required to run the business, such as salaries, rent, utilities, etc. They are different from the costs directly tied to production.
-
EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization. A measure of operating profitability.
-
Net Income – Also called net profit. This is the bottom line figure indicating total profit or loss after subtracting all expenses from revenue.
The income statement provides crucial insight into the profitability and efficiency of a company. It shows whether the business is generating enough profit to be sustainable. Managers can also analyze changes in revenue and expenses over time to identify trends and opportunities to improve the company’s performance.
What is a Balance Sheet?
Next is the balance sheet. If the income statement provides a snapshot of business performance, the balance sheet is more like a snapshot of the business’s financial health. It summarizes a company’s assets, liabilities, and equity at a specific point in time.
The key components of a balance sheet are:
-
Assets – Anything of value owned by the company. This includes both current assets like cash, accounts receivable, inventory, and long-term assets like property, equipment, and intangible assets.
-
Liabilities – Debts and obligations owed by the company. This includes current liabilities like accounts payable and wages payable that are due within 12 months. It also includes long-term liabilities like loans, bonds, and leases due in over 12 months.
-
Equity – Also called shareholders’ equity for corporations. This represents the owners’ residual claim on assets after liabilities are paid off. It includes elements like paid-in capital, retained earnings, and treasury shares.
Assets = Liabilities + Equity
This balance sheet formula demonstrates how the three key components are interconnected. The balance sheet provides crucial insights into the company’s liquidity, leverage, and solvency. Unlike the income statement, it is not a running total but a snapshot at one point in time. Comparing balance sheets over time can identify positive or negative trends in the company’s financial strength and flexibility.
What is a Cash Flow Statement?
Finally, we have the cash flow statement. While the income statement shows profitability and the balance sheet shows financial position, the cash flow statement shows how changes in the income statement and balance sheet affect a company’s cash balances.
Essentially, it tracks how cash is generated and spent by organizing cash flows into three main categories:
-
Operating Activities – Includes cash generated or spent on normal business operations, such as cash received from customers and cash paid to employees and suppliers.
-
Investing Activities – Includes cash used or received from investments in equipment, property, securities, etc.
-
Financing Activities – Includes cash from financing and paying off debt, interest, dividends, issuing or repurchasing stock, and other financing related cash flows.
The cash flow statement provides additional insight into liquidity and solvency. Even a profitable company can experience a cash flow problem if more cash is going out than coming in. Analyzing operating cash flows shows how efficiently the company is generating cash from core operations. The investing and financing sections show where cash is being tied up or borrowed and repaid.
Key Differences Between the Statements
Now that we’ve summarized each statement, let’s discuss some of the key differences:
-
Timing – The income statement covers a time period such as a quarter or year. The balance sheet shows a snapshot at one moment. The cash flow statement covers a time period.
-
Purpose – The income statement shows profitability. The balance sheet shows financial position. The cash flow shows liquidity.
-
Format – The income statement and cash flow statement use a running total format adding up debits and credits. The balance sheet uses a balancing format with assets equaling liabilities plus equity.
-
Flexibility – The income statement and cash flow statement can use either accrual or cash basis accounting. The balance sheet requires accrual accounting.
-
Accounting Rules – The income statement incorporates non-cash items like depreciation expense. The cash flow statement only includes actual cash transactions.
Why All Three Statements Matter
While each statement serves a different purpose individually, it’s important to analyze them together to get a complete picture of your company’s finances. Here are some examples:
-
A company can show a profit on its income statement but have negative cash flow, signaling potential future liquidity issues.
-
Increasing sales could drive revenue growth on the income statement while also bloating inventory on the balance sheet if products don’t sell.
-
Taking on significant new debt could show up as a liability on the balance sheet and increased interest expense on the income statement.
Rather than reviewing just one statement in isolation, smart business managers will analyze trends across all three statements together to make fully informed financial decisions.
Key Takeaways:
-
The income statement shows profitability over a period of time. The balance sheet shows financial position at a point in time. The cash flow statement shows liquidity over a period of time.
-
The income statement focuses on revenues, expenses, and profit. The balance sheet focuses on assets, liabilities, and equity. The cash flow statement focuses on operating, investing, and financing activities.
-
It’s critical to review the income statement, balance sheet, and cash flow statement together to get a complete picture of your company’s finances.
Understanding the purpose and format of these three key financial statements is the foundation for making smart financial decisions and effectively managing your business. If you have any questions on properly utilizing these statements, don’t hesitate to reach out to a qualified accountant or financial advisor for guidance tailored to your unique business needs.
This device is too small
If youre on a Galaxy Fold, consider unfolding your phone or viewing it in full screen to best optimize your experience.
Our Small Business Expert
All publicly-traded companies are required to release three main financial statements — the income statement, balance sheet, and cash flow statement. Heres an overview of what you can find on each one.
As the name implies, this is where you can find details about a companys income. Starting with the companys net sales (revenue), various costs are subtracted to arrive at four different income metrics.
- Gross income: Equal to sales minus the cost of goods sold and depreciation. Gross income can tell you how efficiently a company is producing its product.
- Operating income: Gross income with fixed expenses subtracted, such as rent, administrative expenses, and research & development.
- Pre-tax income: Accounts for expenses such as interest income and interest paid on debt, as well as charges and credits that have nothing to do with the companys core business operations.
- Net income: Net income is equal to pre-tax income, minus all income taxes (current and deferred) that a company pays on its earnings. This is generally the best indicator of a companys overall profitability during a certain time period.
From this information, there are a few things you can determine. For starters, you can determine the companys profit margins by dividing any of the income metrics by the revenue, which can be a great way to assess how efficiently a company is running and to compare it to peers.
Also, the income statement contains the calculation for a companys earnings per share. This is done by dividing the companys net income by the total number of shares, which is listed on the bottom of the income statement.
The balance sheet can tell you where a company stands financially, and is separated into three main sections — assets, liabilities, and equity. A companys assets must be equal to (or “balance” out) its liabilities plus equity.
Assets are generally listed in order of liquidity, or the ease in which they can be sold or otherwise disposed. Assets are divided into two subcategories: current and long-term.
Current assets include those items that can be converted to cash within one year or less. Just to mention a few examples, current assets include such things as:
- Cash and equivalents
- Securities that have a liquid market
- Accounts receivable
- Inventory
- Prepaid expenses
Long-term assets include everything else, and cannot be readily liquidated. Some examples of long-term assets you may find on a companys balance sheet include:
- Securities without a liquid market
- Land
- Equipment
- Buildings
- Intellectual property
- Other intangible assets
Liabilities are organized in a similar manner, with current (within one year) liabilities such as rent, tax, utilities, interest payable, and any long-term debts due within the next year. Long-term liabilities generally include the companys long-term debt and any other liabilities that arent due in the near future, such as pension fund liability.
Finally, the shareholders equity portion of the balance sheet shows how much of the companys value is attributable to shareholders, and is sometimes referred to as “net equity.” This includes any retained earnings, shares held in the companys treasury, and preferred shares, in addition to equity held by common shareholders.
A cash flow statement tells you about the overall flow of money into and out of a company. The statement is divided into three sections — operations, investing, and financing.
First, the operations section shows the cash flow from the companys core business operations. Unlike the figures on the income statement, the cash flow statement ignores non-cash “income” such as depreciation.
Second, the investing section contains a companys expenses related to purchasing new equipment or buildings, as well as buying securities and other types of investments that involve cash leaving the companys accounts.
Third, the financing section shows changes in a companys debt, loans, or dividends. For example, when a company receives cash as a result from issuing debt, this adds to the cash coming in. Later, when the company makes payments to debtholders, cash is reduced.
The overall cash flow of a company can tell you whether the company is cash-flow positive or negative. Keep in mind that a negative cash flow isnt automatically a bad thing. For example, if a company invests a lot of money to expand its factories, that can be a positive long-term development. However, several consecutive time periods of negative cash flow are good cause for further investigation.
Financial Statements Explained in One Minute: Balance Sheet, Income Statement, Cash Flow Statement
What is the difference between cash flow statement and balance sheet?
A balance sheet shows a company’s financial position in terms of how many assets it has, as opposed to liabilities. Cash flow tracks the movement of money, whether incoming or outgoing, during a period. Income statements and balance sheets provide information for the cash flow statement. Related: 8 Reasons Cash Flow Statements Are Important
What is the difference between income statement and cash flow statement?
The income statement illustrates the profitability of a company under accrual accounting rules. The balance sheet shows a company’s assets, liabilities, and shareholders’ equity at a particular point in time. The cash flow statement shows cash movements from operating, investing, and financing activities.
What is the difference between income and cash flow?
Income statements, for example, determine how much profit a company is making or losing at a certain point. A balance sheet shows a company’s financial position in terms of how many assets it has, as opposed to liabilities. Cash flow tracks the movement of money, whether incoming or outgoing, during a period.
How does a cash flow statement work?
The cash flow statement then takes net income and adjusts it for any non-cash expenses. Then cash inflows and outflows are calculated using changes in the balance sheet. The cash flow statement displays the change in cash per period, as well as the beginning and ending balance of cash.
