Income statement vs balance sheet vs cash flow: what’s the difference?


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Here’s what you need to know about the three main financial statements published by companies

All publicly traded companies are required to publish three main financial statements: the income statement, the balance sheet and the cash flow statement. Here is an overview of what you can find on each of them.

income statement

As the name suggests, this is where you can find details of a company’s earnings. Starting with the company’s net sales (revenue), various costs are subtracted to arrive at four different revenue measures.

  • Gross revenue: Equals sales less cost of goods sold and depreciation. Gross revenue can tell you how efficiently a business produces its product.
  • Operating result: Gross income less fixed expenses, such as rent, administrative costs and research and development.
  • Income before tax: 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 core business activities of the company.
  • Net revenue: Net profit is equal to pre-tax profit minus all income taxes (current and deferred) that a company pays on its profits. It’s usually the best indicator of a company’s overall profitability over a period of time.

From this information you can determine some things. For starters, you can determine company profit margins by dividing one of the revenue metrics by revenue, which can be a great way to gauge a company’s efficiency and compare it to its peers. .

Also, the income statement contains the calculation of earnings per share of a company. This is done by dividing the company’s net profit by the total number of shares, which is shown at the bottom of the income statement.

Balance sheet

The balance sheet can tell you the financial condition of a business and is divided into three main sections: assets, liabilities and equity. A company’s assets should equal (or “balance”) its liabilities plus equity.

Assets are generally ranked in order of liquidity or ease with which they can be sold or otherwise disposed of. Assets are divided into two subcategories: current and long term.

Current assets include items that can be converted into cash within one year or less. To cite just a few examples, current assets include items such as:

Long term assets include everything else and cannot be easily liquidated. Here are some examples of long-lived assets that you may find on a company’s balance sheet:

Liabilities are organized in the same way, with current liabilities (less than one year) such as rent, taxes, utilities, interest payable and any long-term debt due during the year. Next year. Long-term liabilities typically include the company’s long-term debt and any other liabilities that are not due in the near future, such as pension fund liabilities.

Finally, the equity portion of the balance sheet shows how much of the company’s value is attributable to shareholders and is sometimes referred to as equity. This includes all retained earnings, shares held in the company’s treasury and preferred stock, in addition to equity held by common stockholders.

Cash Flow

A cash flow statement tells you about the overall flow of money in and out of a business. The statement is divided into three sections: operations, investment and financing.

First, the operations section shows the cash flows from the main business activities of the company. Unlike the income statement figures, the cash flow statement ignores non-cash “income” such as depreciation.

Second, the investment section contains the expenses of a business related to the purchase of new equipment or buildings, as well as the purchase of securities and other types of investments that involve cash flowing out of the accounts. of the company.

Third, the financing section shows changes in a company’s debt, loans, or dividends. For example, when a company receives cash as a result of issuing debt, this is added to the incoming cash. Later, when the company makes payments to creditors, cash is reduced.

A company’s overall cash flow can tell you whether the company has positive or negative cash flow. Keep in mind that negative cash flow isn’t automatically a bad thing. For example, if a company invests a lot of money to expand its factories, this can be a positive long-term development. However, several consecutive periods of negative cash flow are a good reason for further investigation.

Combine all three to get the full picture of a company’s finances

By using a company’s three financial statements, you can get a clear picture of a company’s performance and derive useful metrics to use when analyzing a stock.

For example, by taking net income from the income statement and equity from the balance sheet, you can determine the company’s return on equity, which is one of the best indicators for assessing its profitability.


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